Finance over substance?
THE more ambitious among us in my undergraduate years in the 1990s pored over John Pierpont Morgan’s biography. The world was in the clutches of finance capitalism and there was an urgent need to learn how to play this game.
We were merely catching up to a wave of financialisation that had already transformed the major economies, such as the US and the UK, from being industry-led to finance-led. The historical role of finance as facilitating economic activity in the real economy was turned on its head — financial products became the source of value in and of themselves. Even traditional industrial companies such as car manufacturers began to earn a significant share of their profits from consumer-financing activity.
The term financialisation came into use to try to explain this phenomenon; this waning of Main Street in favour of Wall Street, in US-speak. With financialisation, the role, relative size and the influence of the financial sector increases in the economy and in policy making. Resources shift from what economists call the “real” economy of production into the intermediary sector.
Financialisation is more than just the growth of the financial sector. It is also about the supremacy of a view that values financial engineering over substance, ephemeral returns over sustainable growth. In such a scenario, is it not surprising that when it came to conceptualising one of the most important tasks of post-apartheid SA — restoring black South Africans to a meaningful role in the economy — the logic of financialisation took hold. In this context, the idea of creating wealth by building a portfolio of assets through complex and often leveraged financial structures, with little operational input from the new shareholders hardly raised any eyebrows.
The rise of JP Morgan first gave the world the idea that a master of financial wizardry can mould industries just as effectively as an old-school industrialist. But financialisation had not quite set in yet in his time. Far from being just a disinterested financier, Morgan directed the development of key industries in his time, especially the railroad and steel industries. His activism in the real economy provoked the passing of key microeconomic reforms in the form of competition legislation in the US. In our times, the holding company model that Warren Buffett so excels at is not only testament to his financial skills but has much to do with his authority to reorganise businesses according to his vision.
In the case of early black economic empowerment (BEE), the young were nudged into marriages of convenience with the aged. It’s easy to see, with hindsight, how BEE fell under the sway of financialisation. Not that the financial instruments it generated were particularly exotic, but much of it was inspired by deal-making, not being embedded in the real economy.
The necessity of BEE is indisputable. The challenge has been how to get the incentives right. Financially driven structures do not prioritise the genuine development of capability. The new drive to support the emergence of black industrialists would do well to keep finance in its place as an enabler and to focus on creating real wealth.
You can find the rest here: Business Day