The Dark Ages of Financialization
European Straits #9
Dear all,
Since the 2008 crisis, the public debate has been dominated by the role of finance in our economy. Colin Crouch has written about household debt as a substitution for the welfare state to sustain mass consumption. Clayton Christensen has denounced the distortions that the ‘doctrine of new finance’ has imposed on corporate innovation. More recently, in her acclaimed Makers and Takers, Rana Foroohar has called for tackling the issue of financialization “to ensure not only more sustainable growth, but more stable politics”.
The current domination of global finance can easily be reconciled with Carlota Perez’s model of technological revolutions. When a techno-economic paradigm enters a phase of exhaustion, it’s usually time for finance to retake the upper hand and try and make the most of legacy assets. This happened one century ago, when the post-Great War exhaustion of the age of steel and electricity coincided with the financial exuberance leading to the Stock Market Crash of 1929. Since the 1970s we have been witnessing a recurrence of that phenomenon with leveraged buyouts, derivatives and securitization.
If history is to be trusted, the current reign of finance could endure as long as a major, destructive crisis doesn’t prompt governments to build the new institutions necessary to make economic growth sustainable and inclusive again. The 2008 crisis evidently wasn’t enough: as hard as it struck the economy, it was ultimately contained thanks to a swift reaction from governments and central banks. Now we’re somehow still waiting for the destructive blow that would lead governments to take radical action and build the new socio-institutional paradigm called for by the current Entrepreneurial Age.
There are several reasons why the exhausted age of the automobile and mass production has endured for so long: the sudden rise of large consumer markets in emerging countries; the possibility of making products cheaper by producing them offshore so as to sustain domestic mass consumption; the expansionary monetary policy that followed the terrorist attacks of 9/11 in the US; and the development of fracking as a way to prolong the era of cheap fossil fuels. One reason, however, stands out: the invention of business strategy by a small group of consultants and scholars from 1968 onward. As executives discovered the power of the experience curve, portfolio management and strategic positioning, it became easier to comply with the financial hunger for higher, more short-term returns.
Of course, business strategy, a neutral discipline, is not the culprit for the current sad state of our economy. However, the unexpected alliance between financial markets and business strategists reveals dramatic consequences. You can harness the power of business strategy to take bold risks and implement radical innovation. You can also use it, as has been the case since 1968, primarily to preserve the status quo and divert more value in favor of corporate shareholders.
All in all, the convergence between business strategy and global finance has enabled the exhausted Fordist paradigm to be kept on artificial respiration—even beyond the 2008 financial crisis. And that era of never-ending exhaustion, from 1968 to 2008, has been tough on people from many points of view. This is the reason I now call it the Dark Ages of business strategy and global finance—a long, painful and ambivalent period between the fall of the Empire (the exhausting age of the automobile and mass production) and the Renaissance (the nascent age of personal computing and networks).
There lies the ambivalence of our time. Should we long for a crisis comparable to World War II that would clear the way for building new institutions? Or should we resign ourselves to the status quo, with all its corrosive consequences—the lack of innovation, the widening of the inequality gap, the increased economic insecurity, and the rise of populism in every advanced democracy?
The concept of the Dark Ages is an idea I’ve been exploring in my new book’s latest completed chapter. Here’s an overview: How Technology Drives Institutional Change.
Also, I’ve recently published two more notes about business strategy:
Warm regards,
Nicolas