The UK is in debt. Its government, consumers, households, corporations, students, all. But then, so is everyone else. In 2015 world debt was estimated to stand at around $200 trillion, nearly three times world GDP¹. The calculation, by consultants McKinsey & Company, may be debatable, but the point is not: Debt – the flow of finance - is a defining quality of the global political economy.

In this indebted world, the UK is an important protagonist. Its financial system processes £75 trillion worth of payments every year²; it has, after the US, the second largest stock of foreign direct investments³; and its banks lend more to China than the rest of the world put together⁴.

What does it mean, then, to imagine an economy where we – as Jeremy Corbyn put it - ‘Build it In Britain Again’? His landmark July speech was about the UK’s economic renewal. A future Labour government would turn the country away from this financialised world and instead champion national, productive growth. The idea is to “make finance the servant of industry, and not the masters of all.”

The denigration of finance and nostalgic fascination for ‘real’ production has an extensive lineage in British progressive thought. From Hobson to Keynes to Harold Wilson to Tony Benn, there has long been a frustration about the supposed disconnect between the actions of finance and the needs of industry.

Deeply embedded in Left thought is the idea that the country’s ruling class and governing institutions, regardless of party stripe, have been overly committed to a liberal economic order that has failed the country’s productive sector⁵. That is, they have an unwillingness and incapacity to take control over the way resources, especially financial resources, are deployed.

This liberal order is thought to have let the country’s financiers off the hook. Unlike competitors in Europe, America and East Asia, British finance does not work with the nation’s industry. Rather - in cahoots with a state that refuses to intervene – it chases higher returns overseas, excessive terms at home and in all fails to provide the investment or currency environment necessary to support industrial growth.

This critique is that the country’s elites have put class before nation. The danger, of course, is of a Left politics that responds by putting nation before class⁶.

Finance against Nation for Corbyn and the IPPR

The sepia-tinged celebration of a productive past, as both Corbyn’s July speech and a recent discussion paper by Grace Blakeley for the IPPR⁷ demonstrates, has important implications for how we understand the problem of our debt-dependent economy and the possibilities of reform.

The focus is on Britain’s relation to the rest of the world. The nation is elevated to the centre of analysis. The political programmes that follow are then necessarily dedicated to national progress.

This idea that progressive politics can be grafted onto a more nationalist model of capitalism has been a guiding principle for most of Labour’s postwar history. In reviving the trope, Labour risks invoking what Joe Kennedy describes⁸ as “authentocrat” themes about real production and Britain’s manufacturing past.

As nationhood and the real economy take centre stage, the classed social processes of financialisation and the particular actors and institutions they involve often fade from view.

Instead, emphasis is placed on the performance of the country’s imports and exports, as if the status of the balance of payments gives special insight into people’s political economic wellbeing as a whole.

The historian David Edgerton has described this concern about Britain’s lagging industrial sector as the politics of ‘declinism’⁹, one that puts national productive uplift at the centre of progressive economic policy.

As such, it is no surprise that today’s analysts ask much the same question that animated declinists for most of Britain’s postwar history. Simply, how can a country that imports more than it exports continue to pay its way in the world? Household debt, regional inequality, financial volatility and spiralling house prices are all thought to be part of the answer today.

With the productive sector unable to generate sufficient export earnings, Britain must rely on financial inflows from overseas. That is, we need money from abroad to pay for all the food, energy and consumables we import. The money that sloshes into our financial sector is used to buy UK assets (especially real estate) and to lend to UK consumers. The great sums that flow in also ensure the UK’s overvalued currency remains stable. All of which further undermines exporters and deepens the problem.

In this analysis, the financial dynamics of private debt and spiralling house price inflation are thought to follow neatly from flows of trade. It is as if the real economy - production - sets the agenda, and finance simply fills in the gaps. Framed by the neoclassical economic assumption that finance exists to support production (in theory, at least), the politics of finance is understood in terms of how it does, or more often does not, support national productive renewal.

The consequence is to divide the financial world into a neat binary. Good finance invests in ‘real’ production; bad finance speculates. And the problem is Britain has too much of the latter and not enough of the former.

In this world, speculation is unsustainable. Real economy ‘fundamentals’ can be avoided for a while, but eventually reality bites. That is why both Corbyn and the IPPR paper argue Britain’s attempt to cover overseas spending through overseas borrowing won’t work in the long term. Unless we invest domestically and adjust our currency to remedy our lack of international competitiveness, there will come a point (Brexit, perhaps?) where lenders lose faith. And the bubble will burst.

But Britain has been running a financialised model, with a large current account deficit, for four decades now. Focus on the apparent _un_sustainability seems to miss the point.

Moreover, productive success is no guard against financial instability. South Korea has a flourishing manufacturing sector which, in national terms, runs a handsome trade surplus. Yet, come the 2008 financial crisis it was left horridly exposed¹⁰ and dependent on a $30 billion American bailout for survival.

Export success, then, is no more a guarantee of a functioning financial sector than it is a guarantee of high living standards.

Rather than dismiss it as an aberration, the challenge in Britain is to grasp how the country’s debt-dependent, viciously regressive economic regime has endured for so long. Indeed, the electoral success of Margaret Thatcher and Tony Blair was in large part forged on the country’s capacity to sustain great waves of credit creation. In both the 1979-1990 (Thatcher) and 1997-2007 (Blair) periods, the taxes (barely) skimmed from the financial sector financed limited public-sector job creation in ex-manufacturing regions. At the same time, mortgage holders borrowed against the rising price of their houses to boost consumption. The share of mortgage equity release in both periods was greater than GDP growth¹¹.

Understanding this capacity for sustained credit creation requires examining the institutions, instruments, processes and practices of finance and how they are formed.

This is difficult when ‘the national’ and ‘the productive’ lay at the heart of our analyses. If we focused instead on the staggering shifts that have taken place within finance itself, we can better grasp how financialisation has become so deeply embedded in the UK and world economy and who it has empowered.

The credit revolution

Financialisation is, of course, a story of vast numbers but it also entails, as the IPPR paper notes, a deeper cultural shift. The way financial norms and interests reach deep into everyday life is just as important as the eye-watering aggregates of debt.

How this has happened can be difficult to clarify. From a declinist frustration with Britain’s liberal order, focus often falls on the state’s regulatory regime. Financialisation becomes a tale of lax regulators (transfixed by “magical thinking”, as Corbyn called it) who allow a free market to flourish. The social practices and struggles of banks and financiers within the market fall out of the story.

In both the IPPR paper and Corbyn’s speech, this stems from a Polanyian-style reading. State action is presented as a choice between ‘embedding’ finance with regulation to make it work for the good of society (production), or ‘disembedding’ finance by liberalising markets and allowing what Corbyn described as “a global economy free-for-all”, in which financiers run free and speculate for their own enrichment.

Unsurprisingly, from this basis, Thatcher’s 1980s government is depicted as the key moment of transformation. Her deregulatory supposedly agenda allowed financialisation to spring into existence. These accounts depict the politics of finance as a lurch from state-led regulated ‘good’ finance, to market-led, unregulated ‘bad’ finance. The wish is then for a radical government to take us back once more.

Yet the wave of credit creation that began the great leveraging of the British political economy did not begin in the 1980s. Financialisation did not spring from Thatcherite deregulation. Rather, new financial practices that developed in the 1960s were crucial. This at the high-tide mark of supposedly ‘embedded’ and regulated finance.

To understand this shift, we should look less at state regulation and productive performance and more at banks themselves. The heterodox tale about banks creating the money they lend is well known. Doing so, however, is a delicate operation. Banks, like the rest of us, operate under a constant liquidity constraint. They, like us, must be able to attend the daily inflow and outflow of cash balances¹².

To meet their cash-flow commitments going out to customers, they must always have ready access to liquidity coming in. This could be met from cash in reserves (the deposits we make in banks), by borrowing cash from the central bank, or - as became crucial - by borrowing cash on the open, ‘wholesale’ markets.

Previously, British commercial banks managed the constraint mostly by expanding the pool of reserves (through a network of branches) and, whenever necessary, by borrowing from the Bank of England¹³. In the late 1960s, however, an invention from American finance came to Britain on the Euromarkets that saw the rapid growth of wholesale money markets.

These are markets of private, short-term cash-like financial securities. Though Britain had always had private money-like securities, in the 1960s the volume and variety expanded rapidly because banks began to issue short-term securities - Certificates of Deposits (CDs) and later Repurchase Agreements (repos) - that other financial institutions bought with cash¹⁴.

Rather than having to build a network of deposits to access cash, or access costly state-created securities from the Bank of England, the wholesale money market was a place where banks could instead ‘buy’ deposits (by issuing CDs). This provided an alternative approach to meeting the liquidity constraint and in doing so forged the capacity for banks to unleash credit on a far greater scale.

This practice, called liability management, flipped finance on its head: banks lent first (expanding the asset side of their balance sheets), and then went to the wholesale markets to fund their liquidity constraint (the liability side). As one clearing banker described it, “almost for the first time in banking history you found your lending business then scurried around for deposits.”¹⁵

This was a credit revolution that fundamentally altered the political economic terrain. It made wholesale finance the central node that knitted banks, non-financial corporations, and central banks together in a new way. This transformed the position of investment banks, whose development of liability management helped them displace merchant and commercial banks at the apex of finance.

The terms by which banks could access liabilities - buy the deposits needed to meet the liquidity constraint - became a key driver of political economic conditions, greatly empowering the few dozen global banks at the centre of credit creation¹⁶.

Financalisation and Productivity

As Adam Tooze¹⁷ (along with others) notes, credit dynamics became constitutive of productive outcomes, rather than the other way around. The way liabilities are raised globally, and often in foreign currency, often to support ‘speculative’ lending, disturbs the categories of ‘nation’ and ‘production’ and might necessitate different policy responses.

The power of particular City actors - the oligopolistic banks and asset managers in particular – won’t be countered by more active state support to the productive sector.

Indeed, liability management, and the financialisation it has underpinned, has muddied the distinction between ‘financial’ and ‘non-financial’ firms. Is an energy company like the BP Group (notionally headquartered in the UK) strictly non-financial? It operates in conditions where commodities are subject to speculative demand, and is able to raise debt finance through huge bond issues (in Euros, most recently).

This kind of melding of financial and productive companies is thought to have seen productive priorities lose out to financial imperatives. Rentier lenders are thought to demand excessive and immediate returns, out of kilter with the slower rhythms of productive enterprise. This lack of ‘patient capital’ is a chief complaint articulated by Mariana Mazzucato and adopted by John McDonnell and others.

But they often misread how that happened. They assume the mantra to ‘maximise shareholder value’ came from rapacious institutional investors using financial markets to project their demands on hapless industrialists. Finance, again, scuppering industry.

In reality, the trajectory ran more in the other direction. Shopping around for money to fuel ever more highly-leveraged asset growth was an art honed by conglomerate industrial firms like LTV and Litton Industries in 1950s and 1960s America. These firms exploded onto the corporate landscape from obscure origins and their profits quickly surpassed some of America’s largest and most well-established companies.

Their innovations with debt-financed acquisitions, new ownership structures, accounting practices, shareholder offers and organisational restructures were central to financialising the firm. These were innovations dedicated more to managing the cash-flow constraint than to improving productive efficiency¹⁸.

This mode of highly-leveraged operation proved instructive for corporate reform in Britain. The asset-stripping tycoon Jim Slater was important in ushering in the transformation to short-termist financialised ‘industrial’ firms in Britain. He was a vocal admirer of LTV’s James Ling and spoke of trying to bring the conglomerates’ managerial style to Britain. Though Slater, and similar asset-strippers like James Goldsmith, articulated their practices in the language of promoting shareholder interests, they were in fact using financial markets to serve themselves¹⁹.

As these techniques slowly reformed corporate America and then corporate Britain, top brass firm insiders gained handsomely, while distant shareholders, workers and other stakeholders bore the risks. Protecting managers from shareholders might not actually be the best response.

The contemporary highly-leveraged dynamic was identified in Blakeley’s analysis of the Carillion debacle²⁰. Carillion was playing the art of leverage in much the way Slater once did, taking on more and more short-term debts and hoping to win enough contracts to just about pay next year’s creditors²¹. It was, as Blakeley memorably put it, “a giant, state-backed, debt-driven Ponzi scheme”. This model of state-backed special purpose vehicles borrowing heavily against an ever narrower asset base is an important characteristic of Britain’s economic model²².

The bubble bursts when these entities, like Carillion, are no longer able to keep generating the liabilities. And when this happens it is workers, customers and stakeholders that lose out far more than insider executives who have already skimmed the gains.

It is not unusual for financialised firms to grow wildly and collapse. Yet we should not read their political significance in terms of their failure. Like all financial bubbles, what is interesting is how they are sustained, not just why they burst²³.

What next?

In Corbyn’s July speech, the IPPR paper and indeed the last 70 years of Left reformist politics, the policies proposed centre on nationalist capitalist revival. This would come from using state institutions to help direct productivity growth.

To do so, the price of sterling would be eased down to better reflect current account realities, and the state would sponsor infrastructural spending, procurement support, and educational investment. Alongside tax restrictions to slow speculative finance, these would somehow jump-start a productive renewal anchored in high-wages and regional balance. There are clear parallels here with Wilson’s white-heat revolution of the 1960s, whose techno-utopian vision of productive upheaval Corbyn’s economic rhetoric most closely resembles²⁴.

Yet the problems Wilson faced have only magnified today. Britain’s industrial heyday was undermined not so much by parasitic finance nor an uninterested ruling class; rather, competitors from abroad had developed and Britain’s uniquely dominant position had come to an end.²⁵ Even if Britain’s industrial sector could be revived, it is not clear why productive companies would work any more equitably than the current model.

Boosting exports and reducing imports does not neatly translate into greater wellbeing or opportunities to live rich and meaningful lives. Better infrastructure and educational resources may well do, but not necessarily if they are dedicated to a zero-sum conception of international competition.

Moreover, the optimism²⁶ that productive renewal and financial regulation can stop predatory financial growth is not necessarily warranted. In 2008, finance briefly froze, speculation stopped, house prices fell and sterling dropped. Belief in the magical thinking that had walked us to crisis zapped away. Yet the fundamentals of Britain’s debt-based economy revived almost instantly. History does not reverse; the financial genie won’t go back in the bottle.

If de-financialisation is not possible, is it worth asking how we make a permanently leveraged political economic model more equitable?

One place to start could be the wholesale money markets that underpin contemporary finance. Wholesale finance makes the creation of ‘safe assets’ central to credit creation. In the run-up to the 2008 crisis, real-estate assets were thought to be safe and were the collateral upon which credit was issued by the conglomerate banks. Since the crisis, it is state-backed securities that have taken this role.²⁷ The wholesale money market is dependent on public debt securities, or private securities with implied state-backing, to function²⁸. This could be a basis for the public sector to demand far better terms from oligopolistic finance.

Other ideas, from the monetary financing of QE to taxes on bank liabilities, already exist. It might be that monetary finance is not necessary, but it could work alongside supply-side reform that supports the development of a green, low consumption infrastructure. Or, indeed, an upgrading of the social (re)productive sector which is often occluded in the depiction of factories and workshops as authentically ‘productive’ economic activities.

Given the problem of overproduction of global capitalism as a whole²⁹, perhaps progressive economic renewal could focus on radical democratic redistribution rather than further growth.