What does finance do for society?

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.

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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. 

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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.

Published by Marco Vangelisti

Marco Vangelisti is a 100% impact investors dedicated to shifting financial capital from Wall Street and the extractive economy towards building the world we want. He helps individual investors, family foundations and financial advisers move towards aware and no-harm investing.

5 thoughts on “What does finance do for society?

  1. Thanks so much for this post, Marco. I’d be very interested to discuss all of this more.

    I am right there with you in thinking that it’s incredibly important for anybody trying to change the status quo to appreciate the nature of money, especially how it is created and allocated. I don’t find so many people in movement spaces who are thinking about this stuff or who are aware of many of the corrections to mainstream myths that you name – that money is created from nothing as an accounting entry, that private banks create most of our society’s money, and that currency (which is essential to money having any value) is created by government (in whatever form it takes) by governments requiring that taxes be paid in that currency. The social implications of these insights are profound. Private banks and other financial institutions have privatized the creation of money, and private financial institutions plan the creation of our society’s money for their own benefit of returning more money to them.

    I do think that both money creation and money allocation should be subject to democratic control. I also think that, given the nature of how money is actually created, our society possesses an abundance of resources to make sure that everybody in the world has access to all of the basic necessities of modern life – living wage employment (with plenty of time left for anything other than work), housing, education, health care, access to transportation, communication and other digital technologies. There isn’t any economic reason why everybody doesn’t have access to all of the above necessities and there isn’t any economic reason why those necessities shouldn’t be high-quality very affordable (without debt) for everyone. The fact that we don’t have access to these necessities is purely about power and politics.

    I’m wondering, how do you envision a democratic system for money creation and allocation?

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  2. Marco, Thanks for introducing me to John Kay and for taking the time to frame up your work with his here.

    This is really important work. I’m so grateful you’re using this workshop to dive in. As you think about your work, one thing that struck me as we were talking last night was about why you choose to write “under your own flag” so to speak.
    Have you considered joining a larger institution, university or otherwise?
    What might that offer? What would it curtail about your work?
    What experiences and assumptions inform that judgement?

    One reason I bring this up is that I had one economics professor — David Ruccio — that had a profound impact on my life — starting from when I was 19 years old. He has a nice blog that you might find of interest from time to time: https://anticap.wordpress.com/ but what I wanted to point out to you, was the way he framed up the field of economics — in terms of introducing different schools of thought. He helped me see that our mainstream economics discourse is simply blind to the issues you and John Kay bring up. Neoclassical economics — and the way it’s studied and taught and reproduced and advanced in our leading economics journals — systematically hides from us the kind of critique and alternative that you’re advancing. That said, there are well developed alternative schools of thought in political economy: classical, post‐Keynesian, radical, institutionalist, Austrian, feminist, Marxian, postcolonial. In David Ruccio’s – Introduction to Political Economy, he introduced me to the different consequences of these theories by examining some specific issues and themes: justice, households, income inequality, politics, and alternatives to capitalism. I wonder if you might find more conversation partners, a broader corpus of work, and set of colleagues to help deepen, broaden and help your work find a larger audience as part of the movement to change the field of economics. Here’s one quick syllabus that was very influential for me 15 years ago:
    https://www3.nd.edu/~druccio/IPE-syllabus-S11.pdf Here’s his full course lists and syllabi: https://www3.nd.edu/~druccio/Courses.html
    Let me know if you’d like to discuss this more.

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