Cutting the financial sector down to size

That’s the provisional title I used for my latest piece in Inside Story. Peter Browne, the editor, gave it the longer and clearer title “Want to reduce the power of the finance sector? Start by looking at climate change”.

The central idea is a comparison between the process of decarbonizing the world economy and that of definancialising it, by reducing the power and influence of the financial sector. Both seemed almomst impossible only a decade ago, but the first is now well under way.

There’s also an analogy between the favored economists’ approach in both cases: reliance on price based measures such as carbon taxes and Tobin taxes. Despite the theoretical appeal of such measures, it looks as if regulation will end up doing much of the heavy work.

11 thoughts on “Cutting the financial sector down to size

  1. I have my doubts that decarbonising is well under way. The best we can say is that some hopeful green shoots have emerged and that it does appear technically possible. However, real progress to decarbonising still appears to be too little, too late with respect to avoiding dangerous climate change. But yes in theory decarbonising can happen and shrinking the financial system can happen too. In theory we could even do these things quite quickly but when is still an open question. The current system and its rulers are not permitting changes yet. Can their minds be changed? Eventually, yes or they will just pass away.

    I think I can say with certainty that if I don’t see real change in my compos mentis lifetime then I will know change is sadly too late. That gives 20 years to see real root and branch change.

    Signed , ikonoclast.

  2. The linked article advocates a return to defined benefit pensions and says this would help shrink the financial system. Two comments are in order. Defined benefit superannuation works only when an employee stays with the same employer (or tightly defined group of employers, such as the Australian university system) their whole career, or at least several decades. These days, people, especially younger people, change employers every few years. And even if DB superannuation became the norm again, the money would still have to be invested. There would be less of a need for financial advisers, but funds managers and associated hangers on would still exist.

  3. This is the important stuff right here. With a sound paired back financial system, like we had back in the 50’s and 60’s, we were able to have a good life without even being ambitious.

  4. Great article, JQ. Two points to which I’d appreciate getting your thoughts:

    1. Re Tobin tax vs regulation. To the best of my knowledge, it is almost typical for economic models to consider alternative systems but not the adjustment from one system to another. A Tobin tax around the time of the Big Bang in London (around 1988 from memory) is a different proposition to a Tobin tax in say 2020 in terms of its effectiveness. (Similar for a ghg emission tax). My question: Is there a critical point in the development paths of ‘an economy’ beyond which fiddling with relative prices no longer works and quantity restrictions, implemented by legislation, is called for (I am thinking of the difference between local and global – as in general – stability of a system)?

    2. Financialised capitalism. You and others have used this term and I have adopted it in places for convenience of communication. However, IMO the expression financialised capitalism is saying the same thing twice because an important and perhaps the most important difference between a market economy (with a financial sector as described in textbooks) and capitalism is the financial system as we experience it in reality and as has been experienced in the 18th and 19th century .[1] So, in my mental model, the system we have could be called ‘financialised market economy’ or capitalism. My question: What is capitalism? Why does this word seem to have the status of a protected species?

    [1] Ikonoclast’s endless requests to get rid off capitalism – without saying what it is that has to be eliminated – inspired me to try to figure out what are the distinguishing features of ‘capitalism’ vs a market economy on a theoretical level.

  5. Good piece.
    I would underline the point about corporate taxation based on real economic activity, as shown by pretty objective data like value added, fixed assets and payrolls. Doesn’t California already use apportionment to levy corporate taxes, to stop US corporations from using Biden’s Delaware as a tax haven?

    A rival agenda for definancialisation is that of the cryptocurrency cranks. If we revert to bitcoin as the means of payment, bye-bye fractional reserve banking. The scheme is so nutty it makes you think better of banks. The somnolent, boring, safe banks of my childhood.

  6. Bitcoin is not a wealth-producing currency. Gaddafi was trying to start a new currency that would have enriched much of North Africa so he had to die on television. Bitcoin is a disgraceful waste of energy. Thats being said; No bitcoin shouldn’t make you feel any better about banking. And No it won’t get rid of fractional reserve banking. We have to get rid of fractional reserve banking. We are in an extended energy crisis, that won’t be solved until late in the century, and we cannot afford banker welfarism. We don’t want to be softheaded about this. We only want welfare for poor and struggling people. Not for bankers.

  7. Re my endless requests to get rid of capitalism. They occur because capitalism endlessly inflicts itself on me. 😉 However, to explain myself would take a large post. That is impossible now due to the horrendous keyboard and OS that this iPad inflicts on me. So, another time I will expalin my latest thinking. You may all breathe a sigh of relief!


  8. Ikonoclast,
    I think along the same lines as you do. But with your next Vorplay I would like you to address this question. If a society had a very progressive “earned” income tax, and a very progressive tax on other forms of “unearned” income, such as dividends and capital gains, and a property tax to discourage the hoarding of real estate, and some kind of a sales tax, or value added tax, to discourage needless consumption, and rationing so that the wealthy could not hord more way natural resources than they need to have a vit of pleasure and a Cuban style job guarantee (as oppossed to a MIT., job guarantee which I do not support) and a special measure in some countries to give an additional boost to certian social groups that have been left behind by history, such as the Roma would capitalism actually need to be abolished?
    Would the above measures be adequate to tame the abuses of capitalism?
    Also if the anwser to that question is No. No, we still have to get rid of capitalism would those measures be adequate to psychologically prepare a population for the shift to an economy commanded by (idiot) Savants with very little input from people who do not know what in the hell that they really want let alone where in the hell that they are going, which is almost everyone else?
    Thank you for your contemplations and your meditations.

  9. JQ, I and Id say others, would sincerely appreciate a reply to Ernestine’s questions:
    1) Is there a critical point in the development paths of ‘an economy’ beyond which fiddling with relative prices no longer works and quantity restrictions, implemented by legislation, is called for? And,

    2) What is capitalism? Why does this word seem to have the status of a protected species?

    Thanks Ernestine, and in anticipation, JQ.

    Q2 needs to have it’s own sandpit. As does ‘socialism’ and ‘freedom’ and ‘tax’.

  10. Some people view capitalism as the voluntary society. But historically our version of capitalism is a system of state-supported, and even state-subsidised, fractional reserve usury. Mussolini described fascism as “Everything in the State, nothing outside the State, nothing against the State.” But our system as it has developed since the respite of Bretton Woods is more akin to “Everything within the banks, nothing outside the banks, nothing against the banks.”

    As time goes on this system is getting much more evil than Mussolini’s fascism but in our part of the world we see the results as the banks subtly setting up all things such that any kind of economic rent winds up in their hands. So a simple socialist program like running optical fibres everywhere becomes a horrendous mess of rent-seeking and red ink. A debt crisis in the United States, caused by the banks becomes a feeding frenzy where the bankers use the crisis to get their snouts deeper into the trough.

    Exploitation of natural resources is made a catastrophe under this system, since they have made interest tax deductible, they see to it that retained earnings are taxed, but on the other hand royalties are completely inadequate. The net effect is panic and a race against time to get all this gear out of the ground, without thought to the future, but with most of the value landing on the banks table. Where there is fracking, a perfectly good technology, the sprint against usury leads to the polluting of the groundwater, all these people walking around like white walkers, activities going on that the land owners don’t approve of, and a string of companies that are fundamentally financially unsound.

    So we see it all the way down the line. Even innovative businessmen who used to be a great boon to the rest of us, are now a threat, as the financial system seeks to pick a single winner and use him to create huge amounts of debt ponzi money supply upon, create a multi-billionaire even as the average wage stagnates and falls. Anything good can become bad if you attach enough usurious debt to it. So our system of capitalism is a disaster. Whereas for a short time under Bretton Woods it was really rather successful. And it must be noted that when the worthies met to set up the new Bretton Woods system, they left the bankers outside. We can talk amongst each-other and disagree. But keep the bankers outside in the cold.

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