This is the third of four extracts from the introductory chapter of my recent book Inventing Value (Cambridge UP, 2022).
“The explosion of financial assets over the last few decades has transformed the world’s leading economies. The finance, insurance and real estate sector now accounts for 21% of US national income – double its level in 1947 (Howells & Morgan, 2020, p. 11; Witko, 2016). The financial services sector alone constitutes 8% of the formal economy of the US and 7% in the UK (Rhodes, 2019, p. 8). Beyond its sheer scale, it plays a pivotal role in the wider economy, with substantial power over the flow of funds to other sectors, and in politics, where it is often able to influence policy in its interests, not only through lobbying but also through the regular exchange of personnel between the sector and the top echelons of government. One measure of that influence was the progressive loosening of financial regulations, allowing rampant financial innovation with little regard for the risks it created until in 2008 it generated the greatest crash in living memory.
One of the central mysteries of contemporary society is how the financial sector has managed to accumulate so much wealth and power. The heart of the answer is its capacity to create financial assets – stocks, bonds, options, derivatives, and the like – which investors are prepared to buy. These assets have been naturalised: they have come to be seen as unproblematic objects with value in their own right and thus as just one more commodity that it is perfectly reasonable to buy and sell for profit. Yet in reality they are nothing more than promises, typically promises to deliver a revenue stream if certain conditions are satisfied, and highly tenuous promises at that. The value of these assets, to put it differently, is socially constructed: it depends on the beliefs of investors about their value, which depend in turn on the stories that are told in order to encourage those beliefs.
The naturalisation of financial assets thus obscures an extraordinary set of structures that lie behind the acceptance of such promises by investors. Once we look behind the veil of naturalisation, we can see both the layer upon layer of promises but also the possibility at each layer of things going wrong. These are mountains of promises, where a slippage of any one stratum could bring the whole edifice crashing down, as we saw in 2008. Perhaps what is most extraordinary of all is that a massive portion of our economy has been built on top of this mountain of promises, and that the institutions that construct the mountain extract enormous revenues from their power to sell them, while those revenues are also naturalised, as profits from supposedly productive activity. Yet it is far from clear what the social benefits of the process are, if there are any, and if so whether they justify the enormous risks created for the rest of our economic system.
This book aims to peel back some of these layers, to reveal how these promises are created and sold and how this process produces the apparent value of financial assets. We cannot rely on conventional economics to explain this. Its models of supply and demand take the naturalisation of financial assets for granted and as a consequence they obscure rather than illuminate the fundamental drivers of the prices of financial assets. To put the point as simply as possible: financial assets have value only because they are believed to have value, and mainstream economics hardly scrapes the surface of how such beliefs are established.
This book develops and applies an alternative, sociologically-influenced account of how those beliefs are constructed. It argues that the value of assets like money, shares, and derivatives is socially constructed: it is experienced as an individual belief but it depends on collective normative structures that shape those beliefs. The demand for financial instruments is thus created by narratives that generate expectations of future value, by institutions that bolster these expectations, and by persuading other financial actors to accept them as facts. While such values are often stabilised, they are potentially highly precarious, generating massive risk for our economic system.
We must also ask whether these are the kinds of values that ought to be governing our economic and thus our social lives. As Mariana Mazzucato and indeed many other critics of mainstream economics have argued, there are different kinds of values and monetary value is often not a good measure of the social value of the different options facing us as a society (Mazzucato, 2018). Unlike many material goods and personal services, financial assets do not meet directly material human needs. No doubt they sometimes help investors to meet such needs in the future, notably through providing opportunities to invest savings, funding pensions, and underpinning the provision of insurance, but there are other ways of meeting our genuine needs that may avoid the risks and the savage inequality that result from relying on investment markets. The issues are complex, but we are entitled to ask whether the buying and selling of financial instruments creates social value at all, or ultimately generates greater social costs than any benefits it may deliver.
It is difficult to obtain a balanced answer to questions like these because of the enormous power of the finance sector to repress such discourses in the public sphere. The playing field is sloped vertiginously against critics of the financial institutions, for a host of reasons. One is the revolving door between senior political positions and lucrative positions in the finance sector that places financiers in positions of governmental authority and creates a sense of common interest between politicians and finance (notably the many former Goldman Sachs bankers in recent US administrations: Dealbook, 2017). Another is the ways in which the discourse of mainstream economics portrays the success of the banks and other financial institutions as a reasonable reward for responding to a set of markets that simply and neutrally express the needs of the wider economy and society. This discourse implies that the prices of the financial assets on which their power depends are an objective reflection of their social value of their contribution and serves to legitimate financial markets and financial profits. This argument in turn has led to the modification of national accounting principles to treat the profits of the finance sector as part of the national income (Assa, 2018). Combined with the obsession of the political media with so-called economic growth, this means that politicians who are measured in part by their ability to deliver growth in national income have an incentive to support growing profits in the finance sector. The consequence is that the sector ends up being treated by politicians as untouchable and by mainstream economists as a triumph of the market model (until it collapses, and even then the qualifications are temporary).
And yet, if the prices of financial assets are a product, not of meeting a genuine social need, but at least partly of processes through which finance sector actors use their market power, their discursive power, and their political power to invent and shape the value of financial assets, then the whole basis of the glorification and safeguarding of the sector must be called into question. If the values of financial assets are a means for finance sector actors to profit at the expense of wider society rather than a means for them to provide for the needs of wider society, we must ask whether this is what is best for us collectively and be prepared to rethink the place of finance in our society. The better we can understand how these processes work, the better placed we are to determine what sort of political response is appropriate. This book is a step towards understanding those processes better.”
Assa, Jacob. 2018. ‘Finance, Social Value, and the Rhetoric of GDP’. Finance and Society 4 (2): 144–158.
Dealbook. 2017. ‘The People From “Government Sachs”’. The New York Times, March 16, sec. Business. https://www.nytimes.com/2017/03/16/business/dealbook/goldman-sachs-goverment-jobs.html.
Howells, Thomas, and Edward Morgan. 2020. Gross Domestic Product by Industry Fourth Quarter and Year 2019. News release. Bureau of Economic Analysis, US Department of Commerce. https://www.bea.gov/news/2020/gross-domestic-product-industry-fourth-quarter-and-year-2019.
Mazzucato, Mariana. 2018. The Value of Everything: Making and Taking in the Global Economy. 01 edition. Allen Lane.
Rhodes, Chris. 2019. Financial Services: Contribution to the UK Economy. Briefing Paper 6193. London: House of Commons Library.
Witko, Christopher. 2016. ‘How Wall Street Became a Big Chunk of the U.S. Economy — and When the Democrats Signed On’. Washington Post. https://www.washingtonpost.com/news/monkey-cage/wp/2016/03/29/how-wall-street-became-a-big-chunk-of-the-u-s-economy-and-when-the-democrats-signed-on/.