How can we Structure the Financial System to be Compatible with a Shared Ownership Economy? (part 1)
The most compelling topic for me is at this point is what would a financial system compatible with democratic values and ecosystem and social health look like and how do we bring about such transformation?
Clearly, articulating the former is a prerequisite for achieving the latter.
I will use my limited writing time during this workshop to explore this vast topic.
Part One – What does finance do for society?
To answer that question I will borrow from a blog I wrote in January 2018 Other People’s Money.
I recently read Other People’s Money by John Kay – a great book exploring the role of finance in society, the transformation in the sector and society at large brought about by financialization, the structural causes of the financial crisis and ways to reform the financial sector to serve society again rather than itself.
So, what is finance for?
In the words of John Kay, finance can contribute to society and the economy in four principal ways:
First, the payments system is the means by which we receive wages and salaries, and buy the goods and services we need, as well as enabling business to contribute to these purposes. Second, finance matches lenders with borrowers, helping to direct savings to their most effective uses. Third, finance enables us to manage our personal finances across our lifetimes and between generations. Fourth, finance helps both individuals and businesses to manage the risks inevitably associated with everyday life and economic activity.
According to Kay, the evolution of finance in the last thirty years has increased the role of trading over relationships through the process of financialization. It has increased the complexity of the sector, increased the risks to the economy and transferred to itself a greater share of national income without improving the quality of the four key services it provides to society.
Here are a couple of salient paragraphs from the book.
The finance sector of modern Western economies is too large. It absorbs a disproportionate share of the ablest graduates of our colleges and universities. Its growth has not been matched by corresponding improvements in the provision of services to the non-financial economy – payments systems, capital allocation, risk mitigation and long-term financial security for individuals and households. The process of financialization has created a structure characterized by tight coupling and interactive complexity, and the resulting instability has had damaging effects on the non-financial economy. […]
The belief that the profitability of an activity is a measure of its social legitimacy has not only taken root in the financial sector but has spread its poison throughout the business world. […] There has been a wide failure to distinguish profit generation from wealth creation, or to see the difference between the appropriation of resources and their production, and a willingness to license activities that border on fraud and which sometimes cross that border. Both supporters of the market system and its critics have failed to recognize that the trading floor of the investment bank is not the epitome of the market economy but an excrescence from it.
What John Kay proposes as ways to remedy the situation are just first steps in my view.
I believe we need to go to a radical redesign of the system to make it compatible with democratic values and our ecological bio-geophysical limits.
In terms of the four useful roles of finance in society the first two are provided by the banking system the third by the investment management industry and the last one by the insurance industry.
In part two of this blog I will explore the topic of Money and Banking.