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A brief history of... Financialisation

Updated Thursday 15th October 2009

Ione Mako talks with Pauline Gleadle, Lecturer in Management at The Open University Business School. What does financialisation mean for businesses - and individuals?

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Ione Mako: Hello, you’re listening to the Open Finance series on Lessons From History from The Open University Business School. My name is Ione Mako and today we’re looking at financialisation with Pauline Gleadle, who is the Lecturer in Management at the Open University Business School. Hello, Pauline.

Pauline Gleadle: Yes, Hello.

Ione Mako: So tell me first, what is financialisation?

Pauline Gleadle: Well, financialisation is basically an approach that looks at the impact of financial markets, capital markets, upon organisations and also upon individuals. So why this is interesting is that there’s some important researchers in this area at Manchester University, Julie Froud and Karel Williams, and they say that these new forces of the capital market are much more mobile and more threatening than the old forces of simply the product markets of consumers, so that we’re facing quite a different phenomenon now.

Ione Mako: Can you give me an example of that?

Pauline Gleadle: Well, yes. As we know, under globalisation and under deregulation financial institutions will move quickly in and out of companies with great speed, arbitraging as they see good investment opportunities. Now, obviously the speed with which they can do that is much quicker than you would see product consumers reacting to differences in products.

Ione Mako: So, what sort of effect is this having?

Pauline Gleadle: Well, potentially, a huge effect because a company can find that maybe it’s been taken over by a financial institution with a very short-termist perspective who will radically look at the way they do business and sort of demand all sorts of changes, adopting quite often a much more short-termist perspective than management would normally.

Ione Mako: An emphasis on “profits now”.

Pauline Gleadle: An emphasis on “profits now”, yes.

Ione Mako: Okay. So how has it come about? What’s the history of financialisation? Where does it come from?

Pauline Gleadle: I guess we tend to see it at its most extreme in the US and the UK, say, compared with other countries. I mean, basically, what we had was in the 1960s, particularly in the US, there was a massive over-expansion of companies. By the 1970s we had these companies who were showing evidence of poor corporate performance and they were beginning to suffer much more the effects of international competition from the Japanese, for example.

What we then see by the late 1970s is the beginning of what we call a productionist as opposed to a financialised period, and this was basically, as I was saying, with people like the Japanese coming in and posing new competition, especially in things like cars and consumer electronics as companies very much moved beyond their traditional geographical boundaries.

It also happened that, around the 1980s, there was a lifting of restrictions on US pension funds and insurance companies and, as a result of this, we had much more aggressive investment policies which, as I was saying, can be much more threatening to individual companies than the old consumer competition model. What we had was that around 1990 we then had a lot of old economy sector firms who were having trouble meeting capital market demands.

And particularly then about ten years later, we had that there was new universal competition of financial results where companies were increasingly being ranked, quite unlike companies against another unlike company, in terms of a sort of league table of financial performance. And there were certain measures, such as, for example, economic value-added, which claimed to do exactly that, which claimed to be able to measure shareholder value across quite different sectors, and that was what the proponents of such measures as economic value-added claimed.

Ione Mako: So what does all this mean to us now in the summer of 2009, following on from all the global banking collapses we’ve seen?

Pauline Gleadle: Well, for example, some people would say that what we are living through is something that you can call “coupon pool capitalism”. And what you have under coupon pool capitalism is that banks and other financial institutions are no longer simple intermediaries between people who want to borrow money and people who want to lend money. Instead, what we have is that these financial institutions are acting very much almost in their own right in order to shape the behaviour of you and of myself, of individuals, but also of organisations.

Ione Mako: So we’ve got the banks running businesses that actually they know nothing about?

Pauline Gleadle: Potentially that can happen. But what we’re essentially saying is that we’ve got these capital market pressures that are very much impacting on organisations in a way that product markets simply did not do in the recent past.

Ione Mako: Okay, so now what might the lessons be from this financialisation that’s happened over the last forty to fifty years, what can we learn now?

Pauline Gleadle: Well I mean to some extent, as you can see from what I’ve said, financialisation is about a whole series of events coming together and obviously sped along by developments in information technology and obviously globalisation. I mean my own personal view is that we actually need to go back to a situation of more regulation in contrast to the past, where we had a lot of deregulation from around 1980 in the US particularly.

Ione Mako: And is that possible now, because if we deregulated companies and we’ve got large global companies and large banking institutions running things I imagine they’re not going to be that happy about being regulated again, and don’t they have quite a lot to power to resist now?

Pauline Gleadle: Well they will have quite a lot of clout, but obviously we’re having one of the fallouts from the situation is that we’re having the situation work where banks will not lend. So it seems to be, I would have thought, in just about everybody’s interest for there to be a greater measure of regulation than there has been in the recent past.

Ione Mako: Right, and I can see that there’s a great deal of interest for us ordinary people at the bottom of all this being affected, but is there some interest for the banks and people running the banks to do this yet, or are they still getting away scot free?

Pauline Gleadle: The answer to that is, I don’t know. But they have been under such public pressure that they’re having to be seen certainly to change some of the ways in which they pay bonuses. One thing that I think is also interesting is that there is certainly debate going on about the need for a more ethical approach to business. And, for example, I read recently that a fifth of the recent Harvard Business School MBA graduates had elected to take an ethical oath about and they would seek to act in an ethical way and not just follow their own short term interests, and there is more discussion about that among other US schools.

Something else you may know is that, perhaps in the last ten years, particularly at business schools, there’s been this great growth of interest in business ethics. So we are seeing certain currents in that direction.

Ione Mako: So, really, what we’re saying is we think there’s a new generation coming through that will be interested in an ethical dimension for the good of all.

Pauline Gleadle: Well, we hope so. One critical management professor read about these Harvard Business School graduates taking the oath and he said it made him want to gag. My reaction to that is well, okay, maybe it did make him feel like that but at least it is a step in the right direction.

Ione Mako: Is financialisation a dead concept now, or what’s going to help recovery?

Pauline Gleadle: No, financialisation I think is very much an alive concept. It describes an awful lot and provides a good framework for understanding what has happened. We are living essentially in highly financialised times and there have been books recently written about how financialisation affects you and I as individual consumers, as people who have mortgages and pensions, and in fact how every aspect of our daily lives in many ways is now financialised. So I think it is very much alive and kicking.

Ione Mako: That’s great, thank you very much Pauline. You’ve been listening to the Open Finance series on Lessons From History from The Open University’s Business School.

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