Original: "The Fall and Rise of American Finance"
Translation: MicroMirror
Preface
1: The Latest Stage of American Capitalism Development
The Rise and Fall of American Finance
A New Landscape of Financialization
Rethinking Finance and Corporations
2: Classical Financial Capital and the Modern State
Financial Capital and Industrial Capital
From Bank Capital to Financial Capital
Financial Capital and Competition
State Power, Class Power, and Crisis
3: Managerialism and the New Deal State
Reshaping Capitalist Finance
A New Industrial Order
Class Struggle and the Crisis of Managerialism
4: Neoliberalism and Financial Hegemony
Financialization of Non-Financial Companies
Asset Accumulation and Market Finance
Financialization and Authoritarian Nationalism
The 2008 Crisis and the Question of Decline
5: New Financial Capital and the State of Risk
Crisis Management and the State of Risk
The Rise of the Big Three
New Financial Capital
Private Equity, Hedge Funds, and Financial Capital
6: Crisis, Contradictions, and Possibilities
The Nationalization of Market Finance
Macroeconomic Policy of Financial Capital
The False Promise of Universal Ownership
Financial Democratization
1: The Latest Stage of American Capitalism Development
The 2008 financial crisis marked a fundamental change in American capitalism. As the crisis management efforts of the Federal Reserve and the Treasury brought state power deeper into the core of the financial system, successive rounds of quantitative easing facilitated an unprecedented concentration of corporate ownership in a small group of large asset management companies. In the aftermath of the crisis, these companies—BlackRock, Vanguard, and State Street—replaced banks as the most powerful institutions in contemporary finance, accumulating ownership on a scale and scope never seen in the history of capitalism. These asset management firms became central nodes in a vast network that encompassed all major companies in nearly every economic sector.
This represents a historic shift in corporate power. Since the New Deal, the separation of ownership and control has been a core feature of corporate organization: those who own the company (shareholders) are formally distinct from those who control it. In the decades leading up to the crisis, the market regulated the relationship between shareholders and managers: shareholders could "exit" by selling shares of underperforming companies. However, with the rise of the Big Three after the financial crisis, the boundary between ownership and control has been blurred. As "passive investors," asset management companies could only trade to reflect their changing positions in indices like the S&P 500 or NASDAQ. Unable to freely sell shares, they turned to more direct means of controlling industrial companies.
Such financial influence over industrial enterprises has not been seen since the Gilded Age, when giants like J.P. Morgan dominated American capitalism. For over a century, the concentration of ownership was limited by a fundamental trade-off: investors could own a relatively small part of many companies or a large part of a few. In other words, as diversification increased, shareholdings in many companies were diluted, limiting investors' control over any specific company. Thus, investors could accumulate enough shares to exert substantial power over a relatively small number of companies. Since 2008, the rise of large asset management firms has reversed this situation: the Big Three have become the largest shareholders in nearly all of the biggest and most important companies.
Today, the Big Three collectively hold the largest or second-largest stake in companies that account for nearly 90% of the total market capitalization of the U.S. economy. This includes 98% of the companies in the S&P 500, which tracks the largest U.S. companies, with the Big Three averaging over 20% ownership in each. Equally striking is the speed at which this concentration has occurred since the 2008 crisis. From 2004 to 2009, State Street's assets under management (AUM) grew by 41%, while Vanguard's assets increased by 78%. However, BlackRock's unique significance in this power structure is reflected in its AUM exploding by an almost unbelievable 879% during these years, making it the largest global asset management company to date by 2009.
The speed and scale of this transformation herald a new phase of American capitalism characterized by unprecedented ownership concentration and the concentration of corporate control around a few financial firms. Large asset management companies now play a highly active, direct, and powerful role in corporate governance, influencing nearly every publicly traded company in the U.S. They have become "universal owners," managing all of America's social capital.
The Rise and Fall of American Finance
The close ties established between financial institutions and non-financial companies after 2008 constitute a new form of the fusion of financial and industrial capital, which Marxist political economist Rudolf Hilferding referred to as "financial capital" in 1910. Although the term has been widely misused, financial capital does not merely refer to financial capital, let alone bank capital. Instead, financial capital emerges from the combination of financial and industrial capital, establishing a new form of capital through their integration—a synthesis that transcends the original industrial and financial forms (in Hegelian terms). Through this process, financial institutions play an active and direct role in the management of industrial enterprises. By shaping the strategic direction and organizational structure of the companies they control, financiers aim to maximize the returns on their monetary capital in the form of stock prices, dividends, and other interest payments.
Financial capital is a specific form of financialized capitalism. Generally, financialization refers to the process by which monetary capital—or the circulation of money that is prepaid and then returned with interest—gains greater dominance in social life and the economy. As is often observed, the expansion of monetary capital is a major feature of the neoliberal era. This is reflected in the principle of "shareholder value," which emphasizes that companies should provide greater returns to investors through dividends and stock buybacks. The current form of financial capital represents a more concentrated form of financialization, with tighter links between financial and industrial capital. A core argument of this book is that neither the broader trend of financialization nor the emergence of financial capital indicates, as is often claimed, the decline of capitalism or the hollowing out of industry. Instead, financialization is aimed at enhancing competitiveness, maximizing profits, increasing productivity, and exploiting labor.
Moreover, contrary to many accounts that describe financialization as a sudden break from pre-neoliberal, non-financialized capitalism, we argue that the roots of financialization lie in the post-war period, when it was the result of a series of state efforts to achieve a "watertight" separation between finance and industry. Tracing the rise of financial power from the last two-thirds of the 20th century to the first two decades of the 21st century—from the collapse of the J.P. Morgan empire to the rise of BlackRock—we present a history of American finance that challenges popular narratives. In the arc we outline, the history of financialization has four distinct phases: classical financial capital, managerialism, neoliberalism, and new financial capital. These phases form a cycle that includes the decline of financial power, followed by a gradual, uneven, and contradictory reconstruction. Each phase is characterized by specific organizational forms of state, corporate, and class power, with transitions marked not by sharp "breaks" but by continuity and change.
Hilferding's theory of financial capital stems from his study of the development of German capitalism at the turn of the 20th century; however, his analysis has also been widely applied in the U.S. During this classic period of financial capital (1880-1929), investment banks formed large companies by merging smaller firms. The power of these banks depended on their ownership of corporate stock and their ability to extend credit. As investment banks extended large loans to industrial firms, the interests of both became closely intertwined: industrial firms relied on credit, while investment banks sought to ensure that loans were repaid, thus monitoring corporate operations to protect their investments. The position of banks as the largest shareholders ensured their power over companies, allowing them to secure seats on boards and establish "interlocking directorates" for the companies they controlled.
As equity became increasingly dispersed in the first half of the 20th century, these networks of financial capital became more loosely connected. A new class of professional managers exercised increasingly autonomous control over industrial companies, relegating banks to a purely supportive role. Regulations enacted after the stock market crash of 1929 sanctified the managerial era (1930-1979), formally separating the governance of banks from that of industrial companies and making "internal" corporate managers the dominant force in the economy. During this period, without large block holdings from conglomerates, these managers could control industrial firms without facing a unified challenge from investors. However, at the same time, the separation of banks from industrial companies led the latter to internalize a range of "financial" functions, developing extensive capabilities for independently raising and extending funds. Thus, the financialization of non-financial companies originated at the core of the post-war "golden age."
The hegemony of industrial enterprises during this period was supported by the New Deal state, which had three key attributes. First was its concern for legitimacy. New Deal reforms, such as labor rights and social security, aimed to eliminate the intense class struggles of the 1930s. These measures enhanced the legitimacy of capitalism and incorporated workers into the structure of managerial hegemony. Second, these reforms led to a massive expansion of state fiscal spending, which was largely funded by taxation. Thus, the New Deal state was a tax state, with its redistribution programs leading to reduced levels of income inequality. This was also due to the success of unions, which were largely apolitical, in collective bargaining. Finally, industrial hegemony was supported by family industrial complexes that combined the most dynamic companies with state power, leading to the tremendous growth and diversification of so-called multinational corporations (MNCs) and facilitating the development of corporate organization in the form of multi-sector corporate groups.
As post-war prosperity slowed in the late 1960s, union wage struggles increasingly squeezed corporate profits, leading to a growing contradiction between legitimacy and accumulation: labor rights and New Deal programs now posed obstacles to accumulation. This issue was resolved through the formation of a neoliberal authoritarian state, which constrained labor through unprecedented interest rate hikes and a new wave of globalization. As state power became concentrated in institutions unencumbered by democratic pressures, particularly the Federal Reserve, elections and political parties became less significant. This authoritarian structure was reinforced by the fact that the neoliberal state was a flawed state. As tax cuts were implemented to restore corporate profits, state projects increasingly relied on debt financing, tightening the fiscal constraints on the national budget. This also exacerbated inequality. The wealthy no longer paid taxes for redistribution programs but instead lent state funds to cover their interest payments.
In the neoliberal era (1980-2008), industrial hegemony was replaced by a new financial power. To some extent, this was due to the integration of global financial markets, which provided the necessary infrastructure for the circulation of value within internationalized production networks. Financial hegemony was also supported by the surge of worker pension funds managed by professional fund managers that began in the 1960s and 70s. Among these new "institutional investors," a wave of concentration and centralization of corporate stock occurred, granting these investors significant power over industrial companies. However, this form of financial power is fundamentally different from classical financial capital. Rather than individual banks directly controlling corporate networks, it is a cluster of competitive financial institutions that imposes broad structural discipline.
However, financial hegemony was not imposed by external investor pressure but initially emerged within industrial enterprises as an adaptive response to diversification and internationalization over the decades following the war. In fact, this is an inherent aspect of the multi-sector corporate group organizational form. Large companies are no longer organized around a single business but consist of many different businesses that often have little direct relationship with one another. Moreover, the scope of these operations has become increasingly internationalized. The challenges this brought about led corporate groups to decentralize the operational management of their business units, even as investment authority remained concentrated in the hands of top management. These so-called "general managers" do not manage specific production processes but rather manage the monetary capital itself; by the time of the neoliberal era, they had become financial capitalists, sitting at the nexus of finance and industry.
With the development of internal capital markets within industrial enterprises, their financial departments and functions increasingly took on a dominant role. This was most evident in the transformation of corporate treasurers into chief financial officers (CFOs), who serve as key assistants to the CEO, responsible for establishing "investor expectations" and undertaking necessary internal restructuring to meet those expectations. The financial capabilities of industrial enterprises also expanded as they sought to manage globalization risks through engaging in derivatives trading. All of this ultimately led to the emergence of corporate organization in the form of multi-layered subsidiaries, with multinational corporations organizing production by integrating their internal divisions with a second layer of external contractors, forming highly flexible and competitive global networks. Apple's reliance on Foxconn is just one prominent example.
New financial capital emerged after the 2008 crisis, as the decentralized financial power of neoliberal shareholder capitalism concentrated in large asset management companies. During the financial crisis, regulators attempted to enhance systemic stability through carefully orchestrated bank mergers. When the dust settled, only four large banks—J.P. Morgan, Bank of America, Wells Fargo, and Citigroup—dominated the industry. Ironically, state intervention led to a shift from banks to a group of asset management companies, namely BlackRock, State Street, and Vanguard. As the formation of a risk state significantly reduced the risks associated with stocks, asset management companies facilitated a massive influx of funds into these assets. Channeling savings into stocks further lowered risks, resulting in a sustained rise in stock prices, and the ownership of asset management companies also continued to concentrate.
An important foundation for the concentration of ownership by asset management companies is pension funds and other institutional investors, who increasingly delegate the management of their portfolios to these firms. By pooling the vast capital already accumulated in these funds, asset management companies further concentrated financial power, achieving an economic dominance not seen since the era of J.P. Morgan. This was facilitated by a historic shift toward passive management. Unlike active management, where high-paid fund managers seek to maximize returns by "beating the market," passive funds hold stocks indefinitely, trading only to track the performance of specific indices, allowing them to offer significantly reduced management fees and achieve high returns, especially in rising markets. However, these passive investors are very active owners. Since they cannot constrain industrial enterprises through simple stock trading, they pursue more direct methods of influence characteristic of financial capital.
If the rise of asset management companies is part of a historic transformation in the organization of American capitalism, it particularly revolves around BlackRock's preeminent position. By 2022, BlackRock managed assets totaling $10 trillion. Including assets managed indirectly through its Aladdin software platform, this figure approaches $25 trillion. BlackRock is now one of the major owners of almost all large publicly traded companies in the U.S. The degree of capital concentration has never reached such astonishing levels. Its power is reflected not only in the scale of its managed assets but also in its special connections with the state. George W. Bush appointed Goldman Sachs' Hank Paulson as Treasury Secretary during his term, while both Hillary Clinton and Joe Biden considered BlackRock CEO Larry Fink for the position. Biden's chief economic advisor, Brian Deese, is also an executive at BlackRock. All of this indicates that a portion of the power of the new financial capitalists is on the rise.
A New Landscape of Financialization
This book's analysis of the role of finance in the development of contemporary capitalism is markedly different from analyses found in progressive policy platforms and critical academia. In fact, today, almost everyone agrees that, especially in the years following the 2008 crisis, finance is a corrosive and parasitic force on the "real" industrial economy. Many of the ills of neoliberalism, from economic crises to social inequality, are often attributed to "financialization." While progressives worry that without regulation to control financial power, America's prosperity and competitiveness will weaken, Marxists typically view financialization as a symptom of "late capitalism" and a harbinger of the decline of the American empire. These ideas have fueled political debates between socialists and progressives, as well as the agendas of political figures ranging from Hillary Clinton to Jeremy Corbyn.
Many observers follow Giovanni Arrighi's view that financialization is an inevitable phase in the growth and decline cycles of the capitalist world system. In this view, the decline of hegemonic states is closely related to the growth of finance. However, Arrighi downplays the central role of finance in the early growth and vitality of capitalism. Investment banks were key players in the modern corporate organization of the 19th century, just as finance remains an indispensable part of the current multi-layered subsidiary forms of corporate organization. Finance is the nerve center of contemporary global capitalism, constituting the infrastructure through which value circulation is achieved via internationalized production systems. The increasing prominence of finance does not signify the decline of the American empire but rather underscores America's central position in the global economy.
Progressives like William Lazonick and Greta Krippner argue that the rise of finance has led to the "hollowing out" of production, echoing the narrative of decline. They contend that the financial sector is not concerned with investing in long-term growth and prosperity but rather with "quick profits." Consequently, the rise of finance has brought "short-termism" to industrial enterprises, leading them to abandon investments in "good jobs" that supported post-war living standards for the "middle class," as well as the R&D necessary for American companies to maintain global leadership. Instead, firms have shifted funds to "non-productive" financial services and enriched themselves. The compensation of executives through stock options only enhances their motivation to engage in this dysfunctional strategy, leading them to inflate stock prices through buybacks for windfall gains.
However, the reason for the lower levels of inequality in the post-war period was not the benevolence or foresight of corporate managers but rather a balance of class power, particularly the ability of unions to win wage increases. As we will argue, these distributional bargains were supported by the unique context of post-war prosperity and the structure of world trade that existed before the emergence of free capital flows. The causes of rising inequality and the rollback of social programs associated with neoliberalism are not the rise of finance but rather capitalism's inability to sustain these compromises. With the end of post-war prosperity, union wage struggles squeezed profits, leading to a decade-long crisis that could only be resolved under conditions of labor defeat and the exploitation of a large low-wage workforce through globalization. Thus, financialization was key to restoring profitability and resolving the crisis of the 1970s, leading to a second golden age of capitalism, albeit one that was not as robust as the first "golden age."
Moreover, viewing finance fundamentally as short-termist overlooks the fact that some of contemporary capitalism's big stars, despite not being profitable in the short term, attract significant investment. For example, Uber has consistently operated at a loss, yet investors have remained optimistic about the development of autonomous vehicle technology, expecting it to make the company profitable at some point. Tesla has also focused on the long-term development of a new electric vehicle infrastructure, even as it incurs losses in car sales. Despite low or nonexistent profits, investors have poured vast sums into Amazon over more than a decade, with The Economist describing it as "the largest bet on a company's long-term prospects in history." Similarly, many industrial companies in various sectors are willing to bear the enormous short-term costs of neoliberal globalization over decades to ensure their long-term competitiveness and profitability.
None of this is surprising. After all, why would financiers or corporate executives intentionally undermine the long-term value of their assets? Furthermore, the assumption that paying dividends or conducting stock buybacks must come at the expense of new investment is unfounded. In a low-interest-rate environment, there is no inherent contradiction between investing in production and R&D and engaging in buybacks and paying dividends, as companies can borrow almost for free. In fact, over the past forty years, the share of corporate investment and R&D spending in GDP has increased, as have dividend payments, and profits have surged. While a significant amount of excess cash has been returned to investors through buybacks, the continued investment in R&D by tech giants like Apple, Microsoft, and Google is clearly sufficient to maintain their status as global leaders.
In addition to lamenting Wall Street's short-termist privileges, many Marxists argue that "financialization" is rooted in a deeper—even fundamental—crisis of the capitalist mode of production. For Robert Brenner, Cédric Durand, and David Harvey, the decline in profit rates in the industrial sector since the late 1960s has led to a shift in corporate investment from manufacturing to relatively profitable and rapidly growing financial services. They argue that this has created the illusion of economic growth through a series of speculative bubbles, which merely mask the underlying inadequacies of industrial profitability. French economist François Chesnais links the political and economic centrality of finance to its role in international economic integration, but he also views financialization as an aspect of a long-term economic crisis characterized by overproduction and declining profit rates. For Chesnais, this forty-year "global downturn" signifies the decline of the capitalist world system.
These views are based on a certain interpretation of Marx's theory of "fictitious capital," according to which many forms of financial capital are "fictitious" and separate from "real" industrial capital. In this view, finance is largely seen as a passive recipient of a portion of surplus value generated by industry through the payment of various forms of interest (including loan interest as well as dividends and service fees). Viewing everything from corporate stocks to derivatives as fictitious capital can at best downplay the role of these financial instruments in the integrity of industrial capital; at worst, it sees finance as a cancer on the "real" economy, suggesting that the real economy would fare better without it. This opens the door to explaining the "hollowing out" in social democratic theories—though these theorists often aim to prove that capitalism is doomed rather than to save capitalism by curbing finance.
Finance and industry are not opposed. As we will demonstrate in the following chapters, they have historically been deeply intertwined with capitalist production. Finance—whether within or outside non-financial companies—regulates the extraction of surplus value, promotes competitiveness, and facilitates the international circulation and valorization of capital. Multinational corporations' ability to freely transfer investments around the world in the blink of an eye is a key condition for their construction and reorganization of flexible, dynamic, and globalized production networks. Derivatives are far from merely a speculative "casino"; they are crucial for managing the risks of globalized production for enterprises. Finance is also essential for corporate mergers and for maintaining consumption in the face of stagnant wages over recent decades.
Radical economist Costas Lapavitsas avoids defining finance as independent from or opposed to industry, emphasizing its structural role in capitalism. However, in asserting that finance "exploits us all," he tends to minimize the important and very positive role of finance in value production. Finance is not only a rentier and extractive force in the economy but is also crucial for enhancing the competitiveness and vitality of productive capital. Furthermore, he primarily understands the financialization of non-financial companies from the perspective of changing asset portfolios, namely that industrial companies are investing more in financial services. The deeper transformation of companies, where monetary capital becomes more prominent in their organizational structure, has yet to be explored. Lapavitsas also does not adequately question the changing relationship between corporations and financial institutions, missing the decisive feature of neoliberal shareholder capitalism: the concentration of stocks in the hands of powerful institutional investors, which strengthens investor discipline over non-financial companies, and the restructuring of corporate governance reflects the empowerment of finance.
Perhaps most critically, like many Marxist and non-Marxist economists, Lapavitsas largely overlooks the central role of the imperialist state in organizing economic structures and financial political hegemony. This omission paves the way for interpretations by Robert Brenner, Dylan Riley, and Cédric Durand, who argue that the state has now been instrumented or "captured" by a corrosive financial sector. A key argument presented in this book is that, on the contrary, the state's role in managing and constructing the financial system reflects what Nikos Poulantzas referred to as the state's "relative autonomy" concerning specific capitalist companies and a small portion of the overall, long-term systemic interests of capitalism. As we emphasize, capitalism is not only an economic system but also a political system that requires the state to manage the trade-offs and power conflicts between different capital parts within power groups—albeit always against the backdrop of deeper economic contradictions and pressures.
As Leo Panitch and Sam Gindin have long argued, finance is neither a challenge to production nor a challenge to American hegemony. Rather, it is a fundamental component of the American imperial order that makes globalization possible. For them, global financial integration represents the culmination of the U.S. government's project of "building global capitalism" since World War II. The unique imperial responsibility of the American state in regulating the world system is primarily committed to ensuring the free flow of capital across borders, regardless of its nationality, thereby creating a truly global capitalism rather than a unique regional or national capitalism. As they demonstrate, a key foundation for this is the integration of global finance. While this means that finance will become more powerful in the global economy, industrial enterprises are able to accept this because they also benefit from it.
Panitch and Gindin point out the interconnections between the unique imperial role of the American state, the development of state institutions, and the rise of finance. By doing so, they show that globalization is not an automatic result of economic "laws" but requires the development of specific state capacities. This has led to the concentration of national power in the Federal Reserve and the Treasury, insulating them from democratic pressures. This independence allows these institutions to flexibly intervene in managing the contradictions of globalized capitalism, free from the arbitrariness of democratic accountability or the direct "capture" by capitalists. Thus, a relatively autonomous state can act on behalf of capital, if not strictly according to capital's demands. Financialization, globalization, and the development of more authoritarian states are all part of "manufacturing global capitalism."
Finance has always been closely related to the state, forming what David Harvey calls the "state-finance relation," which is a "direct integration" of finance with state institutions. Understanding finance is impossible without considering the core role of state power in supporting and protecting finance; likewise, understanding the structure of state power is impossible without considering the fusion of state power with the economy. However, to date, few have seriously attempted to trace the historical development of American state economic institutions. As we will demonstrate, the evolution of the financial system in the twentieth century depended on the continuous expansion of state economic functions, leading to the emergence of authoritarian power structures in democratic capitalist states, which form the fundamental basis of today's new financial capital.
Sociologists and political scientists have also cited some significant transformations in corporate capitalism in the twentieth century, including financialization. However, they often fail to connect institutional changes with capitalism as a system, thus failing to understand how this transformation achieves a competitive reorganization of accumulation and how this reorganization is produced—even suggesting that economic concentration leads to a suppression of competitiveness rather than exacerbating it. Moreover, the focus on institutions in these accounts, rather than on the production and circulation of value, supports the view that financialization suddenly emerged with the rise of neoliberal shareholder capitalism, thereby overlooking the deeper and more complex interconnections that have always existed between finance and production in a fundamentally monetary economy. The dynamics of class struggle are similarly crucial for understanding history but have largely disappeared from people's view.
Sociologist John Scott demonstrates how the concentration of institutional investors since the 1970s has produced a historic shift from management companies primarily controlled by insiders to neoliberal companies that are subject to greater investor discipline in the form of "multiple financial hegemony." Unlike the direct control of company networks by individual investment banks in traditional financial capital, competing financial institutions have formed temporary alliances on corporate boards to exert broad influence and discipline over "insiders" in companies. Gerald Davis goes further, claiming that the concentration of assets in mutual funds (especially Fidelity) has constituted a "new financial capital." However, he argues that this concentrated ownership has not translated into control due to regulatory constraints, conflicts of interest, and the short-term nature of active mutual funds, as well as the fact that simple stock trading is easier than direct action.
Thus, Davis defines the new financial capital as "a historically unique combination of concentration and liquidity," equivalent to "ownership without control." However, Davis did not anticipate how the truly astonishing concentration of equity in passive investment funds (such as those managed by BlackRock, Vanguard, and State Street) would change these dynamics. Davis argues that the $1 trillion Fidelity fund "struggles to maintain flexibility in investment," leading it to turn to other business areas. However, BlackRock alone currently manages $10 trillion in assets. Moreover, as Davis observes, Fidelity is a relatively short-term investor, while these passive funds are extremely long-term. Therefore, they exercise power not through trading but through direct control. New financial capital, like the old, is built on concentration and long-termism, thus primarily defined by the fusion of ownership and control.
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