Finance, real economy and the State

The work on WP8 is drawing to a close. In June, the last of a total of 28 deliverables will be finished. Research conducted by the international team has been focused on effects of financialisation on the real economy. The study of this subject has been pursued at both the theoretical and practical levels. Critical review of the relevant academic literature has shown that financialisation – understood as autonomous and spontaneous development of the financial sector leading to its domination over the real economy and, consequently to the deepest global crisis since the Great Depression of 1930s – has been triggered by development and propagation of the neoliberal economic theory and ideology, built on patently counterfactual axioms and premises. Neoliberalism has reversed the dynamic relationship between the financial sector and the real economy: the former, instead of adapting itself to changing needs of the latter, has become focused on adapting the real economy to its own egoistic short-term interests. Over time its supporting function towards the real economy has been more and more subordinated to the exploiting one (Thirteen Things You Need to Know about Neoliberalism and forthcoming).

Neoliberal economics, regarding the market mechanism as a perfect regulator of the long-term development, urged policymakers to abolish all legal barriers standing in the way of unrestricted expansion of the financial sector and of particular financial companies beyond their traditional markets and activities. Neoliberals have fetishized econometric models considering them a universal, foolproof research technique. Such models – extremely sophisticated mathematically but having very little to do with the economic reality – were behind the creation and mass supply of toxic financial innovations. Consequently, the financial system created according to neoliberalist recommendations has become technically ungovernable, with a build-in crisis-generating mechanism. Paradoxically, financial economics and financial policy have been focused entirely upon vain attempts to prevent short-term instability, or restoring lost stability of the ungovernable financial sector at the expense of the real economy, instead of eliminating systemic reasons for its pathological development (Working Paper forthcoming).

Due to its intrinsic limitations, neoliberal economics has been unable to discern and understand key problems of the financial sector development, much less to predict the inevitable detrimental consequences of policies that adhered to its recommendations for the sector itself and the real economy: deep financial crises, recessions and a dramatic increase in income inequality. Empirical studies confirm that development of the financial sector on global scale, and in many countries, has led to its hypertrophy and changes in its structure, which are detrimental to social-economic development. A thorough analysis of structural changes in the banking sector has shown that the bigger and more universal the financial institution,  the more it is willing to engage inhazardous financial activities. On the other hand, small, traditional, locally operating banks have turned out to be the most resistant to financial crises. Countries with a significant share of small banks controlled by local communities and local customers have suffered less from the global crisis.

Working Papers

Empirical studies showed that as a consequence of the recent global financial crisis, followed by the so-called sovereign debt crisis, the EU 27 gross value added (GVA) decreased by € 4.3 trillion (7.7%) in 2009-2013 compared to the value which would have been reached if the pre-crisis growth trend had continued. Particularly heavy negative impact was made on industry and construction which GVA and gross fixed capital formation fell below the 2000 levels in 2009. At the same time, there were great differences between core, periphery and CEE countries and among individual countries within each group (WP forthcoming).

Particular attention in WP8 has been paid to the impact of financialisation on the provision of two basic services: housing and water. Using the original ‘system of provision approach’, five country studies have been conducted revealing the dramatically diminishing role of the state in providing basic services and the growing presence of finance in daily life with detrimental impact on the services accessibility for low income households

Working Papers