{"id":61866,"date":"2024-03-29T17:34:22","date_gmt":"2024-03-29T17:34:22","guid":{"rendered":"https:\/\/www.themintmagazine.com\/?p=61866"},"modified":"2024-05-24T20:08:37","modified_gmt":"2024-05-24T19:08:37","slug":"sharks-are-eating-the-whales","status":"publish","type":"post","link":"https:\/\/www.themintmagazine.com\/sharks-are-eating-the-whales\/","title":{"rendered":"Sharks are eating the whales"},"content":{"rendered":"

Alex Kozul-Wright<\/strong> reviews The Value of a Whale<\/em> by Adrienne Buller, Manchester Press (2022) and The Finance Curse<\/em> by Nicholas Shaxson, Penguin Random House (2018).<\/p>\n

Though distinct in their focus, these books reach a similarly stark conclusion. Left to their own devices, financial services cannibalise the foundations they\u2019re built on \u2013 industry and the natural world.<\/p>\n

Both authors argue that we\u2019ve locked ourselves into growth models that are overly reliant on finance. Since the Reagan-Thatcher \u201crevolution<\/a>\u201d of the 1980s, this sector, and the shadow banking<\/a> sector that\u2019s spun off it, has seen remarkable expansion.<\/p>\n

In the UK, for instance, financial assets were worth 50% of Gross Domestic Product (GDP) in 1970. By 2007, they had reached 500% \u2013\u00a0 twice the European average. But as Britain remodelled its economy as an engine for finance, other industries struggled to survive in its wake.<\/p>\n

A typical financial sector tends to reach its optimal size when credit to the private sector is equivalent to 90-100% of GDP. After that, Nicholas Shaxson, in his book, argues it starts sapping economic output. Britain passed its optimal point long ago,\u00a0averaging around 160%<\/a>\u00a0of credit to GDP from 1995-2016.<\/p>\n

And over the past 40 years, large flows of foreign money into the City of London have raised the price of the pound, making British manufactured products more expensive. At roughly the same time, British banks started restricting money supplies to non-financial sectors.<\/p>\n

A century ago,\u00a080% of British bank lending<\/a>\u00a0went to domestic industrial firms. Now, it\u2019s\u00a0less than 4%<\/a>. Meanwhile, from 1960-2015, the UK saw steeper drops in manufacturing employment than any wealthy country other than another financial hub, Switzerland.<\/p>\n

Today, British banks lend mostly to each other as well as into commercial real estate. This has seen the value of British financial assets and property prices snowball<\/a>.<\/p>\n

On the flipside, national wages<\/a> and productivity<\/a> have flatlined. In effect, Shaxson argues that the rapid growth of finance has distorted everything around it. Instead of serving the real economy, it preys upon it. This is the \u201cfinance curse\u201d in the book title.<\/p>\n

Shaxson does not doubt that modern economies need financial services. But he queries whether the City provides Britain with useful products at a reasonable cost. Research shows<\/a> that Britain\u2019s oversized financial sector may be making the country poorer.<\/p>\n

The finance curse works in numerous ways. For instance, Shaxson concludes his analysis of private equity (PE) by suggesting that it \u201cgrasps companies and shakes them to see what cash flows fall out.\u201d<\/p>\n

In essence, PE firms buy up other companies using debt and then sell them off shortly afterwards \u2013 typically five years. And borrowing the cash to fund the purchases\u00a0 juices up profits (see box, Many happy returns<\/em>). It can also be used to write-down tax liabilities and interest payments. That means big returns for PE managing partners.<\/p>\n

Many happy returns<\/div>
Simplified example: you buy a house for \u00a3100,000, then sell it for \u00a3120,000. You\u2019ve increased your capital by twenty thousand pounds. Now, say you borrow \u00a3900,000 and then add that too your hundred grand, buying ten similar houses. If they all rise by 20%, you can sell the lot for \u00a31.2mn. Pay back the \u00a30.9mn and keep the \u00a3300,000. Instead of increasing your capital by 20%, it\u2019s risen by 300%. This is the principle of leverage.<\/div><\/div>\n

The purchased company, meanwhile, is squeezed to stay on top of its new debt repayments. The easiest way to \u201cfree up\u201d cash flow is by cutting costs, like wages and planned investment. Though not always the case, PE tends to<\/a> sap economic growth.<\/p>\n

Elsewhere, Shaxson examines the large loss of tax brings on financial crises \u2013 which are deeper and more frequent in countries with larger banking sectors. He also argues that finance impoverishes countries by sucking highly educated people from more productive industries.\u00a0<\/p>\n

These trends have been turbo-charged by the \u201ccompetitiveness agenda\u201d \u2013\u00a0 the politically mainstream idea that countries should compete like companies, coupled with the perennial threat<\/a> that capital owners will relocate if they don\u2019t get what they want.<\/p>\n

In turn, governments of different stripes have lowered<\/a> corporation taxes and loosened<\/a> financial market regulations. Politicians have, in effect, pandered to financiers and written laws to facilitate extractive behaviour.<\/p>\n

\u201cCompetitive\u201d\u2019 economic policies have led to more state tasks \u2013 like water management \u2013 outsourced to, and capitalised by,\u00a0 private firms. Conveniently, \u201cde-politicising\u201d the job of government exonerates politicians when things go wrong<\/a>. Everyone wins, except the public.<\/p>\n

While the results of financialisation on growth have been questionable, there has been a clear shift<\/a> of income and wealth upwards, away from workers and towards top executives. Excessive inequality erodes public trust, undermines democracy and impedes state action.<\/p>\n

Where, incidentally, does all this extracted money go? Shaxson calculates that the number of trusts \u2013 holding structures which shelter wealth from tax \u2013 rose by 700% from 1990-2014. The wealth held in trusts is comparable to the amount hidden in tax havens at between $9-36tr.<\/p>\n

Shaxson asserts that the finance curse has become so entrenched that the United Nation\u2019s guiding framework<\/a> for climate governance is based on \u201cgreen capitalism\u201d \u2013 shorthand for the conservation of nature via financial markets.<\/p>\n

According to Adrienne Buller, \u201cthe received wisdom of markets holds sway over our understanding of how to address ecological crisis.\u201d She emphasises how green capitalism purports to offer a roadmap for decarbonisation and nature preservation while simultaneously creating opportunities for profit, or \u201cdoing well by doing good.\u201d<\/p>\n

For Buller, however, this logic amounts to wilful obfuscation. It creates a \u201cveneer of action\u201d to the public, while distracting policy makers from meaningful legislation as they face a closing window for climate action.<\/p>\n

Like Shaxson, she finds little optimism in green capitalist solutions to the climate crisis. The book is littered with criticisms of \u201csolutions\u201d like carbon offsets, which aim to internalise the costs of pollution, typically by planting trees to neutralise carbon dioxide emissions.<\/p>\n

In 2020, oil giant, Total, used a Zimbabwean nature protection scheme \u2013 clearing trees to prevent forest fires \u2013 to offset a $17m shipment of liquefied natural gas. To ratify the deal, it ignored the effects of burning fuels and conveniently focused on operational emissions.<\/p>\n

Total was \u201cproud<\/a>\u201d of the scheme. It provided $600,000 for clearing activity that probably would have happened anyway, and then spewed hundreds of thousands of tons of carbon dioxide into the atmosphere. Similar platitudes can be seen with environmental, social and governance (ESG<\/a>) products and \u201cgreen bonds<\/a>\u201d.<\/p>\n

Total\u2019s amoral exploits give credence to Buller\u2019s argument that green capitalism seeks to minimise disruptions to our existing economic systems. Meanwhile, the world continues to fall woefully short of addressing climate change.<\/p>\n

Ultimately, green capitalism collides with an uncomfortable truth: all the available evidence<\/a> shows that addressing ecological breakdown will require a significant downscaling of economic production and consumption, particularly in the Global North.<\/p>\n

Still, the case for green capitalism rests on two key facts: robust government oversight<\/a> for eco-preservation has not yet emerged, and; free-market solutions tend to be relatively quick to implement. In other words, don\u2019t let perfection be the enemy of the good.<\/p>\n

Unfortunately, this view not only ignores systematic greenwashing, it\u2019s also undemocratic \u2013 it takes decisions about public goods like clean air and species preservation away from citizens and gives it to financiers.<\/p>\n

What\u2019s more, it does not account for the inherent fragility of financial markets. Why, given the banks\u2019 chequered history<\/a> in maintaining economic stability, should they be entrusted with protecting the natural world which is vastly more complex than quantifying equities?<\/p>\n

For Buller, a bias towards the imagined ability of free markets to prevent climate disaster can be seen as a legacy of Shaxson\u2019s finance curse. That arises as a swollen financial sector, which has successfully infiltrated public policy making, has become the arbiter of environmental justice.<\/p>\n

Meanwhile, the two authors have their differences.\u00a0 While Shaxson is keen to pursue more productive investment, and the jobs that that would bring Buller is more inclined to see economic growth as a problem. But both agree that a strict faith in unfettered finance is harmful. Left to financial markets, the natural world will go the same way as British manufacturing. Book a whale watching trip while you still can.<\/p>\n","protected":false},"excerpt":{"rendered":"

Alex Kozul-Wright reviews The Value of a Whale by Adrienne Buller, Manchester Press (2022) and The Finance Curse by Nicholas Shaxson, Penguin Random House (2018). Though distinct in their focus, … <\/p>\n","protected":false},"author":1,"featured_media":61867,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","footnotes":""},"categories":[54,82],"tags":[2232,132,2606,2595],"class_list":["post-61866","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance-sector","category-reviews","tag-alexander-kozul-wright","tag-economics","tag-finance-curse","tag-mar-2024"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/posts\/61866","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/comments?post=61866"}],"version-history":[{"count":0,"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/posts\/61866\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/media\/61867"}],"wp:attachment":[{"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/media?parent=61866"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/categories?post=61866"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.themintmagazine.com\/wp-json\/wp\/v2\/tags?post=61866"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}