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The Finance Curse

‘Finance good, big finance better and biggest finance best’. This subtle mantra has bounced around developed economies for decades and it has almost entirely captured politicians, the media and the public. In the name of competition, countries have fallen over themselves to attract financial corporates to their shores to create wealth.

But recent studies have shown that financialization actually extracts wealth, hollows out an economy and drives inequality.

So is the realization finally dawning that what has been sold to us as a blessing, is actually a curse? World travelled financial journalist, Nicholas Shaxson, outlined to Renegade Inc. the link between the resource curse and the financial curse in developing nations.

The resource curse

While based in Angola during the 1990s, Shaxson began writing about what academics termed ‘the resource curse’. The journalist realized that at its core poor countries dominated by natural resources are in many cases made even poorer as a result of them having access to minerals like oil.

At that time, the United Nations referred to the cursing of Angola’s oil and diamonds as the worst form of war in the world. This provided the starting point for Shaxson’s thesis:

“Nobody had any doubt that Angola’s oil and its diamonds had cursed the country”, says the journalist. He claims to have discovered a similar pattern at play in relation to the British tax haven of Jersey – a territory dominated by offshore finance rather than oil.

The common denominator, according to Shaxson, is the retreat of the most well educated and talented people from other sectors of the economy into the dominant sector – enticed by higher salaries and status. Thus, a key element indicative of the curse relates to “the kind of golden sector to which everybody looks to”, says Shaxson, adding “..If in Britain, you studied at Oxford or Cambridge or one of the top universities, finance is gonna be very attractive. And so a lot of these people will be sucked out of…great medical research or designing better rocket ships or whatever, and instead go into finance.”

The same process was characteristic of Angola where:

“The oil sector… sucked… all the best people out of the agriculture and former manufacturing sectors – all of them slaughtered by… oil money. But you had lots of other effects happening as well – the instability with oil boom and bust. Oil prices, for example, rose from $10 a barrel up to well over $100 and then crashed right back down again. This caused enormous damage to the rest of the economy. So this is kind of a second wave of damage”, says Shaxson.

Here, Shaxson draws an equivalence with Britain’s finance dominated economy; its relationship to the global financial crisis and the slowdown in growth:

“The phenomenon there is when you have… huge inflows of capital coming into your economy and you get.. rising exchange rates, prices rise. This high price environment …makes it much harder for other sectors like manufacturing to compete with imports, so those sectors wither…. And with finance you get a whole range of other things happening that go beyond what happens to an oil dominated economy. So the idea of the oil curse leading to the finance curse is a… kind of a starting point for understanding the damage that finance causes to the economy.”

Shaxson posits that his opposition to the notion of a dominant finance sector is not an argument against financial liquidity or finance per se. Indeed, he acknowledges the validity underlying the expert consensus view that society needs finance in order to ensure people’s savings are channelled towards productive investment.

Optimum state

Shaxson’s point, is that there’s an optimum state of finance – the law of diminishing returns – that counteracts the propensity for growth:

“Once financial sector development exceeds a certain optimal point then it starts to turn negative – starts to turn harmful”, says Shaxson. “The research that’s now coming out is showing that there is this kind of U shaped graph between financial sector development and growth.”

The way to think about this is to use the example of a developing country. The said country with an underdeveloped financial sector would benefit from more financial development because it would tend to enhance growth as a result of the new opportunities created in the economy. “But once you reach this optimal point, you start to see that more financial development doesn’t create more economic growth…It then starts to turn negative”, says Shaxson.

Pointing to the example of the City of London, the journalist notes:

“As financial sector development has grown, it has inflicted more and more damage, relative to how the UK would have been if it had a much smaller financial sector serving it… the roles that it should be serving rather than the new kind of predatory roles that have been emerging over the last decades.”

For Shaxson, the most historically interesting period in terms of the establishments recognition of the optimum point, occurred during Bretton Woods after the Second World War, because:

“This was a system…that savagely suppressed cross-border finance. It was broadly accepted that too much cross-border financial speculation and so on was actually very dangerous and damaging so [John Maynard Keynes and his American counterpart Harry Dexter White] put in place this remarkable system for controlling, reducing and curbing flows of finance across borders in order to give governments breathing space to put in place the policies they wanted to put in place.”

Shaxson continues:

“This period [of very savage suppression of finance]…corresponded ….[with]….the highest and most broad based economic growth in world history, before or since. During the period of suppressed finance there was stuff happening in the City of London to kind of try and break free. So there was a kind of economic thing going on and the system began to tremble and it kind of smashed apart. There was also an ideological change [the neoliberal period from the late 1970s] as people were saying, we need to deregulate, we need to cut taxes and so on. These things came together, busted open the system and then economic growth started to slow after that.”


“The period [in the 1970s was when] the system really… broke down. You had the OPEC oil price shock and all sorts of other things happened and finance was basically freed and started to flow across borders [because those regulations were systematically taken away].

Finance serving the economy

The thirty year period after the Second World War, therefore, was actually a time where the real economy was supported by finance and not undermined by it as we see today. In other words, the consensus during the period after the war, was to ensure, as Shaxson puts it, an economy…served by finance, not an economy that serves finance.”

Shaxson adds:

“Since the ’70s as finance has become free and it has grown more and more dominant in our economies, it’s fair to say that to a very large degree…the British economy and that of…other finance dependent countries, are serving finance, not the other way round. And that’s the situation we find ourselves in and that’s the situation we need to do something about.”

The states capitulation to capital – where servant has become master – can be characterized in two ways:

1) the growth of finance, credit/banking and real estate sectors.

2) the growth of what academics call ‘financialization’ – the rise of financial techniques and models in the rest of the economy.

Shaxson says that financial techniques have “increasingly been put to use in these sectors [in addition to manufacturing] and that “there has been a rising focus away from the kind of old view of companies as servants of society. They had various goals -providing good jobs for workers, profits for the owners and providing tax revenues. These were all part of the good stuff that companies were providing.”


“As financialization has progressed, these multiple goals have been kind of narrowed down towards a single minded focus on extracting profit for the owners of these companies and all the other goals have kind of fallen away. So you’ve had companies start focusing increasingly on financial engineering [in which] a private equity firm, for example, buy up a company and say, ‘This company hasn’t put enough of its financial affairs through tax havens so let’s do that. Let’s buy it up, run more of its stuff through tax havens. Let’s buy lots of companies in the same sector and put them all together so now we’ve got a monopoly and we can extract more money from consumers’. So they’re extracting from taxpayers and from consumers.”

In other words:

“What financialization is really about is this shift away from [the] idea that we’re creating wealth towards this idea that we’re extracting wealth.”

Shaxson characterizes the system as a superstructure of pipelines under which the real economy sits where money is extracted out of different parts of the economy for the benefit of a relatively small number of people at the top of the financial sector.

But this is not quite the Angolan model of oil resource depletion implied by Shaxson:

“The big difference here”, says Shaxson, “is that with Angola you’ve got pipes going into the ground and extracting oil. With the financialization you’ve got pipes coming into our pockets or going into businesses and extracting wealth from that. So in a sense…it’s even more damaging.”

Nicholas Shaxson

How can the public rationalize the ‘shadowy world’ indicative of the finance curse?

For Shaxson, the starting point in understanding what’s going on, is the image of an ‘extractive machine’ that sucks money out of other parts of the economy:

“You can see it in geographical terms…You know there’s this narrative that London is the engine of the British economy [which] generates tax revenues…and sprinkles it around the country. But once you look under the hood at this process of financialization, what you have is a large number of ….financialized institutions based in London extracting wealth from other parts of the economy and also from poorer parts of London as well.”

The reason the City of London is able to earn huge profits is because they can impose very high rates of interest on the real wealth creators and effectively extract economic rents from the real economy. They can do this because they have this monopolist power as creators of money. The finance curse helps people to understand what’s gone wrong – that…we have an oversized financial services sector and, therefore, the City of London is too big in the UK.

Consequently this helps legitimize the arguments of those who say what’s needed is regulation, the pushing back against money laundering, fraud and embezzlement and the introduction of a financial transaction [Tobin-style] tax. These kinds of actions would be better for the economy because it would shift banking away from crooks to actually helping push money into productive investment.

“One of the things that people in Britain and in Europe have not really woken up to”, argues Shaxson, “is the level of market power, corporate concentration and monopoly that’s going on. If you open a copy of the Financial Times, any given day, the chances are that the headline is about a merger. All these companies that are out there are steadily being merged into bigger and bigger entities. And if you look at the world’s rich list – the Jeff Bezo’s, Bill Gates – almost all of the richest people in the world are basically monopolies. That’s their game. This is another example of financialized wealth extraction.”

Fake competition

The irony of course, is that capitalism is all about competition and market efficiency – a contradiction within the system recognised by Marx over 150 years ago. Moreover, competition and competitiveness is based on a fundamental fallacy:

“Market competition is one thing. ‘Competitiveness’ and the ‘competitiveness agenda’, is another thing completely…We need to get the language right by removing political doublespeak”, says Shaxson:

“When people have been promoting what they call the competitiveness of the City of London, what they mean is we must give the City of London breaks. We must give them goodies; we must give them deregulation; we must give them tax cuts, wherever they need to kind of compete on a global stage…otherwise they’re going to run away to Geneva or Hong Kong.”

In the view of the journalist, the finance curse analysis crystallizes the issue because:

“What it says is, ‘Up to a certain point finance helps, beyond [which]…it starts to turn negative….Britain passed that point a long time ago. So the bigger your financial sector – the more growth you have now in the financial sector, in general terms – the lower your economic growth will be and all these other harms that will happen. So if you’re….calling for a more competitive financial sector, you’re calling for a bigger City of London. It doesn’t take a genius to see that… more finance, lower growth – and so on, is going to damage the economy. But I think people have… been dazzled by these jobs that are created. They say, you know, this sector creates a million jobs and….tens of billions of tax revenues.”

Logical flaw

Shaxson highlights the flaw in this logic:

“The problem is that’s a gross figure. That is the amount of jobs that are created in tax revenues just by the City of London, but it airbrushes out all this other stuff that’s going on – the financialization, the brain drain, the Dutch disease – all these other things.”

In addition:

“There was a study done by [US finance professor] Gerald Epstein and a couple of others which tried to estimate the damage that has been caused to Britain by an over-sized financial sector. They used all the standard research from the IMF and others to build this kind of model and estimated that over-sized finance – that had grown beyond its optimal size – had cost the British population the equivalent of £170,000 per household in terms of economic output from 1995 to 2015.”

Shaxson added:

“That’s an absolutely massive number. But this is the closest estimate I think we have to how much over-sized finance – and I stress over-sized – has damaged Britain.”

Arguably, Shaxson’s thesis is consistent with the notion we are living in the ultimate Age of Capital mis allocation. The argument, in other words, is that the reason the real economy after the Second World War boomed was because finance was suppressed.

“Innovation; the experiences and services are all suffering from this problem of financialization – from the techniques of extracting wealth from these sectors” – says Shaxon. “Large multinationals are doing very well because… they’ve been financiaized. Just taking the supermarkets as an example: you have the likes of Tesco and Sainsbury’s doing fine. But in the old days you used to have…your local butcher and…a whole high street full of businesses that have been destroyed by competition from these larger players.”

There is an alternative

“It doesn’t necessarily have to be that way”, says Shaxson. “You would have a much more balanced economy if you were to put in place policies that did not favour these larger players [by way of tax cuts etc] who nevertheless shift profits for themselves offshore. Your local hairdresser, your local car dealer can’t make that threat, can’t say you know, ‘give me a tax cut or I’m going to head off to Singapore.’ It doesn’t work like that. So this system of supposed competition between countries and the notion that we must be competitive, is always taking resources away from the smaller, weaker players and giving it to the larger players in the name of this bogus competitiveness.”

The logical conclusion – a hollowed-out economy within the context of a broken and sanitized society – is a bleak one, that nevertheless doesn’t necessarily result in a negative conclusion:

“It simply doesn’t have to be this way”, claims Shaxson. “When they get this idea of competitiveness in their head, people say, ‘Well you know, there’s a race to the bottom going on, everyone’s cutting corporate taxes’ and the next country joins in and then you have to kind of cut taxes some more or cut financial regulations or whatever. And they always…make this threat, ‘we need tax cuts or we’re going to run away'”.

Shaxson adds:

“The finance curse analysis shows…that…if you regulate the City of London properly as your democracy demands, you will shrink the most harmful parts of the City of London leaving the useful core and your economy will benefit…..If you are genuinely committed to serving the interests of the people of Britain as a whole, rather than just serving the interests of one part of Britain, then you can do this and [it] will benefit your economy.”

Rather than being encouraged to make political choices, a neoliberal government like Britain claim there is no alternative to the ‘race to the bottom’ competitiveness path….”Some of the Brexiteers”, claims Shaxson, “have this idea that after Brexit Britain will be free to compete – to become more of a tax haven than it already is.”

This eventuality would create:

“A more financialized economy, a larger financial sector, more damage to the rest of the country…which is what they call ‘Singapore on Thames.’ Yeah. Let’s be like Singapore. As if a country the size of Britain could be anything like Singapore. A small minority of people would get richer from this… but the large majority of British people would become [significantly] poorer… finance became more and more dominant and the rest of the economy…. became more and more subservient to finance.”

What are the likely medium and long term implications of a shift in the other direction?

According to Shaxson, there would be a reduction in the finance curse: “It would also likely reduce the political power of finance and that would open up a lot of possibilities for actually doing something about this because….the biggest blockage is not only this kind of societal and cultural dominance of finance that’s reflected in. You [also] see it in the output of large media organisations – the BBC and so on. I think if you had a weakened finance you would start to see the possibility for different political constellations opening up.”

“I think people haven’t got over this idea that the city creates jobs and tax revenues…that…we must protect….I think once we can show people that the city is not a golden goose…it is more like a cuckoo in the nest crowding out other sectors, they will start to realize that they don’t have to worry about the size of the city anymore…Then I think it becomes a no brainer. We just need to regulate it….democratically, tax it appropriately and reduce the financialization that’s happening in the rest of the economy.”

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