Is the United States the One Great Success Story

in the Failed Neoliberal Experiment?

미국은 실패한 신자유주의 실험에서 하나의 성공적인 사례인가?

James Crotty

University of Massachusetts, Amherst

July 2002

The Macro Economic Perspective

A central lesson drawn from the experience of the decades between the World Wars was that the economic and political fate of the world could not safely be entrusted to unregulated, free market national and global economic systems. In the aftermath of World War II, national economies, even those in which markets played a very powerful role, were placed under the ultimate control of governments, while the International Monetary Fund (IMF) and World Bank consciously managed international economic relations. Sustained full employment and ever more generous social welfare systems became the norm. Trade was expected to rise in importance, but it was thought at the time that the degree of global financial integration would remain modest, with cross border money flows under tight government control. The global prosperity that characterized the quarter century following the war -- the Golden Age (GA) of modern capitalism -- reinforced belief in the wisdom of social regulation of economic affairs.

거시경제적 전망

1차대전과 2차대전 사이의 수십년의 경험으로부터 얻은 핵심적인 교훈은 세계 경제와 정치의 운명이 통제되지 않고, 자유로운 시장 국가 및 세계경제 시스템에 안전하게 맡겨질 수 없다는 것이었다. 제2차 세계대전 직후에, 심지어 그 나라 안에서 시장이 강력한 역할을 하고 있는 나라들이라도, IMF와 세계은행이 국제경제관계를 의식적으로 관리하고 있는 반면에 국민경제들은 근원적으로 정부의 통제하에 놓여있었다. 지속적인 완전고용과 더욱 더 일반화된 사회보장 시스템은 일반적 기준이 되었다. 무역은 그 중요성이 증가할 것으로 증가되었으나, 당시에 강력한 정부통제 하의 통화의 유통을 수반하는 국제금융시장의 통합은 적절한 정도로 유지되어야 한다고 생각되었다. 전쟁에 이어 나타난 25년-현대 자본주의의 황금시대-의 특징인 세계번영은 경제상황에 대한 사회적 조절의 현명함에 대한 믿음을 강화했다.

The economic instability that erupted in the 1970s as the structures of the Golden Age  unraveled led us back to the future, creating a powerful movement, organized by business and, especially, financial interests, to roll back the economic regulatory power of the state, and replace conscious societal control with the invisible hand of unregulated markets. Neoliberal globalization is the name given to the emerging system of lightly regulated and globally integrated national economies. Now that the Neoliberal revolution is two decades old, it seems reasonable to ask whether the optimistic predictions of its supporters or the fears of its opponents have been justified by experience.

황금시대의 구조들이 붕괴됨에 따라 1970년대에 분출한 경제적 불안정성은 비즈니스와 특히 금융의 이해관계에 의해 조직된 강력한 흐름을 창출하면서 우리를, 국가의 경제적 조절능력을 저하시키고, 그리고 의식적인 사회의 조정을 통제되지 않는 시장의 보이지 않는 손으로 대체하는 미래로 돌아가도록 했다. 신자유주의 세계화는 가볍게 규제되고 세계적으로 통합된 국민경제라는 최근의 시스템에 붙여진 이름이다. 지금의 신자유주의 혁명은 20년 전의 것인데, 그것의 지지자들의 낙관적인 예언 혹은 그것의 반대론자들의 두려움이 경험적으로 옳다고 판명이 났는지 묻는 것은 온당한 것처럼 보인다.

The evidence to date supports Neoliberalisms critics. The promised benefits of Neoliberalism have yet to materialize, at least for the majority of the worlds people. Global income growth has slowed  world GDP growth in the 1990s was slower than in any other post war decade, as has the rate of growth of capital accumulation. Productivity growth has deteriorated, real wage growth has declined, inequality has risen in most countries, real interest rates are higher, financial crises erupt with increasing regularity, average unemployment has risen, and the less developed nations outside East Asia have fallen even further behind the advanced. After the crisis of 1997, even most of the East Asian miracle economies have succumbed to the instability and slow average growth associated with global neoliberalism.

기록된 증거는 신자유주의 비판자들을 지지하고 있다. 신자유주의의 약속된 혜택은 아직 구체화되어야 한다. 적어도 세계 민중들의 대다수를 위해서는. 1990년대의 세계 GDP 성장은 자본축적의 성장률과 마찬가지로 전후 어떤 10년대보다 더 낮다. 생산성 향상은 악화되었고, 실질임금 성장은 내려갔으며, 대부분의 나라에서 불평등은 증가했으며, 실질이자율은 더욱 더 높아졌고, 금융위기는 균형(?)을 증가시키면서 분출했으며, 평균실업률을 증가했고, 동아시아를 제외하고 저개발국가들은 선진국들의 뒤편으로 더욱 더 추락했다. 1997년의 경제위기 후에, 동아시아 경제기적을 이룬 국가의 대부분이 경제 불안정에 굴복했으며 느린 평균성장은 세계 신자유주의와 연계되었다.

It is often claimed that even though world economic performance has been disappointing in the era of global neoliberalism, at least the US, by adapting to the new neoliberal model earliest and most thoroughly, has prospered. US industrial and financial corporations dominate world markets, it is argued, job growth is strong, unemployment is low, and the US is master of the new information technologies, the world leader in productivity growth, and the pioneer of ruthless corporate downsizing and restructuring. Thus, the story goes, US success will be replicated by other nations a few decades hence, provided they adopt Neoliberalism with the same enthusiasm and thoroughness as America. It is a story that Koreans are quite familiar with.

비록 세계경제의 성과가 신자유주의 시대에 실망스럽다고 할지라도 적어도 가장 빠르고 가장 완전하게 새로운 신자유주의 모델을 채택한 미국은 번창해왔다고 주장된다. 미국의 산업 그리고 금융회사들이 세계시장을 지배하고, 일자리 창출이 강력하고 실업은 낮고, 미국은 새로운 정보 기술들의 지배자이며, 생산성 향상에서 세계 리더이자, 거침없는 기업 군살빼기와 구조조정의 선구자라고 칭해진다. 그리하여 다른 나라들이  미국만큼의 동일한 열정과 철저함으로 신자유주의를 채택한다면, 미국의 성공이 몇십년만 지나면 다른 나라들에게도 복제될 것이라고 이야기된다. 이 것은 한국인들이 상당히 친숙한 이야기이다.

But even after recent data revisions designed to raise post-1978 performance indicators, the claim of US exceptionalism is not supported by macro economic statistics.  US GDP growth averaged 4.2% a year in the Golden Age era from 1959-73, but only 2.9% in the Neoliberal years from 1979-2001, no better than in the troubled 1973-79 era.  Even in 1990-2001, growth was only 2.9% per year. The average US unemployment rate, which was 4.8% from 1950-1973, rose to 6.3% in 1979-2001. And annual growth in labor productivity for the nonfarm business sector averaged 2.9% from 1959-73, but fell almost in half to about 1.5% from 1979 through 2001.

그러나 1978년 후 경제지표를 상승시키기 위해 고안된 최근의 데이터 수정에도 불구하고 미국이 예외라는 주장은 거시경제 통계에 의해서 지지받지 못하고 있다. 미국 GDP성장은 황금시대인 1959-73년에 평균 4.2%였으나 신자유주의 시대인 1979-2001년에는 단지 2.9%로 불황기인 1973-79기간과 유사하다. 심지어 1990-2001에 성장은 매년 단지 2.9%였다. 1950-1973년 기간에 4.8% 였던 미국의 평균 실업률은 1979-2001년 기간에 6.3%로 증가했다. 그리고 매년의 비농업부문 노동생산성은 1959-73년 기간에 평균 2.9%였으나 1979년부터 2001년까지 약 1.5%로 절반 가까이 떨어졌다.

Without question, US economic performance improved significantly in the exuberant expansion from 1995 to 2000. Real GDP growth averaged 3.8% in these years. This is a good performance, though hardly exceptional: real GDP growth averaged 4.7% a year in the four years ending in 1979, and, as noted, it averaged 4.2% during the entire GA period  including both booms and busts.  An explosion of investment in high technology equipment  in the 1990s combined with a substantial rise in the propensity and ability of companies to fire workers at the first sign of a slowdown in demand raised productivity growth in the recent expansion, though not by much. It averaged 2.2% a year from 1995 through 2000, faster than in 1979-94, but much slower than in the Golden Age. Though unemployment was below 5% for the six years ending in 2000, inflation remained subdued. Even real wages and median real family incomes, in decline or stagnant, respectively, for so many years, begun to rise after 1995. Real wages for production workers grew by 1.2% a year in the boom, restoring the wage to its 1979 level, but it remained 5% lower than in 1973

의문의 여지없이, 미국 경제의 실적은 1995년부터 2000년까지 왕성하게 팽창했음이 분명하게 입증되었다. 실질 GDP성장이 이 기간에 평균 3.8%에 달했다. 이것은 비록 예외적인 것은 아닐지라도 훌륭한 실적이다. : 1979년 말부터 4년동안 실질 GDP성장률이 매년  4.7%였으며, 호황과 파산을 포함하는 황금시대의 전 기간동안 실질GDP 성장률은 평균 4.2%였다. 1990년대의 노동자를 해고하려는 기업의 성향과 능력의 상당한 상승과 결합된, 고급 기술 설비에 대한 투자의 폭발은, 수요 감소의 첫 번째 신호가 있는 단계에서 비록 크지 않더라도, 최근의 호황국면에서 생산성 증가율을 제고시켰다. 1995년부터 2000년까지 매년 평균 생산성 상승률은 2.2%로 1979-94년 기간 보다 높아졌지만 황금시대에 비해서는 낮은 수준이다. 비록 2000년 말까지 6년동안 실업률이 5% 미만이었음에도 인플레이션은 억제되었다. 심지어 오랫동안 각각 감소하거나 정체되어 있었던 실질 임금과 중위가구 실질소득은 1995년 이후 증가하기 시작했다. 생산직 노동자의 실질임금은 1973년 보다 5% 더 낮은 수준이지만, 1979년 수준을 회복하면서 호황 기간동안에 매년 1.2%씩 증가했다.

Nevertheless, those who concluded that this boom was the start of a prosperous New Era in the US now appear to have been badly mistaken. Real GDP growth slowed dramatically after mid-2000. It was a scant 0.3% in 2001, a year in which GDP declined in three of the four quarters. Investment in equipment and software, which helped fuel the rise in productivity, fell at an 11% annual rate in the second quarter of 2001 and failed to increase in the year that followed. Industry capacity utilization peaked in 1997 at 83.5%, but collapsed to 76.8% in 2001. The only two years in the modern era with lower capacity utilization rates were 1982 and 1983, when the economy was in the depths of what came to be called the Great Recession. Unemployment hit 6% in April 2002.

그럼에도 불구하고, 이 호황이 미국에서 번영하는 새로운 시대의 출발이었다고 결론지었던 사람들은 심한 잘못을 저지른 것처럼 보인다. 실질GDP 성장은 2000년 중반이후 극적으로 감소했다. 그것은 4분기 중 3분기에서 GDP가 감소했던 2001년도에 겨우 0.3% 였다. 생산성 증가의 연료역할을 했던 설비와 소프트웨어 투자는 2001년 2/4분기에 11% 감소했고 남은 기간동안 증가시키는데 실패했다. 산업가동률은 1997년에 83.5%로 정점에 달했으나 2001년에 76.8%로 추락했다. 현대에 와서 산업가동률이 낮았던 두 해는 경제가 거대한 경기후퇴라고 불릴 만큼 깊은 수렁에 빠졌던 1982년과 1983년이다. 실업률은 2002년 4월에 6%에 달했다.

The expansion from 1995 through mid-2000, thought to be the first stage in a new epoch of permanently higher growth, turns out to have been built on a number of unsustainable trends. Consumer spending rose much faster rate than GDP in the boom: the contribution of consumption growth to GDP growth almost doubled after 1995.  And an unusually high proportion of consumer spending was related to, and therefore dependent upon, the incredible stock market boom of the period, which saw the S&P 500 stock price index rise by over 26% a year from 1996 through 1999.  Household incomes were augmented by substantial realized capital gains -- estimated at $440 billion in 1998 alone.  The huge rise in financial wealth caused the household saving rate to fall to a near-zero historic low.

새로운 영구적 고도성장 시대의 첫 단계라고 여겨졌던 1995년부터 2000년 중반까지의 호황은 많은 지속불가능한 경향에 의해 만들어졌다고 입증되었다. 소비자 지출이 호황 기간에 GDP보다 더 빠르게 증가했다. : GDP성장에 대한 소비성장의 기여는 1995년 이후 거의 두배가 되었다. 그리고 유별나게 높은 소비지출의 비중은 그 기간동안의 믿어지지 않는 주식시장 호황과 연관되었고 그런 까닭에 거기에 의존하게 되었다. 그 기간동안 s&p 500 주가지수는 1996년부터 1999년까지 매년 26%이상 상승한다. 가계소득은 실질적으로 실현된 자본이득-1998년에만 4,400억 달러로 추정-에 의해서 증가되었다. 금융자산의 엄청난 증가는 가계 저축률을 거의 제로라는 역사적으로 낮은 수준으로 떨어뜨렸다.

The boom economy was also driven by an enormous rise in private sector debt.  The Economist (January 22, 2000, p.4) observed that American households and firms have been borrowing hand over fist, lifting their combined debts to a record 132% of GDP. Household debt as a share of disposable income, nonfinancial corporate debt as a percent of corporate output, and private financial sector debt as a percent of GDP were all at post-War highs in 2000.

붐 경제는 또한 개인부채의 거대한 증가에 의해서 이루어졌다. 이코노미스트지(2000년 1월 22일자, p4)는 미국 가계와 기업은 GDP의 132%까지 그들의 연결된 부채를 증가시키면서 자꾸자꾸(성큼성큼) 빌려왔다고 말했다. 가처분소득의 부분으로서 가계 부채, 기업 생산의 일부를 차지하는 비금융부문 기업의 부채 그리고 GDP의 일부를 차지하는 개인금융부문의 부채는 전후 2000년에 최고치였다.

By mid-2000, the stock market had become substantially over-valued by every widely accepted yardstick, making a very large price decline inevitable.  For example, the price to earnings ratio for the S&P 500 stock price index stayed above twice its post-war average for several years, dividend yields on stocks fell to historic lows, and the ratio of stock market capitalization to GDP -- at 185% -- was more than three times its long-term average of 50%. The recent stock market collapse only brought this ratio down to 125% by the first quarter of 2002. Moreover, the US could not continue to rely forever on the quarter Trillion dollar net average annual inflow of foreign investment funds that it received in 1996-2000.

2000년도 중반에 모든 광범위하게 퍼진 판단기준에 의해서 실질적으로 과대평가 되었고, 매우 큰 폭의 가격하락을 불가피하게 했다. 예를 들어, S&P 500주가지수에 대한 수익율은 수년간의 전후 평균의 두 배 이상을 유지하고 있었으며, 배당이익은 역사적으로 낮은 수준이 떨어졌다. 그리고 GDP대비 주식시장 시가의 비율이 장기평균인 50%의 세배이상-185%-이었다. 최근의 주식시장 붕괴는 2002년 1분기에 단지 이 비율을 125%로 떨어뜨렸다. 더욱이 미국은 1996-2000년 동안에 제공되었던 연 평균 2500억 달러의 외국인 투자 유입에 영구적으로 의존할 수 없었다.

In early-mid 2000, these temporary boom-creating forces began to unwind. The inevitable stock market correction finally arrived as the S&P 500 index fell by 40% and the NASDAQ high-tech index fell by about 75% by mid 2002, yet price-earnings ratios remained well above historic averages because profits had collapsed along with stock prices. Profits before taxes in nominal terms at nonfinancial corporations fell by over 50% from their 1997 peak to late 2001. (Note that corporate profits reported by the government hit their peak in 1997 and fell thereafter, while corporations continued to report rapidly rising profits in their financial statements..) Much of the high tech investment boom was financed by the incredibly cheap capital provided by the stock market boom. // But with cheap capital gone, and signs of over-investment and huge excess capacity in the information technology and telecommunications sectors, investment has failed to rebound from its late 2001 low. The collapse in investment and the onset of recession in the US in turn ended the export-led rebounds in post-crisis Asia, contributing to a global slowdown. Collapsing paper wealth, rising unemployment, and the end of real wage gains will now force consumers to raise their propensity to save, not spend. As the US recession unfolds, the record high US merchandise trade deficit, in excess of $400 billion in 2000 and 2001, will continue to undercut jobs and spending.

2000년 중반에 이 일시적인 호황을 생성하는 힘은 잦아들기 시작했다. S&P 500주가지수가 40% 떨어지고, 나스닥 지수가 2002년 중반에 약 75%나 떨어짐에 따라 불가피한 주식시장 조정이 결국 도래했다. 그러나 주가-수익비율은 주가와 함께 이윤이 폭락했기 때문에 역사적으로 높은 수준에 남아있다. 비금융 기업의 평상시 세전 이윤은 1997년 정점에서 최근 2001까지 50%이상 떨어졌다. (기업들은 그들의 재무제표에서 빠른 이윤 상승을 계속에서 보고하고 있는 반면에 정부에 의해서 보고된 기업이윤은 1997년에 정점에 달했고 그 이후 떨어졌다고 보고되고 있는 점에 주목하라) 하이테크 투자 붐의 상당량은 주식시장 붐에 의해서 제공된, 믿을 수 없을 정도로 싼 자본에 의해서 조달되었다. 그러나 싼 자본이 지나가고, 그리고 과잉투자와 정보기술과 통신분야에서의 엄청난 과잉설비 신호와 함께 투자는 최근 2001년의 낮은 수준으로부터 반등하는데 실패하고 있다. 투자의 붕괴와 반복되는 미국의 경기침체의 징후는 외환위기 이후 수출에 의하여 주도된 경기회복을 종결시켰다. 붕괴되는 서류 상 자산과 늘어나는 실업, 실질임금 이득의 종결은 지금 소비자들이 지출이 아니라 저축성향을 증가시키도록 할 것이다. 미국의 경기후퇴가 전개됨에 따라 2000년과 2001년에 4000억 달러를 초과하는 미국 무역적자는 일자리와 지출을 계속해서 줄이게 될 것이다.

With the US economy in disarray and the stock market in decline, it is becoming increasingly hard to find supporters of the New Economy thesis. Moreover, it has now become clear that US financial markets, believed until recently to be the most efficient, well-regulated and transparent in the world, are in fact riddled with fraud, deception and corruption. (The interested reader can find a discussion of US financial markets in my paper The Effects of Financialization and Increased Competition on the Performance of Nonfinancial Corporations in the Neoliberal Era, presented at Seoul National University on August 29, 2002.)

혼란스런 미국경제와 하강국면에 있는 주식시장 때문에 신경제 이론의 지지자를 찾는 것이 점점 어려워지고 있다. 더욱이 최근까지 가장 효율적이고, 잘 규제되고, 세계에서 가장 투명한 것으로 여겨졌던 미국의 금융시장이 사실은 사기, 속임수 그리고 타락으로 점철되어 있다는 것이 분명해졌다.(관심있는 독자는 2002년 8월 29일 서울대학교에서 발간되는 나의 페이퍼 □금융화의 영향과 신자유주의 시대에 비금융기업의 실행에 관한 증가된 경쟁□에서 미국 금융시장에 관한 토론을 발견할 수 있다.)

The Human Perspective

If we look below national economic performance and examine the situation confronting ordinary American workers and their families, things look even worse. (Most of the data on wages and family income presented here are from Mishel, Bernstein and Schmidtt, The State of Working America: 2000/2001, Cornell University Press, 2001.) The real average hourly earnings of production and nonsupervisory workers, a category covering the bottom 80% of wage earners, grew at 2.3% a year from 1947 to 1973, but were actually 14% lower in 1995 than they had been in 1973. The median real wage of those employed full time and year-round, rose sharply in the Golden Age, then fell by 5.5% between 1979 and 2000. Reflecting increased labor market opportunities for women, the median female wage rose by about 16% for the 1979 to 2000 period, or by just 0.7% a year.  The median real wage for all male workers declined by an extraordinary 15% in the same period.

만약 우리가 보다 낮은 곳의 국민경제상황을 보고, 평범한 미국 노동자들과 그들의 가족들이 직면한 상황을 고찰한다면, 모든 것들이 더욱 악화된 것을 보게 된다.(여기서 제시된 임금과 가족소득에 관한 대부분의 데이터는 Mishel, Bernstein and Schmidtt, The State of Working America: 2000/2001, Cornell University Press, 2001.로부터 가져왔다.) 임금수입자의 하위 80%에 해당하는 생산직과 비감독직 노동자의 시간당 실질 수익은 1947-1973년 동안 해마다 2.3%씩 증가했으나 1973년에 비해 1995년에 실재적으로 14% 더 낮아졌다. 상시 고용된 노동자의 중위 소득자 실질임금은 황금시대에 가파르게 상승했으나 1979년과 2000년 사이에 5.5% 떨어졌다. 여성노동자들에 대한 노동시장에서의 기회 증가를 반영하면서 중위 여성노동자 임금은 1979년대비 2000년 기간에 약 16%, 연간 0.7%씩 증가했다. 모든 남성노동자의 중위 실질임금은 같은 기간에 15%나 감소했다.

The decline in male wages was widespread. The bottom 70% of the wage distribution lost ground in the Neoliberal era. The 90th percentile worker gained a total wage increase of only 8% for the 1979-2000 period.  Even most male college graduates fared poorly: their median real wage was about 5% higher in 2000 than in 1973.  Of course, since the bottom half of male workers suffered wage losses in the era, while the top 10% received modest to large wage gains, the US experienced a substantial rise in wage inequality in the Neoliberal era.

남성임금의 하락은 광범위하게 확산되었다. 임금분배의 하위 70%가 신자유주의 시대에 밀리고 있다. 1979-2000년 기간에 90%의 노동자들이 전체 임금 증가분의 8%를 얻었다. 심지어 대부분의 남성 대졸자들이 빈곤하게 되었다. : 그들의 중위 실질소득은 1973년에 비해서 2000년에 약 5% 높아졌다. 물론, 상위 10%가 큰 임금 소득을 받은 반면에 남성 노동자의 하위 50%가 같은 기간에 임금손실을 겪은 이래로 미국은 신자유주의 시대에 임금 불평등의 측면에서 실재적인 악화를 경험했다.

Though real GDP rose by about 73% and labor productivity increased by 48% from 1979 to 1998, the overwhelming majority of US workers experienced falling or stagnant wages. This is an astounding and unprecedented development. The institutions and power relations of the Neoliberal era were designed to make the economy function in the interests of large corporations and wealthy elites. The wage data demonstrate that the relentless war waged against the American worker by business and government since 1980 under the banner of Neoliberal globalization has resulted in victory by the aggressors.

1979-1998년 기간에 실질 GDP가 약 73% 증가했고 노동생산성이 48% 증가했을 지라도 미국 노동자들의 압도적인 다수는 임금 감소 혹은 정체를 경험했다. 이는 놀랍고 신기한 발전이다. 신자유주의 시대의 제도와 힘 관계는 경제 기능이 거대기업과 부유한 엘리트의 이해관계에 의해 만들어지도록 설계되었다. 임금 데이터는 신자유주의 세계화의 기치하에서 1980년이 침략자에 의한 승리로 귀결된 이래로 잔인한 전쟁이 기업과 국가에 의해서 미국 노동자들을 유지했다는 것을 설명한다.

Economic well being usually depends not just on an individuals wage, but on family income as well. In the US, median real family income rose by 2.9% a year from 1947-73, more than doubling in the Golden Age.  But it grew by a scant 0.5% per year from 1979-99. How did family income manage a modest increase in a period when real wages were falling?  The answer is that the average time at work per family increased substantially.  Between 1979 and 1999, total hours worked by the median family with children increased by 20% -- an astounding 16 extra weeks per year.

통상적으로 잘 돌아가는 경제는 단지 개인임금만이 아니라 가족 소득에도 의존한다. 미국에서 중위의 실질 가족 소득은 1947-73에 해마다 2.9%씩 증가했고 황금기에는 그 두배 이상이었다. 그러나 그것은 1979-99동안 매년 겨우 0.5% 증가했다. 실질임금이 떨어지는 때에 그 기간동안 어떻게 가족소득이 적절한 증가를 유지했는가? 그 답은 가구당 평균 노동시간이 실재적으로 증가했다는 것이다. 1979-1999 사이에 아이들이 있는 중위 가구의 총 노동시간이 20% .- 해마다 놀랍게도 16주의 추가 노동 - 증가했다

Neoliberalism always raises inequality; the US is no exception to this iron rule. A recent study by the respected Center on Budget and Policy Priorities, based on comprehensive Congressional Budget Office data (which includes income from realized capital gains) reports the following facts about changes in real after-tax household income between 1977 and 1999. The income of the bottom fifth of households fell by 9%, the middle quintile income rose by only 8%, while the top fifth had an increase of 43%. The richest one percent of households saw their income rise by 115%,  from $516, 000 to $786,000 per family (in 1999 dollars). This gives the top one percent of families 12.9% of all family income, up from 7.3% in 1977. Financial wealth is always distributed more unequally than income. A 1995 Federal Reserve survey showed that the top 1% of families own almost 50% of all stock and 66%of bonds. The bottom 90% own just 12% of stocks and other financial investment assets. The incredible bull market of the 1990s raised the value of US stock by $13 trillion between1991 and 1999.  The top 1% of families thus must have received about $6.5 trillion in capital gains, a fabulous bonanza. Note that the US continues to experience the highest poverty rates of all the advanced countries. Poverty rates fell continuously in the Golden Age: from 1959-73 the individual poverty rate fell from 22.4% to 11.1%. From 1973 to 1979 it rose slightly, to 11.7%.  It remained above its highest 1970s level in every year from 1974 through 1999. The low unemployment of the past few years pushed the poverty rate in 2000 to near its 1973 low, but with unemployment rising, growth falling, and the social safety net shredded by welfare reforms, these recent gains will quickly erode.

신자유주의는 항상 불평등을 야기한다. ; 미국도 이 철의 규율에서 예외가 아니다. 광범위한 의회재정사무소 데이터(실현된 자본이득으로부터의 소득을 포함한)에 기초한, 유명한 재정과 정책 우선에 관한 센터에 의한 최근 연구는 1977년과 1999년 사이에 실질 가계소득의 변화에 관한 아래의 사실을 보고하고 있다. 상위 15%의 소득이 43% 증가한 반면에 하위 가구 15%의 소득이 9% 떨어졌고, 5분위중 중간3분의 소득이 단지 8% 증가했다. 가구소득 최상위 1%는 115%, 가구당 516,000달러에서 786,000달러의 소득이 증가했다.(1999년 달러 기준) 이는 1997년 전체 가구소득의 7.3%였던 상위 가구 1%의 소득이 전체 가구소득의 12.9%를 차지한다. 금융자산이 소득보다 더 불평등하게 기여했다. 1995년 연방 저축조사는 상위 가구 1%가 모든 주식의 거의 50%, 채권의 66%를 소유하고 있음을 보여준다. 하위 90%는 주식의 단지 12%와 다른 금융 투자자산을 소유하고 있다. 1990년대의 믿을 수 없는 강세시장은 1991년에서 1999년 사이에 주식시장 가치를 13조 달러나 증가시켰다. 상위 가구 1%는 그런 까닭에 자본이득으로, 믿어지지 않는 노다지인 6조 5천억 달러를 얻었다. 미국은 모든 선진국들 중에서 가장 높은 빈곤율을 계속해서 경험하고 있다는 것에 주목하라. 빈곤율은 황금시대에 계속해서 떨어졌다. : 1959년부터 73년 사이에 개인 빈곤율이 22.4%에서 11.1%로 떨어졌다. 1973년에서 1979년에 11.7%로 약간 올랐다. 1974년에서 1999년 동안에 1970년대의 최고치 이상을 유지했다. 지난 몇 년의 낮은 실업은 2000년의 빈곤율을 1973년의 수준으로 떨어뜨렸지만, 실업의 증가와 성장의 하락, 복지개혁에 의한 갈갈이 찢어진 사회보장에 의해서 최근의 수익이 빠르게 잠식되고 있다.

Thus, rich families have every reason to be delighted with the performance of the US economy in the Neoliberal era because they have received almost all of its benefits. But looked at from the perspective of the typical American worker, the average American family, and the poor in America  the overwhelming majority -- the Neoliberal experiment has been an abject failure. However, since the well to do dominate the American political process, it is not surprising that the US continues down the Neoliberal path in spite of the growing threat this poses for the average American family.

그런 까닭에, 부자 가구들은 신자유주의 시대에 미국 수익의 거의 전부를 가졌기 때문에 미국경제의 실행으로 기뻐할 많은 이유를 가지고 있다. 그러나 전형적인 미국 노동자, 평균적인 노동자 가구, 절대다수의 미국 빈민들의 입장에서 보자.--신자유주의 실험은 비참한 실패였다. 그러나, 잘 나가는 부자들이 미국의 정치과정을 지배하고 있기 때문에 신자유주의가 평균적인 미국 가족에 대해 일으키는 증가되는 위협에도 불구하고 미국은 신자유주의 경로를 계속해서 유지해 나가고 있다는 것은 놀라운 일이 아니다.

You might think that the victory by US capital over its workers in the past two decades has at least restored US economic dominance in world markets.  US corporations have been the leading investors in computer based technology and the most ruthless cost-cutters -- through the mass firings we call downsizing, through plant relocation, the substitution of temporary for permanent workers, union-busting, and outsourcing. And US wages have fallen dramatically relative to those of its competitors. However, with a few exceptions, US industrial firms have not regained global competitive leadership.  Since the early 1980s, America has run the largest merchandise trade deficits in the world.  By 1999 almost every sector of the global economy was running a trade surplus with the US. The merchandise trade deficit in 1996, before the outbreak of the Asian crisis, was $191 billion; in 2000 it was $450 billion a record 4.5% of GDP. The recession then cut imports, reducing the 2001 deficit, but only to $427 billion.  On the reverse side of the balance of payments accounts, we find that the US, the worlds largest debtor nation, borrowed a cumulative $2.8 trillion dollars from the rest of the world from 1984 through 2001 to pay for these persistent trade deficits.

당신은 지난 20여년 동안 미국의 노동자들에 대한 미국 자본의 승리가 적어도 세계시장에서 미국 자본의 지배를 회복시켰다고 생각할 수 있다. 미국 기업들은 컴퓨터를 기반으로 한 기술에 대한 주요한 투자자였었고, 우리가 다운 사이징이라 부르는 대량 해고, 공장 해외이전과 상용노동자의 임시노동자로의 대체, 조합파괴와 아웃소싱을 통한 무자비한 비용절감자였다. 기술과 거침없는 비용절감자였다. 그리고 미국의 임금은 그 경쟁자들에 비해서 극적으로 떨어졌다. 그러나, 몇 가지 예외로 미국 산업기업들은 세계 경쟁 리더쉽을 얻지 못했다. 1980년대 초이래 미국은 세계에서 가장 큰 무역적자를 내고있다. 1999년까지 세계 경제의 거의 모든 분야가 미국과의 무역에서 이익을 내고있다. 아시아 위기의 발생전인 1996년의 무역 적자는 1,910억 달러였다. 2000년에 GDP의 4.5%인 4,500억 달러였다. 그런데 경기후퇴는 수입을 줄여 2001년 적자를 감소시켰으나 그래도 4,270억 달러 였다. 무역수지 계정의 저축 측면에서 우리는 세계 최대의 채무국인 미국이 1984년부터 2001년까지 이 지속되는 무역적자를 상환하기 위해 누적총액으로 2조 8천억 달러를 빌렸다는 것을 발견한다.

Though US industrial corporations profits increased from the early 1990s to 1997, primarily because of a shift in income from labor to capital, US firms continue to lose the battle for international market dominance. US financial enterprises, on the other hand, really do rule world markets, but this is more of a curse than a blessing to most Americans, because US financial interests are the most powerful force behind the drive to impose Neoliberalism on the world that is eroding their prospects for stability and prosperity.

비록 본래 노동으로부터 자본으로의 소득이전 때문에 미국 산업기업들의 이윤이 1990년대 초에서 1997년까지 증가하였다 할지라도  미국 기업은 세계시장 지배를 위한 전투에서 계속해서 지고 있다. 반면에, 미국 금융기업들은 실제로 세계시장을 지배한다. 그러나 미국의 금융 이해는 안정과 번영을 향한 전망을 잠식해가는, 신자유주의를 세계에 부과하는 드라이브를 배후의 가장 강력한 힘이기 때문에 이것은 대부분의 미국인들에게 은총이라기 보다는 저주이다.

The Effects of Financialization and Increased Competition on the Performance of Nonfinancial Corporations in the Neoliberal Era

By

James Crotty

Department of Economics

University or Massachusetts, Amherst

July 31, 2002

Paper prepared for the Tenth Seoul Journal of Economics International Symposium

Seoul National University, August 29, 2002

I am grateful to the Political Economy Research Institute at the Department of Economics of the University of Massachusetts, Amherst, for generous research support, to Alper Duman and Ozgur Orhangazi for excellent research assistance, and to Rob Parenteau for help with financial accounting riddles.

Copyright: James Crotty, 2002

I.	Introduction

In the aftermath of the Great Depression and World War II, national economies, even those in which markets played a very powerful role, were placed under the ultimate control of governments, while international economic relations were consciously managed by the International Monetary Fund (MF) and World Bank. Western governments, with varying degrees of enthusiasm, lent support to unions, regulated business, tightly controlled financial markets, and built social welfare systems. They also began to regulate aggregate demand in pursuit of high employment and fast growth, a phenomenon known as the Keynesian revolution. Business and financial interests accepted these changes in part because strong capital controls and low levels of trade and investment flows after the war left them without a credible run-away threat to undercut government economic policies they disliked. The global prosperity that characterized the quarter century following the war -- the so-called Golden Age of modern capitalism -- reinforced the belief that market economies need strong social regulation to function effectively.

Contradictions inherent in Golden Age capitalism led in time to the end of prosperity. Economic instability began in the late 1960s and erupted full force in the 1970s with two OPEC oil price shocks, the collapse of the Bretton Woods fixed exchange rate system, and the buildup of excessive debt in the Third World. Falling profit rates and a moribund stock market in the US triggered a powerful movement, led by business and, especially, financial interests, to roll back the economic regulatory power of national governments, replacing conscious societal control with the invisible hand of unregulated markets, and eliminate restrictions on the flow of goods and money across borders, creating an integrated global economy. Their political economic project is usually referred to as neoliberal globalization.

Supporters of neoliberal globalization used neoclassical economic theory to market their program. The standard neoclassical view holds that, absent excessive government interference, both national economies and the integrated global economy will operate efficiently, more or less like the models of a perfectly competitive market system found in college textbooks. Competitive market pressures lead to the full utilization of labor and productive capital, and cause aggregate demand (or spending) to balance full-capacity income, a proposition known as Says Law. There is thus no need for governments to engage in activist Keynesian aggregate demand management. Globally integrated financial markets will raise efficiency and productivity, it was argued, by allocating world savings to the most productive investment projects no matter where in the world they are located. The elimination of cross border barriers to imports and direct investment will raise efficiency by subjecting stodgy domestic oligopolies to more intense competitive pressure and allowing even firms in small countries to take advantage of global economies of scale.

Critics of neoliberalism argued that the abandonment of growth targeting by activist demand management would slow real GDP growth and generate higher unemployment. High unemployment and the drive for labor market flexibility in turn would slow real wage growth and raise inequality. Financial liberalization would lead to high real interest rates and increased instability in global financial markets. Poorer countries that substituted neoliberalism for interventionist economic development policies were less likely to experience rapid long-term growth. These problems were not seen as the inevitable result of increased global integration per se, but were caused by the specific institutions and practices that constitute neoliberalism.

Though each side defends its position with selected data, the weight of the evidence from the last two decades supports the position of the critics. Global income growth has slowed substantially from its Golden Age pace, as has the rate of growth of capital accumulation. Productivity growth has deteriorated, real wage growth has declined and inequality has risen in most countries, real interest rates are higher, financial crises erupt with increasing regularity, especially in developing economies, average unemployment has risen, the less developed nations outside East Asia have fallen even further behind the advanced, and post-1997 growth in East Asia has slowed. Empirical support for all these claims is provided in Crotty 2000. Since the slowdown in GDP growth rates in the neoliberal era plays an important role in the arguments presented in this paper, a brief look at relevant data is appropriate.

The most widely accepted work on long-term economic growth was done by Angus Maddison for the OECD. It shows that the annual rate of growth of real global GDP fell from 4.9% in the Golden Age of 1950-73 to 3% in 1973-1998  a drop of 39%. Calculated on a per capita basis, the decline in the growth rate was 55%. In Latin America, GDP growth dropped by 43% between the periods, while Africa showed a 38% decline. The only major area where GDP growth rates increased was Asia (excluding Japan), an area in decline since the 1997 Asian crisis (Maddison 2001, p. 126). Using a different measurement procedure from Maddisons, the United Nations estimates that world GDP grew at an annual rate of 5.4% in the 1960s, 4.1% in the 1970s, 3% in the 1980s, and 2.3% in the 1990s. United Nations, World Economic Survey (New York: United Nations), various issues.

In this paper I focus on changes that took place in the structure and performance of large nonfinancial corporations (NFCs) in the neoliberal era, especially those subject to increasing international competition. I accept the general view, associated with Joseph Schumpeter and Alfred Chandler, that large NFCs operating in oligopolistic markets were the main source of most of the capital investment, technological change and productivity growth in the Golden Age and, in the US at least, for most of the twentieth century. I argue that in the 1970s and thereafter, NFC performance was adversely affected by two major changes in their environment created by the impact of neoliberal globalization on product and financial markets: (1) an increasing intensity of competition in product markets; and (2) a shift from patient finance seeking long-term growth to impatient financial markets that raised real interest rates, forced NFCs to pay an increasing share of their cash flow to financial agents, and drastically changed managerial incentives. The combined effect of changes in both sectors lowered NFC profit rates, raised NFC indebtedness, slowed the rate of capital accumulation, and forced NFC top management to switch to short-term survivalist strategies that involved attacks on white and blue collar labor and on its suppliers.

NFCs were eventually placed in what I refer to as a neoliberal paradox: intense product market competition made it impossible for most NFCs to achieve high earnings most of the time, but financial markets demanded that NFCs generate ever-increasing earnings or face falling stock prices and the threat of hostile takeover. We can see the logical outcome of this contradictory set of forces in the recent US stock market bubble and subsequent collapse, as well as in the unmasking of widespread fraud in the financial statements of US NFCs.

-- Section II presents a skeletal outline of the reasoning that leads to the conclusion that neoliberalism has created slow demand growth and destructive product-market competition, conditions that impair the ability of large NFCs to operate efficiently and in the general interest. (A full presentation of my position can be found in Crotty 2000, and also on the website of the Political Economy Research Institute at the University of Massachusetts  --(http://www.umass.edu/peri/research.html#gm)

Section III shows how the evolution of financial markets in the neoliberal era led to changes in NFC objectives and constraints that contributed to the deterioration in their performance. The empirical appendix provides support for many of the assumptions made in these sections. Section IV concludes that global economic performance will not improve until the neoliberal project is abandoned.

II.	Effects of Changing Product Markets on the Structure and Performance of Large NFCs in the Era of Neoliberal Globalization

The Main Argument

In Crotty 2000 I argued that neoliberalism creates chronically weak global aggregate demand growth. Slow demand growth, in turn, has intensified competitive pressures in key industries, leading to inadequate profits, chronic excess capacity, excessive debt, and shifts in corporate strategies that exacerbated the original demand deficiency  a neoliberal vicious circle.

Here I simply identify six constraints on global demand that are deeply rooted in the structures and practices of neoliberalism.

1.  Slow growth of wages and mass consumption.

2.  High real interest rates.

3.  Increasingly restrictive national fiscal policy after the 1980s.

4.	Slower growth in gross private domestic investment worldwide.

5.	The spread of IMF austerity programs and World Bank structural adjustment programs across the globe.

6.  The weakening, and perhaps even the death-knell, of the high-growth East Asian late-development models.

During the Golden Age, important Northern industries were characterized by what Schumpeter called corespective competition, inter-firm relations based on partial cooperation rather than all-out war. Under corespective competition, firms could be reasonably sure that rivals would not take actions intended to undercut industry demand growth or erode industry profitability. Of particular importance, firms avoided predatory pricing and capital investment wars that destroy profits and create large-scale industry excess capacity. By placing upper limits on capacity and lower limits on price, firms generated secure oligopoly rents, which were used in part to fund the high road labor relations that were the hallmark of the dominant firms of the era. I do not mean to imply that if core oligopolies are left alone to relate corespectively, they will always operate in the public interest. A strong government regulatory apparatus is required to achieve this goal. High road labor relations, in turn, helped generate high productivity growth and rapidly rising real wages. Closing the Golden Age virtuous circle, rising wages and low unemployment helped sustain strong private demand growth. In this environment of contained uncertainty and assured high profits, firms in core oligopolies could engage in long-term planning, generously fund R&D, invest at a rapid pace, and offer lifetime employment to most of their workers. Profits were high enough to finance most investment internally, holding indebtedness within safe bounds.

In the neoliberal era, by way of contrast, rapid technical change, increasingly open borders, and the end of a commitment by government to pursue high growth through Keynesian macro policies have destroyed the conditions necessary for corespective behavior. We have witnessed an outbreak of what I have called coercive competition(Crotty 1993) based on cut-throat pricing, the destruction of secure oligopoly rents, over-investment relative to demand -- creating chronic excess capacity, and faced-paced technical innovation that often renders recently constructed capital goods prematurely obsolete -- and the debt that financed them unpayable.

With their survival threatened by fierce competition, much of it international in character, large firms were forced to adopt shorter planning horizons. Semi-cooperative management-labor relations were now considered unviable because firms had to slash labor costs through downsizing and wage cuts to survive beyond the short-run.  Conflict-driven labor relations became the order of the day. Reliance on long-term planning horizons and high road labor policies are winning strategies given corespective competition and strong aggregate demand growth. But an extended bout of low demand growth and coercive competition will make these strategies unsustainable.

Chronic excess capacity in most global industries is a fact of life in the neoliberal era.  For example, Business Week noted that: supply outpaces demand everywhere, sending prices lower, eroding corporate profits and increasing layoffs (January 25, 1999, p. 69). This raises an obvious question: Why hasnt global supply growth adapted to the reduced pace of global demand growth in the past two decades, creating sluggish but balanced growth?  My answer is that in the neoliberal era, demand problems have exacerbated destructive competitive processes, causing widespread over-investment and chronic excess capacity. I summarize below the complex argument presented in Crotty 2000.

The modern global economy has key industries -- such as autos, airplanes, computers, semiconductors, electric appliances, steel, ship building, and machine tools -- that dominate international trade and investment. I refer to these as core industries. They are capital intensive, with huge economies of scale, and marginal costs that do not rise with output until capacity is approached.

Firms in core industries have industry-specialized machinery, labor, and management; assets are thus substantially illiquid. If forced to exit from a core industry, a firm will find that the income from the sale of their assets on the second-hand market might be as little as one third of their original value. Exit is thus extremely costly. The size of firms, the industry-specific character of their assets, and their vulnerability to rapid technical change and financial fragility, suggest that they would face excessive risk and inadequate profits under dog-eat-dog competition.

If intense competition drives price down to marginal cost, price will fail to cover the firms large fixed costs per unit, a problem exacerbated by excess capacity. In John Maurice Clarks words, core industries are natural oligopolies-- industries that require either self- or state regulation.

Under oligopolistic organization and adequate growth in the overall economy, core global industries are highly profitable. Therefore, large multinational corporations from mature industrialized economies want to continue to dominate them. However, as the post-war period evolved, developing countries that wanted to move up the technology/productivity/value-added ladder entered these industries. Each new wave of entrants added to the potential for market over- crowding, making inter-firm cooperative relations increasingly difficult to maintain. Had global aggregate demand growth remained strong, the newcomers would have been easier to accommodate. But with sluggish demand, either established players must quickly exit from the industry as new firms enter or entry must be controlled to avoid chronic excess supply, falling prices and low average profits. Neither happened.

Why do new entrants keep coming? Emerging countries have to go pass through most of the rungs on the technology ladder or they cannot develop: they cannot go directly from labor-intensive textile exports to auto and semiconductor exports. Thus, governments must see to it that domestic firms become competitive in these industries or establish public corporations to do the job. Moreover, pushed by falling profits at home and attracted by the elimination of protectionist barriers against inward FDI everywhere, firms in both the North and the South invaded each others markets.

Why dont established firms withdraw as profits deteriorate? Established incumbent firms have huge sunk costs that will largely be destroyed if they are forced to exit the industry. If it were known in advance which firms would ultimately lose the struggle for survival in the industry, the losers would exit to cut their losses  and some weak firms do exit. But given the importance of these markets and the huge sunk costs required to enter and thrive in them, most competitors try to stay in the game even as competition mounts, hoping to survive the current struggle so they can reap the secure, above-average profits expected to emerge when the eventual winners re-oligopolize the industry. Given crushing exit costs and some probability of emerging as one of the profitable new oligopolists when the industry is reorganized, staying in the fight is often a rational choice.  The survivors of overcapacity downturns often emerge as the big winners, The Wall Street Journal reminds us (November 30, 1998, p. A17).

However, to have any chance of surviving, firms have to make substantial investments. I have elsewhere (Crotty 1993) labeled this phenomenon coerced investment. Price-profit pressures force firms that have decided to stay in the game to build plants where labor and other costs are cheapest and market growth strongest. They must invest to shed and more tightly control labor, and to gain the ever-greater economies of scale (for both cost reduction and quality reasons) that rapid technical change brings. Finally, they must invest to get inside the borders and on the ground floor of expected high growth developing markets. The combination of sluggish demand growth and coerced investment leads to chronic excess capacity. Of course, the most powerful firms have not been content to let this process complete its destructive course. In the 1990s, they engaged in a massive global merger and alliance movement that, in large part, was a response to destructive competition.

Note that the existence of substantial coerced investment is not inconsistent with the empirical observation that the growth of gross domestic investment -- including residential investment, public investment, investment for the sole purpose of increasing capacity, and investment in industries not subject to destructive competition  has slowed substantially in the past two decades, constraining demand growth.

The point that must be stressed is that sluggish aggregate demand growth and chronic excess aggregate supply reinforce one another in a vicious circle. The more competitive pressures develop, the more they force firms to cut wages, smash unions, substitute low for high wage labor, and pressure governments to cut spending so that corporations and wealthy households can receive tax cuts without eroding budget surpluses. But these actions constrain global aggregate demand even more tightly, creating yet stronger competitive intensity, and so on.

Summing Up: Low Profits, Coerced Investment, and Rising Debt

I offer three stylized facts about the condition of most NFCs in this period. First, slow demand growth and more intense competition reduced average NFC profit rates well below their Golden Age levels. Second, while NFC investment spending eventually declined, coerced investment delayed the decline and limited the extent of its fall. This meant that investment spending exceeded internal funds for most of the period. Third, the gap between internal funds and investment in both real and financial assets, forced NFCs into ever-rising indebtedness.

The data used throughout the rest of the paper refer to US NFCs because the US is the most important economy in the world, its economy is the most committed to neoliberal principles, and it has a highly developed economic database. European and Asian economies are undergoing transformation processes similar in form to those in the US, but generally at slower speeds.

There are many ways to measure profit rates; all of them involve serious measurement problems. Figure 1 shows US NFC profits before taxes as a percent of net worth. In the 1950s and 1960s, the profit rate remained high, peaking at almost 11% in the 1960s boom. If the profit rate in this graph seems low, keep in mind that the denominator includes an estimate of the market value of all the firms assets, both tangible and financial. It then declined in the troubled 1970s, and fell even lower in the 1980s and early 1990s, before rising again in the strange boom-bubble of the second half of the decade. (Note that the profit rate peaks in 199-96 and declines rapidly thereafter even as the great US stock market boom rolled on into 2000.) Profit rate data constructed by Brenner 1999, Dumenil and Levy 1999, and Glyn 1997 show a pattern that is reasonably similar to the one in Figure 1. Figure 2 shows the after-tax profit rate. Though the difference between the Golden Age and the neoliberal era is slightly less pronounced as the result of recurring corporate tax cuts in recent decades, the general picture does not change.

Figure 3 shows the annual percentage change in net real fixed investment by NFCs. The important thing to note is that even though the rate of profit fell dramatically after the mid 1960s, the rate of capital accumulation remained at a reasonably high level into the early 1980s. For example, consider the two sub-periods 1953-71 and 1972-86. While the average annual profit rate before taxes declined by almost 30% between periods, and the after-tax profit rate fell by almost 20%, the average annual growth rate of the real net capital stock actually rose by 4%. Figure 4 shows that NFC net fixed investment as a percent of GDP originating in the NFC sector is higher in the neoliberal era than in the Golden Age. Careful econometric analysis would be required to empirically demonstrate the importance of coerced investment in the post Golden Age era, but the evidence in these graphs is certainly consistent with the assumption that it is important, as are the econometric results in Crotty and J. Goldstein 1992. One impediment to an econometric demonstration of the importance of coerced investment is that in theory, it should be a positive function of the intensity of competition. However, it is not clear how to develop a useful measure of this variable. There are not even reliable statistics to measure the extent of excess capacity at the firm or industry level. In Crotty and J. Goldstein 1992, we estimate a time series regression for US manufacturing in which the profit rate, leverage, and the import penetration ratio are the independent variables. The sign on the import penetration index is positive and significant, suggesting that the direct effect of rising import competition was to stimulate more (coerced) investment, even though its negative impact on the profit rate constrained investment.

Figure 8 is a time series of NFC credit market debt as a percent of net worth. It shows a steady rate of increase of NFC indebtedness through 1970, followed by a slow reduction through the early 1980. In the hostile takeover movement of the 1980s, indebtedness rises dramatically. There is a slight decline in the early 1990s, but by 2001, this debt ratio was still more than 50% higher than in its peak year in the Golden Age.

In sum, the data suggest that the neoliberal era brought low profits, coerced investment, and increasing indebtedness to large US NFCs.

III.	Effects of Changing Financial Markets on the Structure and Performance of Large NFCs in the Era of neoliberal Globalization

Overview

There is an emerging literature on the rising importance of finance in the post Golden Age era. (See Aglietta 2000, Aglietta and Breton 2001, Arrighi 1994, Arrighi and Silver 1999, Boyer 2000, Dumenil and Levy 1999 and 2001, Felix 1998, Froud et.al. 2000, Henwood 1998, Krippner 2002, Morin 2000 and Useem 1996.) Its stronger versions suggest that we have moved from a Golden Age system in which finance supported real-sector growth and capital accumulation, toward a neoliberal system in which finance in some sense dominates the real sector, impeding economic growth and imposing more regressive distribution systems on most of the global economy. The unique logic of financial markets, it is argued, has been substituted for the laws of motion of Golden Age capitalism. It is important to emphasize that the 1990s have seen the emergence of a totally new candidate for the succession to Fordism, as a finance-led regime has captured and fascinating many observers, including regulationist researchers□ It is argued that, in such a regime, the hierarchy among institutional forms□ is drastically shifted: the financial regime plays the central role that used to be attributed to the wage-labour nexus under Fordism (Boyer 2000, p. 112). Many financial economists and financial market analysts acknowledge a systemic change, but applaud the transformation, arguing that it will ultimately be best for everyone, even if it is regressive initially.

Many empirical indices point to the possible rise of some kind of rentier capitalism. The value of financial assets as a percent of GDP has risen dramatically in many countries and across the global economy. For example, in the US, stock market capitalization as a percent of GDP rose from its long-term average of about 50% to 185% in 1999. It declined after mid-2000, but was still 128% in the first quarter of 2002. Profits in financial industries have risen much faster than in NFCs. Figure 5 shows that the ratio of the profits of financial corporations to the profits of NFCs rose from about 15% in the early 1950s and 1960s to almost 50% in 2001. Figure 6 shows that annual borrowing by all sectors of the US economy rose from about 10% of GDP in the 1950s and 1960s to an average of about 20% since then. NFC debt burdens are much higher than in the Golden Age, and real interest rates have been much higher in the neoliberal era than they were in the three decades that preceded it. Following the breakdown of the Bretton Woods system in the early 1970s and the gradual elimination of capital controls in both advanced and developing countries, money-flows across borders increased geometrically. In 1978 some $18 billion worth of currency trades took place daily; by 1989 it was $590 billion, and by 1999 it had risen to some $1.5 trillion. Global derivates contracts were worth less than $20 trillion in 1990, but about $120 trillion in 1999 (The Economist, May 18, 2002, p. 9 of special section Capitalism and its trouble). This helped create a powerful international rentier class whose interests are championed by independent central banks and international financial institutions such as the IMF and World Bank.

The new regime of integrated global financial markets has increased both the size and the instability of cross border capital movements, leading to booms in countries favored by global investors, and currency and banking crises in countries that fall out of rentier favor, often as the result of an inevitable collapse of the financial speculation and over-investment that accompanied the capital inflows. The incidence of such crises has increased as neoliberalism has taken deeper root. These crises, built into the neoliberal system, often become the occasion of IMF bailouts. As designed by Lord Keynes acting for Britain and Harry Dexter White for the US, the major goal of the IMF was to help deficit countries deal with short-term balance of payment crises in order to sustain high growth rates and maintain low unemployment. Under the rentier logic of the new neoliberal IMF, however, its standard operating procedure is to force countries facing balance of payments problems to implement austerity macro policy and to reform its economy in accordance with neoliberal principles. As more countries fall under IMF guidance in the current era, global neoliberal restructuring deepens, tightening constraints on growth.

It is not unreasonable, given changes such as these, to argue that finance has grown in importance with the rise of neoliberalism, that financial interests have become much more economically and politically powerful, and that these trends have been coterminous with a deterioration in real economic performance. One could argue that the neoliberal project reflects an economic vision of the world as seen through the eyes of financial interests and neoclassical financial economics. However, even among economists highly critical of neoliberal globalization, there is to date no consensus on the appropriate definition of financialization, never mind agreement as to the logic or laws of motion  or even the existence  of a new system of rentier or finance capitalism. Kevin Phillips defines financialization as follows. The processes of money movement, securities management, corporate reorganization, securitization of assets, derivatives trading and other forms of financial packaging are steadily replacing the act of making, growing, and transporting things (New York Times, The Cycles of Financial Scandal, July 17, 2002).

My purpose in this section is not to develop a model of global rentier capitalism, but rather to speculate about the impact of the evolution of financial markets in the past quarter century on the structure and performance of large NFCs, especially but not exclusively those in important globally-contested industries. I noted in section II that a Schumpeterian view of industrial organization and a Chandlerian perspective on the organization of the firm provide the best analytical framework for understanding the behavior of large firms in core industries. In this section I analyze the processes through which financial markets slowed the growth, eroded the profitability, and shortened the planning horizons of the large NFCs that generate most of the good jobs, implement most important new technologies (even when they do not invent them), own most of the private capital stock, undertake most of national and global investment spending, and normally appropriate the lions share of profits. This paper is an outline for an ongoing research program, not a final product. My ultimate goal is to develop an integrated theory of the evolution of the structure and performance of NFCs in the neoliberal era that incorporates the effects of both rising product market competition and changes in financial markets.

Financial Evolution in the Neoliberal Era and the Character of the Schumpeter-Chandler Managerial Firm

Joseph Schumpeter is the economist most closely associated with the theory that identifies oligopoly under corespective competition as the most efficient form of industrial organization. Alfred Chandler is perhaps the scholar most responsible for helping us understand the internal or structural or managerial revolution that had to take place within US NFCs before they could take advantage of technical change and economies of scale and scope to dramatically increase long-term productivity growth and living standards. With their contributions in mind, one could re-interpret the great contribution of John Maynard Keynes to be the crucial insight that even if the industrial organization that large NFCs need to function efficiently -- corespective competition in an oligopolistic environment -- and the internal organizational structures that make it possible for large multi-division NFCs to operate efficiently -- the Chandlerian or managerial firm -- are present, long-term prosperity cannot occur unless AD rises rapidly, and that this will not happen unless government stands ready to manage AD growth. We argued above that changes in the intensity of product market competition forced NFC managers to adopt short-term survival strategies that are destructive over the long run. Here we present a complementary argument about the effects of financial market change in the neoliberal era.

Lazonick and OSullivan are economic historians strongly influenced by the work of Chandler. They reject the [neoclassical] notion of an economy organized by perfect markets as ideal precisely because such an economy is one in which innovation and economic development would not, and could not, occur (1996, p.4). In a series of essays (1996, 2000, 2002), they chronicle important aspects of the neoliberal-era transformation of giant Chandlerian firms operating in the Schumpeterian industries that formed the core of the US economy for most of the twentieth century.

As has been the case throughout the twentieth century, in the 1980s a relatively small number of giant corporations, employing tens or even hundreds of thousands of people dominated the economy in the United States. On the basis of capabilities that had been accumulated over decades, these corporations generated huge revenues. They allocated these revenues according to a corporate governance principle that we call retain and reinvest. These corporations tended to retain both the money that they earned and the people whom they employed, and they reinvested in physical capital and complementary human resources. Retentions in the form of earnings and capital consumption allowances provided the financial foundations for corporate growth, while the building of managerial organizations to develop and utilize productive resources enabled investment in plant, equipment and personnel to succeed. (2000, 14-15)

They argue (1996) that the most important function of the organizational structure of the successful Chandlerian firm is to foster process and product innovation over the long term. They believe that there are two necessary conditions for NFCs to achieve this goal: organizational integration and financial commitment.

Organizational integration refers to the creation and reproduction of a strong commitment to the long-run goals of the firm by its major stakeholders, including top management, lower level management, specialized professionals, white and blue collar workers, and the firms traditional suppliers. Stakeholders must believe that if they commit themselves to the firms goals, the firm will reward them in return, For workers and managers, the reward is secure employment and remuneration that rises with seniority. This is one version of the theory of implicit contracts that was so popular with economists until flexibility became fashionable.

Lazonick and OSullivan stress the importance of linking engineering and production workers to firm goals, since they are the members of the firm most immediately responsible for generating continuous production cost and quality improvements. Labor economists often describe the relation between top management and workers captured by the concept of organizational integration as high road labor relations. NFCs in Japan, Europe and America that achieved long-term prosperity had organizational integration, implicit contracts and high road labor relations of some kind. The idea that organizational integration in pursuit of continuous innovation is the key to sustained growth is a concept about long-term objectives and long-term planning horizons.

Large-scale innovation is an uncertain, expensive, path-dependent, long-term process. Even when successful, innovation may not pay off for many years and involves learning by doing, so the firm may have to put in more capital than initially planned to bring a successful innovation to fruition. Only sources of finance with a long-term commitment to the firm can possibly provide the money needed to sustain long-term innovation. The national NFCs that we think of as dominant for long periods of time in post war years had access to adequate patient capital. Lazonick and OSullivan argue that if the earnings of the enterprise come under the control of people who demand liquidity rather than financial commitment, then the existing financial conditions for initiating and sustaining innovative investment strategies will disappear (1996, p. 11). Banks with long-term relations with the firm provided this kind of capital to East Asian and European NFCs, while in the decades preceding the 1970s, US firms could finance innovation largely through internally generated funds with assistance from the long-term bond market. Until the neoliberal era, US stockholders allowed management to retain control over the disposition of the firms cash flow.

The stock market was never an important source of corporate finance in the US; it was always a market where entrepreneurs could cash out, trading control of illiquid equipment and structures for money, and households could store value over long periods. As is demonstrated below, before the rise in institutional stock ownership in the US that began in the late 1960s, almost all stock was owned by individuals and held for long periods; stock turnover was quite low. Berle and Means first called attention to the importance of the separation of corporate management from stockholders, or the semi-autonomy of management from short-term shareholder pressure. The key point of this separation thesis stressed here is that until recently, financial agents did not force large NFCs to disgorge earnings to financial markets, then compete with other firms and individuals to get them back.  Rather, they left management alone to use cash flow to finance such capital accumulation and innovation as changes in product markets pressures and opportunities indicated was best for the long-term growth of the firm.

We have already seen how the outbreak of destructive competition in core global product markets strongly pressured NFC managers to break the firms implicit contracts, shift from high road labor relations to attacks on labor, and switch from long-term strategies to short-term survival strategies, eroding organizational integration. The point stressed here is that changes in financial markets over the same period created pressures on NFCs that were similar in their effects to, and thus reinforced, those generated by destructive product market competition. In Lazonick and OSullivans term, financial commitment eroded.

I stress two key dimensions of the changing relation of financial markets to large NFCs in the neoliberal era. The first is a shift in the beliefs and behavior of financial agents, from acceptance of the Chandlerian view of the large NFC as an integrated, coherent combination of relatively illiquid real assets assembled to pursue long-term growth and innovation, to a financial conception of the large NFC in which it is seen as a portfolio of liquid subunits that management must continually restructure to maximize the stock price at every point in time. The second is a fundamental change in the incentives that guide the decisions of top managers, from one that linked long-term managerial pay to the long-term success of the firm, to one that links their pay to short-term stock price movements. This created an alignment of the material interests of management with those of institutional financial investors and wealthy household and against the interests of other firm stakeholders. Both changes drastically shortened the planning horizons in large NFCs and led management to adopt strategies that undermined general economic performance.

We consider in order:

1.	the impact of evolving financial markets on AD growth;

2.	adaptations in the organization of the large NFC caused by a change in the conception of the firm held by and acted on by financial agents;

3.	the rise of the shareholder value movement and its impact on managerial incentives and time horizons;

4.	empirical evidence documenting the dramatic rise in the share of corporate cash-flow extracted by financial agents;

5.	the recent stock market collapse in the US and the outbreak of widespread NFC fraud and deception;

6.	the so-called financialization of the NFC in the neoliberal era.

Financial Constraints on AD Growth

In section II, the impact that changes in product markets had on core industry NFCs as a result of the fall in the rate of growth of AD after the Golden Age was discussed. Here I stress important ways in which the evolution of financial markets helped constrain AD growth.

First, high real interest rates and rising debt burdens constrained corporate and household spending. Real long-term interest rates in the G7 countries averaged 2.6% from 1959 to 1970, then fell to 0.4% in the high inflation years from 1971 to 1982 (Felix 1998, p. 184). Real global long-term interest rates averaged 5.1% from 1984 to 1991, before dropping to 3.8% from 1992 to 1999, but they were still substantially above Golden Age levels (IMF April 2002, p. 223). The shift to extremely restrictive monetary policy undertaken by Fed Chairman Volcker in the early 1980s both raised nominal interest rates and ended inflation in the US, creating extraordinarily high global real rates for several years along with a global recession. But even after the mid 1980s, real interest rates remained above normal, sustained by the spread of investor-friendly central banks, the rising volume of footloose funds in global financial markets, and increased uncertainty in the face of higher instability. (Note that the rise in real interest rates itself tended to shorten the planning horizon in NFCs by shortening the payback period used to evaluate potential investment projects.)

Since interest rates rose as indebtedness increased, higher household, business and government debt payments eventually constrained spending. When new loans were rising faster than interest and principle repayments, the addition of external funds allowed all sectors to increase spending faster than sluggish income growth would have permitted. However, rising debt coupled with high real interest rate eventually reversed this process.

Second, global financial interests increased their influence over fiscal policy in this era. Government debt as a percent of GDP increased rapidly after the early 1970s as transfer payments rose in the face of high unemployment, while tax revenue fell due to slow growth and the assault on the tax base by mobile corporations and wealthy households, a policy trend associated with the Reagan and Thatcher governments. With governments now forced to remain in the good graces of their bondholders, intense pressure was created to shift from the high structural budget deficits of the late 1970s and 1980s toward budget balance. For the advanced countries, the structural budget deficit fell by 3.1% of GDP from 1992 to 2000, creating a huge drag on aggregate demand growth (IMF April 2002, 179).

Third, the IMF and World Bank took control of policy making in a growing number of developing countries that, having initially opened their financial and product markets to some degree, ended up with serious balance of payment problems that forced them to seek IMF and World Bank assistance. Saturated with neoliberal ideology and virtually run by the US Treasury Department on behalf of Wall Street, these institutions forced the implementation of slow-growth macro policy on client states in order, they said, to restore foreign investor confidence. As Nobel laureate and former Chief Economist for the World Bank Joseph Stiglitz recently observed: Today the IMF typically provides funds only if the countries engage in policies like cutting deficits, raising taxes, or raising interest rates that lead to a contraction of the economy. Keynes would be rolling over in his grave were he to see what has happened to his child  (2002, pp. 12-13).

Moreover, the IMF and World Bank accelerated the liberalization process in these countries, requiring them to end credit allocation and industrial policies, even where, as in the case of Korea, they had been enormously successful in the past. Such restructuring tended to slow the growth of global AD by eroding the necessary institutional foundation for high growth in developing countries.

The Rise of the Financial or Portfolio Conception of the NFC in Financial Markets

In the late 1960s and early 1970s, many NFCs began to acquire other firms, becoming diversified conglomerates. Their management was attracted to a conglomeration strategy by high stock prices that made acquisition relatively cheap, by the belief that diversification would bring more stable earnings than specialization, by a vague concept called synergy, and, toward the end of the period, by pressure caused by a decline in the profit rate.

The 1960s conglomerate merger movement was accompanied by a change in the perception of the proper role of top management, from one in which managers were expected to be expert in key aspects of the main business of the firm, to an evolving view of top executives as generalists who could manage any kind of enterprise, even if they knew little about the details of its business. This change helped erode organizational coherence by creating new conflicts of interest among stakeholders. Subunit management and labor obviously had firm- and industry-specific human capital; they were committed to their industries. Top home office managers, on the other hand, began to think of their own subunits as liquid assets that could be disgorged to capital markets if they under performed, and to look at other firms as assets to be added to their own portfolio if their acquisition would raise expected returns. Finance and accounting replaced production and engineering as the quickest paths to the top of the managerial hierarchy.

The shift to a financial or portfolio view of the large NFC remained incomplete until the hostile takeover movement of the 1980s. This was the period when a large active secondary market for below-investment-grade or junk bonds was created by Michael Milken. Junk bonds existed before the 1980s, but it was only after 1982 that they became a viable source of debt finance for virtually any hostile takeover, even of long-established giant firms. In the 1980s, the hostile takeover moved from a marginal or deviant event to standard financial market practice. Financial investors were determined to end the dismal returns to equity of the mid 1970s through the early 1980s, a period that saw price-earnings ratios plummet to half their historic average. Though the late 1970s saw conglomeration fall out of favor with financial investors, in the 1980s the US stock market became, for the first time in the post war era, a well functioning market for corporate control: if insiders at NFCs failed to divest units whose rate of return fell below the cost of capital demanded by Wall Street, corporate raiders would take the firm over and accomplish this task themselves.

Raiders relied primarily on debt to finance takeovers, pushing NFC indebtedness to historic highs. In the case of the takeover of Nabisco, the largest hostile acquisition in history, $23 billion of the $25 billion purchase price was debt financed. Managers of targeted firms often defended their turf by loading the firm with debt-financed stock buybacks or special cash dividends to deter potential raiders. In the period 1984-89 alone, one trillion dollars was borrowed to finance corporate takeovers or defend against them. Figure 8 shows that the ratio of NFC credit market debt to net worth, after rising through the late 1960s and declining in the 1970s, shot up dramatically from the early 1980s through the early 1990s, and remained high thereafter. Yet, as Crotty and D. Goldstein 1993 show in their review of financial markets in this period, the hostile takeover movement failed to improve average NFC performance in key areas such as cost control, productivity growth, and R&D investment.

What the 1980s takeover movement did accomplish was to force the financial or portfolio view of the firm on NFC management. Fligstein and Markowitz (1990) argue that in the financial conception, the firm is seen as a bundle of assets to be deployed or redeployed depending on the short-run rates of returns that can be earned. The normative acceptance of hostile takeovers in the 1980s reflected the more general triumph of this view of the corporation (p. 187). Financial market pressures could now force divestment of subunits that failed to meet investor expectations for just a year or two.

These developments accelerated the ongoing process of the shortening of NFC planning horizons caused by destructive product market competition. Top home office managers now had little allegiance to management or labor in its subsidiaries. Indeed, their standard response to financial market pressure was to cut costs at subunits by firing workers, shifting cost pressure to suppliers, moving production abroad, downsizing the subunit, lowering wages and benefits, and outsourcing new functions  moves that run counter to the interests of subunit stakeholders. In Lazonick and OSullivans terms, NFC management shifted from the long-term strategy of using cash flow to retain and reinvest to a short-run strategy to downsize and distribute cash flow. When cumulated throughout the system, these tactics further constrained AD growth.

This shift in financial practice was accompanied and supported by a development in economic theory know as agency theory. Pioneered by financial economists such as Michael Jensen and Eugene Fama and widely adopted in the business world, agency theory assumes that unregulated market systems would work perfectly were it not for one intractable problem. Principals  the owners or shareholders -- have different information and different objectives for the firm than those of the management agents they hire to run the firm on their behalf, differences that cannot be eliminated contractually. Managers are assumed to seek individual aggrandizement and the endless expansion of firm size rather than shareholder value. Thus, they use free cash flow (cash flow left over after all investment projects with rates of return in excess of the market determined cost of capital have been funded) to create opulent corporate lifestyles and over-extended corporate empires.

Neoclassical financial economists applauded the hostile merger movement of the 1980s because they believed it reduced the agency problem in two ways. First, it loaded most NFCs with debt, forcing selfish managers to disgorge free cash flow to rentiers in the form of interest payments as well as through defensive stock buybacks and cash dividends. As a side benefit, managers would now have to increase productive efficiency or they would be unable to generate the cash flow needed to meet their crushing debt burdens. The attitude of financial markets toward corporate debt has been quite fickle. They condemned excessive corporate debt before the 1980s, then applauded high debt as a sign of good management in the hostile takeover movement. In the early 1990s they criticized excessive debt again, before finding it quite acceptable as a source of finance for stock buybacks in the late 1990s.  Second, the market for corporate control would replace managers who did not maximize shareholder value by others willing and able to do so. Indeed, Jensens later writings picture the stock market as one in which teams of executives bid to see who can manage the large NFC most effectively in the interest of its shareholders. Jensen argues that: The managerial competition model □views competing management teams as the primary activist entities, with stockholders (including institutions) playing a relatively□ passive role (quoted in Henwood 1998, p. 268).

It would be almost impossible to imagine a vision more at odds with the Schumpeterian and Chandlerian views of the firm than its financial conception in agency theory.

The Shareholder Value Movement: A New Alliance Between NFC Managers and Financial Investors

As the financial conception of the NFC was taking root, the influence of institutional investors on stock prices and NFC management behavior rose. Mutual funds, public and private pension funds, insurance companies and other institutional investors had, by the late 1960s, gained influence in the stock market. Technical progress in information processing along with liberalization of regulations that constrained their acquisition of stocks in the mid 1970s led to a continuous rise in the percent of stock held by institutional investors in the 1980s and 1990s.  Throughout the 1950s, households owned about 90% of corporate stock and tended to hold the stocks they owned for long periods. However, by 1970 this share had dropped to 68% as institutional ownership rose. In the second half of the decade, the household share held steady at 59%, but it fell to 47% by 1985 where it stayed until the mid 1990s. By 2000, as the household share fell to 42%, institutional investors had clearly become the dominant stockholders of large US corporations. They were responsible for about three-quarters of all stock trades.

Institutional investment is a highly competitive business in which a very large number of firms fight for contracts to manage very large portfolios. (See Useem 1996.) Failure to achieve at least industry-average rates of return for even a few quarters can mean the loss of many such contracts. This is a situation ideally designed to generate herd behavior among investors: you must follow the crowd as it rushes in or out of an industry or firm or geographical area, thereby raising and lowering stock prices, or risk below-average portfolio returns, which can quickly put you out of business. As institutions became more important in the market, stock turnover (the proportion of total stocks sold in one year) grew ever higher. As shown in Figure 10, turnover on the New York Sock Exchange averaged about 20% from 1960 through the late 1970s. It then increased dramatically to over 70% through the most hectic phase of the hostile takeover movement  from 1983 through 1987. After falling back toward 50% in the early 1990s, it exploded once again as the shareholder value movement of the 1990s moved into full swing. It exceeded 100% in the first half of 2002, more than five times its Golden Age mean.

On average, stocks were now held for just one year. Rational stockholder thus had no reason to concern themselves with the performance of the companies they owned beyond a one-year horizon. Clearly, stock prices lost any connection with fundamentals, no matter how that term is defined. By the late 1990s, the stock market had become a wildly speculative casino where everyone bought stock, not to hold for the long run, but to realize capital gains in the shortest of terms. The extraordinarily short-term horizon of institutional investors was eventually imposed on the managements of NFCs. At many of Americas largest corporations, the dispersion of stockholding and consequent weakening of shareholders left professional executives firmly in control in the early 1980s (Useem1996, p. 15). However, the 1980s hostile takeover movement had either converted top management to the pursuit of short-term stock price gains, or replaced recalcitrant Chandlerian managers with more zealous advocates of shareholder value maximization.

But pressure to push stock prices ever higher also became internalized within NFC top management itself. One of the driving forces behind the corporate raids of the 1980s was a determination to force NFCs to raise the return on equity. This determination also led to the shareholder value crusade of the late 1980s and 1990s through which institutional investors tried to force management to meet their need for ever higher stock prices in their constant search for above-average capital gains. In pursuit of this objective, they used their collective power to shift the incentive structure of top decision makers in large NFCs into alignment with their own. The weapon that achieved this goal was the spreading use of stock options, as well as bonuses tied to stock price movements. Stock options had been used in a small way in the stock market boom of the 1960s, but had fallen out of favor as stock prices failed to rise even in nominal terms from the mid 1960s until the early 1980s.

By the late 1990s, the dominant component of the pay of the management teams running Americas largest NFCs, as well as in smaller firms in high-status high-tech industries, was stock-price driven. The average proportion of the earnings of the top 100 CEOs that came in the form of exercised stock options was 22% in 1979 (the first year the survey done by Forbes Magazine -- the basis of the data used here -- was taken), a not insignificant amount. It rose substantially to about 50% in the late 1980s. In the financial boom years of 1995 through 1999, this average rose to 63%. Meanwhile, top CEO average pay in all forms rose from $1.26 million in 1970, to $37.5 million in 1999 [Piketty and Saez 2001, Table B4]. Gargantuan payments accrued to managers who could get their companys stock price above a trigger level -- even for one minute. Pay structures were such that it was rational for managers to do anything that was legal -- or even of questionable legality since legislation passed in the 1990s made punishment so unlikely  to push the stock price above the trigger point for their largest options. By fiddling with their [financial] accounts, The Economist argues, company bosses could hope to drive up their share prices, cash in the options, and set sail in their yachts (July 20, 2002, p. 53). In the neoliberal era, financial market deregulation made almost any sleazy financial manipulation legal. Frank Rich, a New York Times columnist, said we are rapidly learning that there is no such thing as a prosecutable corporate crime (The Road to Perdition, July 20, 2002). Even Fed Chairman Greenspan joined this chorus, arguing that an infectious greed had gripped the business community in the late 1990s bubble: the spread of shareholding and options among business managers engendered an outsized increase in opportunities for avarice (Testimony before the Senate Committee on Banking, Housing, and Urban Affairs, July 16, 2002).

Moreover, since stock options are worthless if the stock price fails to rise, managers had a strong incentive to take excessive risk. They receive huge rewards if their actions are successful, but are no worse off if the stock price plummets than they are if it maintains its current level. Finally, top executives at the largest NFCs have arranged to receive enormous payments in the unlikely event they are fired. The contracts have made the executives nearly immune from dismissal, ensuring that they will receive millions of dollars when they leave their posts, under almost any circumstances (New York Times, Watch It: If You Cheat, Theyll Throw Money, June 9, 2002).

Managers of large NFCs quite rationally adopted the shortest possible corporate planning horizons and allied themselves with financial market speculators rather than the long-term stakeholders in their firms.

The new options-loaded contracts were not designed to reward unusually effective management skills; in most cases managers did not have to achieve stock price gains in excess of market or industry averages. And in the great bull market of the early 1980s through the 1990s, almost every listed firm saw its stock price rise, so large management pay increases became almost universal. From 1982 through 1999, the S&P 500 stock price index divided by the CPI increased at an average annual rate in excess of 12%, a cumulative rise of almost 600%. The market value of US corporations rose by $15.7 trillion in the period. With the creation of belief in the arrival of a new economy, the S&P index rose 21% a year from 1995 to 2000. Since the median real wage of US workers at the end of the 1990s was still lower than it had been two decades earlier, the ratio of the pay of top managers to that of average workers exploded. For the CEOs of the 100 largest US corporations, this ratio rose from 38 in 1970, to 101 in 1980, to 222 in 1990, and finally to the unbelievable level of 1,044 in 1999 [Piketty and Saez 2001, Table B4]. A more inclusive sample of CEO pay shows a similar time profile. Here the ratio of CEO to average worker pay was 26 in 1965, 37 in 1978, and 72 in 1989. It then leapt to 310 in 2000 before falling to 245 in 2001 as stock prices declined (Economic Policy Institute website, epinet.org, Economic Snapshots, July 24, 2002).

Members of the investing classes had come to believe that annual gains on stock portfolios in excess of 20% would go on forever: institutional investors demanded that NFCs produce rapid earnings growth so they could satisfy their clients. Top NFC managers needed to generate rising stock prices or their stock options would be worthless. The situation was especially precarious because expectations of earnings growth of 20% a year were built into inflated price-earnings ratios. Disappointing reported earnings could thus lead to a sharp downward adjustment of the firms P/E ration, so that the stock price would take a double hit. The S&P 500 P/E ratio had been below its historic average of about 15 from the mid 1970s to the mid 1980s. It then rose above 15 in the early 1990s, hitting 20 by mid decade. In the heat of the bubble from 1996 through 1999, the ratio averaged 27, peaking at 31 in 1999.

By the late 1990s, the rational pursuit of self interest by powerful institutional investors and top managers at most large NFCs led them to do whatever it took to keep stock prices rising even in the shortest of runs. Joseph Stiglitz put the matter this way: Over the last 15 years, executive rewards have soared, and so has the fraction of it related to stock prices, to the point where the fraction related to long-term performance is quite small. Effectively, managers have been discouraged from looking at □ fundamentals (Guardian of London, Corporate Corruption, July 4, 2002). In the late 1990s, stock prices moved solely in response to changes in reported quarterly earnings, or, more accurately, in response to the relation of reported earnings to the markets expectations about them. Nothing else seemed to matter. Managers thus had the strongest possible incentive to make sure that reported earnings kept rising without interruption  no matter what it took to get this done. According to the Wall Street Journal: the incentives to do almost anything to increase the stock price were huge. And the incentives werent to increase profit and share prices over a decade or two, but rather to increase profits  never mind if they have to be restated later  just long enough for executives to cash out□ (June 6, 2002, p. A1).

Financial Agents Have Extracted an Increasing Share of NFC Cash Flow: Empirical Evidence

Destructive product market competition in core industries erupted in the 1970s and increased in intensity in the following decades. This naturally led to a decline in gross NFC profit rates. NFCs used all the means described in section II to cut costs in an attempt to restrain the fall in profitability, but it was not until the mid-1990s that the rate of profit of US NFCs temporarily rebounded back to Golden Age levels. In a careful analysis of the sources of the rise in the US NFC profit rate from the early 1970s to its 1990s peak, David Kotz 2001 found that the entire increase could be explained by a decline in the share of labor in value added.

As noted above, Figure 3 shows that net investment in fixed capital by NFCs rose with the profit rate in the 1960s boom. It stayed at a fairly high level right through the mid 1980s even as the profit rate remained quite low. I have argued that many large NFCs felt they had to engage in coerced investment spending to avoid forced exit from industries plagued by excess capacity and destructive competition. As a result, fixed investment spending exceeded internal funds in almost every year after the mid-60s, as can be seen in Figure 7. This is the investment funding gap often discussed by financial analysts.

Moreover, as demonstrated in the next section, NFCs also increased spending on financial assets, so that the gap between internal funds and total investment, real and financial, was much wider than Figure 7 suggests. As a result, NFC indebtedness rose substantially. Figure 8 shows that the ratio of NFC credit market debt to net worth skyrocketed in the 1980s as a result of the hostile takeover movement, exceeding 50% by the early 1990s, a rise of some  two-thirds from its early 1980s level. Figure 9 shows total financial liabilities of NFCs -- a broader liability category than credit market debt -- as a percent of their competition-constrained internal funds. This ratio cycled between 5 and 8 until the early 1980s, then it rose rapidly in the neoliberal era, topping 14 in 2001.

These changes in product and financial markets and in the incentives guiding management led to a qualitative increase in the percent of NFC cash flow taken by financial agents. Figure 11 shows NFC net interest payments as a percent of cash flow. The interest burden rose from 5% in the financially robust 1950s to 15% by the end of the 1960s, as debt increased and real interest rates rose. Since real interest rates were quite low in the 1970s, the interest burden stayed constant until the early 1980s, at which point super-high real interest rates brought on by Paul Volckers temporary conversion to monetarism followed by the hostile takeover movement caused it to rise to a post-war high of 30%. It then fell back toward 1970s levels as real interest rates declined, and as cash flow rose in the mid to late 1990s.

Figure 12 shows dividend payments as a percent of cash flow. The proportion of NFC cash flow extracted by financial markets from NFCs in this form actually declined after the 1950s and 1960s, an era in which patient stockholders expected the bulk of the returns from their equities to be in the form of dividends. However, the rise of the shareholder value movement caused the dividend payout ratio to double from mid 1980s to the late 1990s, severely draining NFC funds.

Figure 13, which shows net NFC stock purchases as a percent of cash flow, indicates that until the 1980s, NFCs were net sellers of equity, though they never raised large sums in the equity capital market. Neoliberalism changed this pattern. After 1983, NFCs became large net buyers of NFC stock. In the hostile takeover movement of the 1980s, NFC management bought its own stock, often financing the purchase with debt, to keep the raiders from the door. The rise in stock price that resulted made takeover attempts more expensive, while the higher indebtedness made companies less attractive targets. From 1984 through 1989, stock purchases ate up over 20% of NFC cash flow. (Negative numbers indicate years in which NFCs were net sellers of equity.) Net purchases dropped off in the early 1990s with the end of hostile takeovers, but rose again after 1993 as the shareholder value movement gained strength. NFC managers became as anxious as institutional investors to push their stock price up via stock buybacks so they could cash in their options. In 1998 alone, NFCs made net purchases worth $267 billion, over 30% of cash flow that year. From 1995 through 2001, NFCs purchased $870 billion of their own stock, keeping significant upward pressure on its price (Business Week, July 1, 2002, p. 30).

Figure 14 shows total payments to financial markets -- the sum of net interest plus dividends plus net stock purchases -- as a percent of cash flow. It thus brings together product and financial market pressures impinging on NFCs in the neoliberal era. Destructive competition constrained NFC cash flow, while financial markets forced NFCs to disgorge an ever growing share of their shrinking cash flow to financial agents. Financial market payments rose from relatively low levels in the 1950s to average about 30% of cash flow from the mid 1960s through the late 1970s. But from 1984 through 2000, with the exception of three years in the early 1990s, NFCs paid out well over half their cash flow to financial agents. From 1984 through 1990 and again from 1997 through 2001, this ratio never fell below 50%, peaking at 76% in 1989 and again at 74% in 1998. In effect, NFCs were forced to fund most of their capital investment externally in the neoliberal era, and with debt, not equity, since stocks were being bought, not sold. From 1995 to 2001, NFCs added $2.1 trillion in new debt (Business Week, July 1, 2002, p. 30). This is impatient capital in an extreme form!

To be sure that the striking results shown in Figure 14 were not the result of measurement bias, I recalculated total payments to financial market, this time as a percent of the sum of cash flow plus interest payments, a more conservative estimate of financial market claims. Figure 15 is the result. It has the same time profile as Figure 14, though the peaks in the 1980s and 1990s are not quite as high. Still, from 1984 through 1989, and again from 1997 to 2001, the payout ratio is about 50%. In this series, the 1989 value is 58%, while the 1990s peak occurs in 1998, the year of the largest stock purchases, with a payout ratio of 64%.

I conclude that the combination of hostile product market conditions, the imposition of extreme short-term term horizons on NFC management from both external and internal pressures, high capital costs, and a lack of control over their own cash flow have made it impossible for US NFCs to operate effectively in the neoliberal era.

The Logic of Financial Market Evolution, the US Stock Market Collapse, and the Crisis of Confidence in the US Financial System

In the two years following its peak in July 2000, the S&P 500 stock price index fell by more than 40%. And in recent months the US has experienced what already is its worst financial scandal of fraud, deception and corruption since the 1920s, before the creation of the Securities and Exchange Commission and the enactment of other regulatory reforms that were supposed to have made a recurrence impossible.

To understand how these events could have taken place in the richest country in the world, one that was believed to possess the deepest, most efficient, most transparent, and best-regulated financial markets in the world, one must understand the neoliberal paradox discussed above. Destructive competition in product markets in the past quarter century has severely constrained the ability of NFCs to earn high profits and cash flow, yet financial markets demand ever-rising earnings to support ever-rising stock prices. The standard micro strategies NFCs adopt to survive these pressures, such as downsizing, wage cuts and so forth, while rational for each firm individually, create macro economic pressures that further restrain AD growth, reproducing excess capacity and making product market conditions worse  the micro-to-macro direction of causality in the macro-micro dialectic.

In a study of British firms, Froud et. al. 2000 found that a large majority of NFCs could not achieve earnings in excess of the cost of capital. The small percent whose earnings exceeded the 12% to 15% cost of capital demanded by financial markets were concentrated in industries with oligopolistic structures and price-setting power. They see a sharp contradiction in the US and UK between the ROCE [return on capital employed], which the fund managers of the capital market require, and what corporate management can deliver from most product markets. They add: only global monopoly and pricing setting power in most product markets could plausibly produce a general rise in ROCE. They concluded: financialization is not a coherent realizable project for corporate management (2000, pp.106-07).

In the US, it took a precarious and dangerous combination of forces -- over-investment sustained by rising corporate debt, consumption driven by rising household debt and enormous stock market and real estate capital gains, an unprecedented inflow of money from the rest of the world into US financial markets, and a sharp fall in labors share of GDP originating in NFCs  to push NFC profit rates from their low levels in the early 1990s to a two-decade high in 1997. The forces supporting this boom were clearly unsustainable, yet financial market pressures and new internal NFC management incentive structures required that reported earnings rise virtually every quarter to prevent P/E ratios and stock prices from falling. Confronted by these contradictory forces and unable to meet earnings expectations, many large NFCs, such as Enron and WorldCom, became what the business press calls serial acquirers. By adding more and more businesses, NFCs in effect bought the new earnings they could not gain through expansion in traditional product markets because of destructive competition. Yale School of Management Dean Jeffrey Sonnenfeld notes that there is a commonality in the approach used by the CEOs of large NFCs such as Tyco, WorldCom, Global Crossing and Enron whose reliance on fraud and deception to sustain reported earnings has recently been exposed.

All of them are serial acquirers of other companies□ These executives saw their jobs first and foremost as expanding corporate holdings, rather than managing their companies to produce better products and services. And because their focus was on immediate financial results, they also tended to see regulators as adversaries and accounting rules as inconvenient barriers to their schemes□ Mesmerizing Wall Street with a dazzling display of deals makes an absence of long-term management vision easy to hide.

He goes on to say that the serial acquirers were successful briefly in that the very complexity of their businesses made it hard to hold them immediately accountable (Wall Street Journal, June 12, 2002, Expanding Without Managing).

In the end, when even this strategy was not enough to keep earnings on the rise, management cooked the books. Froud et. al. put the matter this way in an article written before the recent stock market collapse and the discovery of widespread fraud and deception in large US NFCs.

Even in blue-chip companies, whose managements once built factories and market share, operating management becomes an endless series of cheap financial dodges: this years target is met by ending the defined benefit pension scheme, which saves labour costs, and next years dodge is leasing the trucks so that the capital appears on somebody elses balance sheet. This work is punctuated and interrupted by major restructurings and changes of ownership where it is the financial engineering which is crucial: what will the capital base of the combined firms be and how many workers can be sacked after merger? (2000, 109)

Obsessed with earnings growth, disinterested in how it was obtained, and mislead by accounting fraud on a massive scale that disguised the spreading corporate rot, institutional and individual stockholders kept pouring money into a market that kept feeding them back rising earnings reports.

Given conditions in product markets, nothing but massive fraud and deception could possibly have keep stock prices from falling after 1997!

Few people understood the extent to which these reporting distortions had grown by the decades end. Yet the evidence needed to understand that something had gone very wrong with reported corporate earnings was freely available to anyone. Government NIPA data showed that profits as a percent of the value added in NFCs peaked in mid 1997 and fell by over 20% in the next two years (Council of Economic Advisers 2002, 339). Still, the earnings reported to financial markets and the Securities and Exchange Commission by the same companies continued to rise at a rapid 20% annual rate through mid 2000. Paul Krugman observed that corporate leaders were desperate to keep their stock prices rising in an environment where anything short of 20 percent annual growth was considered failure (New York Times, May 21, 2002, Enemies of Reform). If markets were as informationally efficient as is assumed in neoclassical financial theory, deception on this scale would have been impossible.

We now know that accounting fraud and deception took place on a grand scale, especially after 1997, as management teams used all the tricks made available by lax regulation, elastic accounting principles, and the inherent complexities of financial engineering to pump up reported revenue and hide rising costs and indebtedness. For example, 1000 firms restated their earnings since 1997(thereby acknowledging that the original estimates were significantly fudged), WorldCom listed $3.8 billion in ordinary expenses as capital investment in 2001, and Xerox claimed $1.4 billion in phantom revenues over five years.  The Economist complained that the abuses that have besmirched corporate America were the work of managers whose wealth depended on propping up their companys share price by any means and in the short term (July 20, 2002, p. 12).

Giant conflicts of interest deeply embedded in the institutions and practices of the financial system allowed this fraud to occur. NFC managers with huge stock options were aided and abetted in their efforts to deceive investors by all five giant accounting firms, who signed off on virtually any financial statement management wanted, no matter how deceptive, because consulting contracts with these firms earned them more money than they got for audits. US stock analysts issued only buy recommendations to their clients, even when they knew better, because their firms needed the investment banking business of the same NFCs these analysts were evaluating. Congress defeated all proposals to force firms to provide accurate income and balance sheet information, passed legislation in the mid 1990s that made it almost impossible for shareholders to sue management for fraud and deception, and in 1999 removed all remaining safety walls separating investment and commercial banking, because the financial and accounting industries are among the largest campaign contributors to Washington politicians in an era when elections are obscenely expensive.

It would be reasonable to conclude that modern financial markets like the one in the US have become so complex and impenetrable, and financial engineering so sophisticated, that they are inherently non-transparent. The financial transparency that economist are searching for cannot be attained unless qualitatively stricter government financial regulation and enforcement systems are put in place.

The US has been experiencing an episode of corrupt crony capitalism at least as bad as the one economists claim took place in East Asia in the 1990s. WorldCom had an estimated $107 billion in assets at the time it declared bankruptcy, and Enron went bust with $63 billion in assets (Wall Street Journal, July 22, 2002, p. A3). The Economist claimed that the telecom bust is some ten times bigger than the better-known dotcom crash: the rise and fall of telecoms may indeed qualify as the largest bubble in history (July 20, 2002, p. 9). In a front-page story in the Wall Street Journal, reporter David Wessel said that the scale and scope of the corporate transgressions of the late 1990s, now coming to light, exceed anything the U.S. has witnessed since the years preceding the Great Depression (June 20, 2002, p. A1). The amounts stolen or misallocated through fraudulent means dwarf the GDPs of many small nations.

Financial fraud contributed significantly to the over-investment boom of the late 1990s that left massive excess capacity and indebtedness in many ITC sectors and pushed the manufacturing capacity utilization rate to its lowest level since the Great Recession of the early 1980s. According to The Economist, telecom firms have run up total debts of around $1 trillion (July 20, 2002, p. 9). They have also fired a half million workers. Lack of confidence in corporate financial statements combined with P/E ratios still way above normal are likely to hinder GDP growth for many years to come. As of early July 2002, the trailing S&P 500 P/E ratio was 41, and reported profits are still exaggerated by deceptive accounting practice.  Since, as of mid July of 2002, the stock market had lost about $7 trillion in value from its 2000 peak, investors were understandably upset and wanted stronger regulation. In late July 2002, Congress did pass a reform package, but these reforms are modest and unlikely to be vigorously enforced. The odds against the creation of an adequate system of accounting and financial regulation for the new millennium are small because powerful interests  in financial markets, in large NFC boardrooms, and in Congress -- continue to control the political process.

If You Cant Beat Them, Join Them: The Financialization of NFCs in the Neoliberal Era

Many NFCs responded to the low profits and high costs of external funds they faced in the 1980s and 1990s, as well as to the high returns they observed being made on financial assets and financial enterprises, in two innovative ways. First, an increasing percent of NFC investment funds were used to acquire financial assets. Second, firms created or bought financial subsidiaries, and expanded those financial subsidiaries already in existence. These widely noted developments are sometimes referred to as the financialization of the non-financial firm in the neoliberal era. Unfortunately, data limitations make it difficult to evaluate the extent of this development.

Other researchers have given precise estimates of the increasing use of NFC funds to purchase financial rather than real or tangible assets. (See Dumenil and Levy 1999, and Krippner 2002.) The database used to analyze US NFCs consists of the Federal Reserves Flow of Funds (FOF), the National Income and Product Accounts (NIPA), and Internal Revenue Service (IRS) documents. Two standard graphs taken from the FOF accounts appear in Figures 16 and 17. Figure 16 shows the value of NFC financial assets as a percent of the value of tangible assets such as structures, equipment, software and inventories. This ratio slowly drifts upward until 1984, after which it rises rapidly for the remainder of the era. Its value in 2001 is roughly two and one-half times its value in 1984, and is now close to 100%. Figure 17 shows the net acquisition of financial assets by NFCs as a percent of their internal funds, which is clearly higher after the Golden Age. The rising degree of financialization exhibited in these graphs is indeed impressive.

However, there are serious limitations of the use of FOF data for the purpose of measuring financialization. The most important one is this. The main source of the rising trend of financial investment is a category of financial asset labeled other miscellaneous financial assets. See Figure 18, which shows that other represents close to half of net financial acquisitions in much of the period from the early 1980s through the present. Unfortunately, there is no independent estimate of the size of this variable: it is merely a statistical residual. Personal communication with Federal Reserve economists make clear that the Fed itself does not know what kinds of assets are in other financial assets, or even whether all assets in that category are financial. I have found no reference to this serious data problem in the financialization literature.

To get a different view of the importance of financial assets for NFCs in recent decades, I constructed a balance sheet time series of the ratio of total financial assets minus miscellaneous financial assets to tangible assets. The only two significant components of miscellaneous financial assets are outward FDI, which is normally considered a real investment, and the other category just discussed. Figure 19 seems to indicate that NFCs were actually de-financializing in the 1970s. It is only in the neoliberal era that this trend begins to reverse itself, and it was not until the 1990s that this measure of financialization exceeded its 1960s level. But this series is unreliable as well, because the other category probably does contain some financial assets. Until we can identify the assets contained in the residual category of other miscellaneous financial assets in the FOF and have independent measures of their size, the extent of this aspect of NFC financialization will remain something of a mystery.

These data problems do not mean that the financialization process did not take place or has not been important. We know, for example, that NFCs made enormous capital gains on their holdings of the equity of other companies, especially in the 1990s, whether these stocks were held in pension fund accounts or as NFC corporate investments. If the FOF accounts incorporate these capital gains, it can only be in the other residual. Assisted by data generously provided by Greta Krippner, I constructed a time series of gross portfolio returns from NFC receipts of interest, dividends, and realized capital gains taken from IRS documents.  Figure 20 shows the time trend of the ratio of NFC portfolio income to NFC cash flow. The ratio rises from a mid 1960s level of some 14% through 1978, when it reaches 24%. It then rises rapidly through the late 1980s where it peaks at 47%. After falling in the early 1990s, it begins to rise again through 1997, the last data point. It would be reasonable to speculate that it continued to increase at least through 1999. But again, caution is required in interpreting the meaning of this time series because we do not know how to allocate the firms total cost of financial capital between real and financial assets. Keep in mind that from 1975 through 1987, and again from 1997 through 2001, the net acquisition of financial assets was negative  NFCs issued financial liabilities whose value exceeded that of the financial assets they acquired. Without a more complete analysis of both the costs and benefits of NFC holdings of financial assets, we cannot know whether this aspect of financialization made NFCs better or worse off.

The second dimension of the financialization of NFCs is equally burdened by data inadequacies. Everyone knows that many large US NFCs have important financial subsidiaries. Every discussion of this topic mentions GE, GM, and Ford. But I have not discovered a single source that either lists the total number of financial subsidiaries of an important category of NFCs -- such as those in the S&P 500 index or the Fortune 500  or, more important, provides a careful estimate of the percent of assets, sales, revenues, profit or employment in large NFCs generated by their financial subsidiaries.

To quote Lord Keynes on a different subject: About such matters, we simply do not know. In sum: an initial study of the data on financialization leads to the temporary conclusion that there indeed has been a financialization of NFC firms in the neoliberal era, but more work is required to establish its precise dimensions.

IV. Conclusion

There are many reasons to oppose neoliberal globalization. It has led to slow growth, high unemployment, rising inequality within and across countries, the end of progress against poverty in the developing world, the outlawing of the policy tools used by those East Asian that made substantial progress toward development in the post World War II era, and the loss of effective democracy in countries under the control of the IMF and, as in the current case of Brazil, in countries where foreign investors can profoundly influence the electoral process.

The main conclusion to be drawn from the analysis of this paper is that neoliberal globalization is also destroying conditions in both product and financial markets that are necessary for the successful long-term performance of large nonfinancial firms. It will not be possible for NFCs to lead either advanced or developing nations to stable, egalitarian, long-term prosperity unless the world rejects the neoliberal project. In section IV of Crotty 2000, I discuss some steps that must be taken to put the global economy on a better long-run trajectory.

REFERENCES

Aglietta, Mischel, Shareholder value and corporate governance: some tricky questions, Economy and Society, February 2000, 29 (1), 146-59.

Aglietta, Mishel and Regis Breton, Financial systems, corporate control and capital accumulation, Economy and Society, November 2001, 30 (1), 433-66.

Arrighi, Giovanni. The Long Twentieth Century: Money, Power and the Origins of Our Times (London: Verso, 1994).

Arrighi, Giovanni and Beverly Silver. Chaos and Governance in the Modern World System (Minneapolis: University of Minnesota Press, 1999).

Boyer, Robert, Is a finance-led growth regime a viable alterative to Fordism? A preliminary analysis, Economy and Society, February 2000, 29 (1), 111-45.

Brenner, Robert. Turbulence in the World Economy (London: Verso, 1999).

Chandler, Alfred. Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge: Harvard University Press, 1990).

Council of Economic Advisers.  Economic Report of the President (Washington: US Government Printing Office, 2002).

Crotty, James and Jon Goldstein, "A Marxian-Keynesian Theory of Investment Demand: Empirical Evidence".  In Fred Moseley and Ed Wolff, eds., International Perspectives on Profitability and Accumulation (Brookfield, Vt.: Edward Elgar, 1992), 97-234.

Crotty, James and Don Goldstein, Do US Capital Markets Allocate Capital Efficiently? The Case of Corporate Restructuring in the 1980s. In G. Dymski and R. Pollin, eds., Transforming the U.S. Financial System: Equity and Efficiency for the 21st Century (Armonk, NY: Sharpe, 1993), 253-68.

Crotty, James "Rethinking Marxian Investment Theory: Keynes-Minsky Instability, Competitive Regime Shifts and Coerced Investment," Review of Radical Political Economics, March 1993, 25(1), 1-26.

Crotty, James, Slow Growth, Destructive Competition, and Low Road Labor Relations: A Keynes-Marx-Schumpeter Analysis of Neoliberal Globalization, Korean Journal of Economic Development, 6 (2), Dec. 2000, 1-74.

Crotty, James, Trading State-Led Prosperity for Market-Led Stagnation: From the Golden Age to Global Neoliberalism. In G. Dymski and D. Isenberg, eds., Seeking Shelter on the Pacific Rim: Financial Globalization, Social Change, and the Housing Market (Armonk, NY: M.E. Sharpe, Inc., 2002), 21-41.

Crotty, James, Why Do Global Markets Suffer from Chronic Excess Capacity, Challenge, September/October 2002, 45 (5), (forthcoming).

Dumenil, Gerard and Dominique Levy, Profit Rates: Gravitation and Trends, CEPREMAP, Modem, Paris, 1999.

Dumenil, Gerard and Dominique Levy, Costs and benefits of Neoliberalism: A Class Analysis, Review of International Political Economy, 2001, 8 (4), 578-607.

Evans, Lawrance, What Drives Equity Values: Fundamentals or Net Flows? An Empirical Analysis of the 1982-1999 U.S. Stock Market Boom (Doctoral Dissertation, Economics Department, University of Massachusetts, Amherst, September 2001).

Felix, David, Asia and the crisis of financial globalization. In Dean Baker, Gerald Epstein and Robert Pollin, eds., Globalization and Progressive Economic Policy (Cambridge: Cambridge University Press, 1998), 163-91.

Fligstein, Neal and Linda Markowitz, Financial Reorganization of American Corporations in the 1980s. In William Julius Wilson, ed., Sociology and the Public Agenda (Newbury Park: Sage, 1990).

Froud, Julie, Colin Haslim, Sukhdev Johal and Karel Williams, Shareholder value and financialization: consultancy promises, management moves, Economy and Society, February 2000, 29 (1), 80-110.

Glyn, Andrew, Does aggregate profitability really matter?, Cambridge Journal of Economics, 1997, 21, 593-619.

Henwood, Doug. Wall Street (London: Verso, 1998).

International Monetary Fund. World Economic Outlook (Washington: International Monetary Fund, April 2002).

Kotz, David, The U.S. Economy in the 1990s: A Neoliberal Success Story?, paper presented at the Political Economy Workshop of the Economics Department at the University of Massachusetts, Amherst, December 2001 (dmkotz@econs.umass.edu).

Krippner, Greta, What is Financialization?, Sociology Department, University of Wisconsin-Maddison, 2002. (Available through

ENDNOTES

1) United Nations, World Economic Survey (New York: United Nations), various issues.

2) I do not mean to imply that if core oligopolies are left alone to relate corespectively, they will always operate in the public interest. A strong government regulatory apparatus is required to achieve this goal.

3) Of course, the most powerful firms have not been content to let this process complete its destructive course. In the 1990s, they engaged in a massive global merger and alliance movement that, in large part, was a response to destructive competition.

4) If the profit rate in this graph seems low, keep in mind that the denominator includes an estimate of the market value of all the firms assets, both tangible and financial.

5) One impediment to an econometric demonstration of the importance of coerced investment is that in theory, it should be a positive function of the intensity of competition. However, it is not clear how to develop a useful measure of this variable. There are not even reliable statistics to measure the extent of excess capacity at the firm or industry level. In Crotty and J. Goldstein 1992, we estimate a time series regression for US manufacturing in which the profit rate, leverage, and the import penetration ratio are the independent variables. The sign on the import penetration index is positive and significant, suggesting that the direct effect of rising import competition was to stimulate more (coerced) investment, even though its negative impact on the profit rate constrained investment.

6) Kevin Phillips defines financialization as follows. The processes of money movement, securities management, corporate reorganization, securitization of assets, derivatives trading and other forms of financial packaging are steadily replacing the act of making, growing, and transporting things (New York Times, The Cycles of Financial Scandal, July 17, 2002).

The attitude of financial markets toward corporate debt has been quite fickle. They condemned excessive corporate debt before the 1980s, then applauded high debt as a sign of good management in the hostile takeover movement. In the early 1990s they criticized excessive debt again, before finding it quite acceptable as a source of finance for stock buybacks in the late 1990s.

APPENDIX

Abbreviations used in figure titles and sources:

NFC: Nonfinancial Corporate Business

FFA: Flow of Funds Accounts of the United States

BEA: Bureau of Economic Analysis

NIPA: National Income and Product Account

FAT: Fixed Assets Tables

Notes:

1. In figures 11 to 15 and 20, cash flow is defined as internal funds plus dividends.

2. In figures14 and 15 Total Payments to Financial Markets includes net interest payments, dividends and net equity purchases.

Source: FFA Table F.102 and B 102.

Source: FFA Table F.102 and B.102

Source: BEA FAT Table 4.2.

Source: FFA Table F.102 and BEA NIPA Table 1.16.

Source: FFA Table F.7.

Source: FFA Tables F. 1 and F.7.

Source: FFA Table F.102.

Source: FFA Table B.102.

Source: FFA Tables F.102 and B. 102.

Source: New York Stock Exchange 2001 Fact Book and