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, these books reach a similarly stark conclusion. Left to their own devices, financial services cannibalise the foundations they’re built on – industry and the natural world.

Both authors argue that we’ve locked ourselves into growth models that are overly reliant on finance. Since the Reagan-Thatcher “revolution” of the 1980s, this sector, and the shadow banking sector that’s spun off it, has seen remarkable expansion.

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

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, averaging around 160% of credit to GDP from 1995-2016.

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.

A century ago, 80% of British bank lending went to domestic industrial firms. Now, it’s less than 4%. Meanwhile, from 1960-2015, the UK saw steeper drops in manufacturing employment than any wealthy country other than another financial hub, Switzerland.

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.

On the flipside, national wages and productivity 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 “finance curse” in the book title.

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 that Britain’s oversized financial sector may be making the country poorer.

The finance curse works in numerous ways. For instance, Shaxson concludes his analysis of private equity (PE) by suggesting that it “grasps companies and shakes them to see what cash flows fall out.”

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

Many happy returns
Simplified example: you buy a house for £100,000, then sell it for £120,000. You’ve increased your capital by twenty thousand pounds. Now, say you borrow £900,000 and then add that too your hundred grand, buying ten similar houses. If they all rise by 20%, you can sell the lot for £1.2mn. Pay back the £0.9mn and keep the £300,000. Instead of increasing your capital by 20%, it’s risen by 300%. This is the principle of leverage.

The purchased company, meanwhile, is squeezed to stay on top of its new debt repayments. The easiest way to “free up” cash flow is by cutting costs, like wages and planned investment. Though not always the case, PE tends to sap economic growth.

Elsewhere, Shaxson examines the large loss of tax brings on financial crises – 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. 

These trends have been turbo-charged by the “competitiveness agenda” –  the politically mainstream idea that countries should compete like companies, coupled with the perennial threat that capital owners will relocate if they don’t get what they want.

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

“Competitive”’ economic policies have led to more state tasks – like water management – outsourced to, and capitalised by,  private firms. Conveniently, “de-politicising” the job of government exonerates politicians when things go wrong. Everyone wins, except the public.

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

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

Shaxson asserts that the finance curse has become so entrenched that the United Nation’s guiding framework for climate governance is based on “green capitalism” – shorthand for the conservation of nature via financial markets.

According to Adrienne Buller, “the received wisdom of markets holds sway over our understanding of how to address ecological crisis.” She emphasises how green capitalism purports to offer a roadmap for decarbonisation and nature preservation while simultaneously creating opportunities for profit, or “doing well by doing good.”

For Buller, however, this logic amounts to wilful obfuscation. It creates a “veneer of action” to the public, while distracting policy makers from meaningful legislation as they face a closing window for climate action.

Like Shaxson, she finds little optimism in green capitalist solutions to the climate crisis. The book is littered with criticisms of “solutions” like carbon offsets, which aim to internalise the costs of pollution, typically by planting trees to neutralise carbon dioxide emissions.

In 2020, oil giant, Total, used a Zimbabwean nature protection scheme – clearing trees to prevent forest fires – 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.

Total was “proud” 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) products and “green bonds”.

Total’s amoral exploits give credence to Buller’s 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.

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

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

Unfortunately, this view not only ignores systematic greenwashing, it’s also undemocratic – it takes decisions about public goods like clean air and species preservation away from citizens and gives it to financiers.

What’s more, it does not account for the inherent fragility of financial markets. Why, given the banks’ chequered history in maintaining economic stability, should they be entrusted with protecting the natural world which is vastly more complex than quantifying equities?

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

Meanwhile, the two authors have their differences.  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. vBut 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.

Alexander Kozul-Wright

Alex joined the Third World Network’s (TWN) Finance and Development team as a researcher in 2021. Prior to joining TWN, Alex was an Associate at Newstate Partners, a sovereign financial advisory firm. …

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