Saturday, 17 May 2008

Financialisation and culture

A few weeks back Mervyn King had a bit of a pop at pay in the banking sector, and the sort of incentives it provided. Notably he also made the following comment about how the high rewards in the City appealed to graduates:

“I do think it is rather unattractive that so many young people, when contemplating careers, look at the compensation packages available in the City and think that these dominate almost any other type of career.”

I think he is right, and that this is a problem. The biggest (economic) rewards are clearly to be found in the financial sector. We shouldn't be surprised therefore if many of the brightest minds end up working there. The financial sector also benefits from huge economies of scale. Getting a small bet right on a huge amount of money can make you very wealthy. In addition the sheer scale of the payoff will likely reinforce the idea of brlliance at work. If I call a coin toss correctly you'd correctly see it as luck. But imagine I call a market move correctly and make £100m, doesn't that pull you towards the view that I must know what I am doing?

This must form a self-reinforcing circle of belief. Very well-paid people taking decisions that generate enormous amounts of money (albeit off the back of even more enormous sums of money) make us more likely to view their pay as being deserved. (Amazingly some on the Right regard this as 'wealth creation', but that's another story.) People who question who question the level of skill when the cash is pouring in are likely to be given short shrift.

Meanwhile working in the place where the ideas and opportunities are generated is also far more appealing to many than working at trying to ensure that the whole system functions effectively - the regulators. Regulators inevitably get left behind by the financial sector and are constantly playing catch-up. Not only are they unable to match the salaries of those they regulate, and hence must use other means to attract staff, but also they will always be reacting to innovation (and less positive developments) in the financial sector.

In addition the cyclical nature of crises, and responses to them, mean that regulators will tend to be either seen as over-prespecriptive or off the pace, depending on where in the cycle we are. Here's what Howard Davies and David Green say about it in their new book:

"There will be some kind of damaging incident which leads to demands for regulation to be tightened. Inevitably, this takes time to agree and implement. By this stage, the circumstances that led to the change in regime will have faded in the collective memory and the new rules may come to be seen as excessively bureaucratic and damaging to business efficiency. There will then be regulatory liberlization, which may well just be implemented when the next crisis hits. As a generality, regulation will be permenently out of alignment with public opinion."

The outcome of all this is, as King suggested, that the City looks like an exciting place to work, with potentially huge rewards on offer. In contrast regulators end up being portrayed as killjoys who don't quite 'get' what the smart people in the City are really up to. And more broadly, let's be honest about this, the labour movement is even further behind in understanding what goes on in the City, and how to respond to it. As such we are cast as dinosaurs, and rarely even feature in debates. When we do appear unfortunately it is often to make moral arguments dressed up as policy responses.

This suggests to me that the process of financialisation is likely having significant cultural impact as well as an economic one. As the financial sector has emerged as a significant force in British society, for businesses and the rest of us, with it may have come certain ideas. For example, is a lack of financial knowledge/awareness becoming seen as a personal failing, a lack of responsibility akin to not taking care our physical sselves? And are we becoming more in awe of those who manage to make money from money?

This keeps leading me back to the same point - we need to develop an effective capacity on the Left to respond. The financial world can be complex and it can be slow, boring work finding out how it operates. But unless we take the trouble to do this we will remain irrelevant, and our impact non-existent. And more broadly we will allow the financial sector to shape culture in a way that celebrates its success (above other occupations and activity), whilst 'critiques' from the labour movement will continue to read like sermons from another age.


Charlie Marks said...

If you don't mind me saying, this post reads like a sermon from another age. The formula is this: bit about financialisation of the economy, bit about how the labour movement isn't responding well, stuff about dinosaurs.

I'm in a glass house here, because my blog post formula is: lengthy quote from somewhere else with added terse grumbling.

I don't think it is all that important to understand the workings of the "products" and processes within the City - evidently some of the best minds in the City haven't been up reading into the wee small hours, either.

Whilst the uneven development of the economy has continued over the past decade - industrial and agricultural decline coupled with financial growth on the back of globalisation - there hasn't been a sharp decline in class awareness and there's no sense that Thatcher's notion of a 'popular capitalism' has materialised.

Given the energy crisis, the possibility of a global recession, and the end of the nice decade of cheap credit and cheap imports, the moralising sermons of the labour movement are more likely to gain credibility - not because they are idealistic, but because they are realistic.

Tom P said...

Hi Charlie

Always welcome a bit of feedback, you cheeky b*****d!

It is my strongly held view though that the labour movement doesn't have a strong grasp of how the financial sector works. That means, in my view, that it struggles to know how to respond. Hence we get a lot of 'fat cat' sloganeering and few practical proposals.

I don't have a problem as such with 'fat cat' headlines, and such an approach certainly got the unions in the centre of the private equity debate. So I agree that a bit of a moral attack can be quite effective at times. But at some point you have to be clear about what you would do differently. And that is where we come up short currently.

I'm not advocating popular capitalism. I just think that the financial sector isn't going to decline in importance any time soon, and as such we need to be clear what we think about it.

I agree that the possibility of a recession may make people revise their views about the conomiy, and the financial sector within it, but I don't see the labour movement playing a decisive role unless it has some reasonable answers.

Just for starters what do we think could/should be done to prevent future asset bubbles arising? This is clearly a major issue, but I don't see much discussion of it coming from the Left (bar a bit of thinly-disguised celebration that this could cause a major crisis in capitalism).

Antony said...

Hey Tommo, thought this was one of your best posts to date....all the philosophy stuff just keeps me checking your pic for cornflakes in your beard ;0)
I agree that on the whole reactions to 'innovation' in the city are both inadequate and tardy, which wouldn't be so much of a worry if this wasn't driving so much of govt policy globally. At times this can feel like an inexorable slow drift towards total financialisation with very little real, informed resistance. We've seen too many shocks to think that sub prime.fatcat bonuses et al are the tipping point for a Charlie Marxsian societal reaction...the best that conscientious objectors can do is to get wise and get their answers straight fast. I had the same feeling reading Naomi Klein's latest book: shock doctrine economics doesn't surprise me unfortunately and is easier to finger. However, it's the gradual, and just as dangerous, financially motivated undercurrents, that are harder to resist.
The Scarlet Pimpleyone

Charlie Marks said...

"We've seen too many shocks to think that sub prime.fatcat bonuses et al are the tipping point for a Charlie Marxsian societal reaction..."

I'd agree with you if people like Soros weren't sounding like Millies... Biggest economic crisis since the 70s, perhaps the depression of the 30's - hello!

Tom P said...

Soros is speaking tonight at LSE actually, but I couldn't get a ticket. Will get his new book when it comes out though.

Nick Drew said...

have to admire your honesty, Mr P

we capitalists get a really easy ride from the Left because so few of you have a clue about what's actually happening

witness the risible 'revelation' in the Guardian that Northern Rock's securitisation vehicle made use of a charitable trust, as if this was news (when the Revenue's own website has a 'how-to-do-securitisation' page setting it all out)

Heaven knows there's enough that needs fixing, without one side of a potential debate choosing to vacate the building with its fingers in its ears

Tom P said...

Hi Nick

Yes, I think we are several laps behind, which is a real problem.

A good example is a lot of the TU responses to private equity. Unions know there is a problem there somewhere, because they can see members getting squeezed, but haven't really got a clear idea of what needs to be done - hence they got pulled onto the territory of just calling for changes to taxation.

Nice blog by the way. I'll give it a plug - you may get some lefty traffic!