How Monopoly-Finance Capital Leads to Economic Stagnation

Nor is the United States alone in this respect. Since the 1960s West Germany, France, the United Kingdom, Italy, and Japan have all seen even larger declines, when compared to the United States, in their trend-rates of growth of industrial production. In the case of Japan industrial production rose by 16.7 percent in 1960–70 and by a mere 0.04 percent in 1990–2010.

The story shown in the chart depicting real growth rates is one of deepening stagnation of production — already emphasized by Sweezy and Magdoff in the 1970s and ’80s. A chart showing share of GDP going to finance, insurance, and real estate, in contrast, reveals that this led — especially from the 1980s on — to a shift in the economy from production to speculative finance as the main stimulus to growth. Thus the FIRE (finance, insurance, and real estate) portion of national income expanded from 35 percent of the goods-production share in the early 1980s to over 90 percent in recent years. The so-called economic booms of the 1980s and ’90s were powered by the rapid growth of financial speculation leveraged by increasing debt, primarily in the private sector.

The dramatic rise in the share of income associated with finance relative to goods production industries has not, however, been accompanied by an equally dramatic rise of the share of jobs in financial services as opposed to industrial production. Thus employment in FIRE as a percentage of employment in goods production over the last two decades has remained flat at about 22 percent. This suggests that the big increase in income associated with finance when compared to production has resulted in outsized gains for a relatively few income recipients rather than a corresponding increase in jobs.

The rapid expansion of FIRE in relation to goods production in the U.S. economy is a manifestation of the long-run financialization of the economy, i.e., the shift of the center of gravity of economic activity increasingly from production (and production-related services) to speculative finance. In the face of market saturation and vanishing profitable investment opportunities in the “ real economy,” capital formation or real investment gave way before the increased speculative use of the economic surplus of society in pursuit of capital gains through asset inflation. As Magdoff and Sweezy explained as early as the 1970s, this could have an indirect effect in stimulating the economy, primarily by spurring luxury consumption. This has become known as the “wealth effect,” whereby a portion of the capital gains associated with asset appreciation in the stock market, real estate market, etc., is spent on goods and services for the well-to-do, adding to the effective demand in the economy.