Humankind & Resource Distribution—XII: Financial capitalism & neoliberal order  

The preceding instalments have examined two arrangements that resist the familiar claim that economic efficiency requires the withdrawal of collective institutions: China’s state-guided industrial transformation and the Nordic combination of competitive enterprise with universal social provision. A third experience demands equal attention. In much of the world, finance has acquired an influence over production, public policy and household life that extends far beyond its indispensable task of mobilising savings for investment. The question is not whether financial markets should exist, but when they cease to serve productive activity and begin to reorganise the economy around the claims of asset owners.

Finance performs essential functions. It allows households to save, firms to invest before revenues arrive, governments to build infrastructure and entrepreneurs to distribute risk. Without credible payment systems, insurance and access to long-term credit, modern production would be severely constrained.

The difficulty begins when the expansion of financial claims becomes detached from the expansion of useful goods, services and capabilities. A rise in the market price of an existing asset may enrich its owner without adding a single dwelling, machine, school or hour of productive employment. This distinction is central to the concept of financialisation: the growing importance of financial motives, institutions, markets and actors in economic organisation.

Scholars disagree about its precise boundaries, and its effects vary across countries and periods. Nevertheless, it directs attention towards a measurable transformation: how much income comes from production and how much from interest, fees, capital gains, rents and the appreciation of existing assets; who receives those returns; and who ultimately bears the associated risks.[1]

The intellectual origins of the contemporary order are often associated with the market-oriented reforms advanced from the late 1970s onwards: financial deregulation, privatisation, trade and capital-account liberalisation, restrained public expenditure and greater reliance on market prices. These measures did not form one uniform programme. Nor were their results identical. Trade integration and competition could improve efficiency, while poorly regulated capital flows and the transfer of public monopolies into private hands could create new concentrations of power. The term ‘neoliberalism’ is therefore most useful when it identifies specific policies and institutional changes rather than functioning as a substitute for analysis.

The fundamental problem is the difference between a market that disciplines privilege and one in which privilege shapes the market. Competition can reward innovation and reduce prices. But financial institutions possessing superior information, political access and the expectation of public rescue may operate under conditions unavailable to ordinary enterprises.

Profits can remain private while losses, when systemic failure threatens, are transferred to depositors, workers or taxpayers. Such asymmetry distorts incentives and weakens the legitimacy of both markets and government.

Hyman Minsky’s financial instability hypothesis explains why this danger can arise from apparently successful periods of growth. When profits are strong and defaults scarce, borrowers and lenders become more willing to accept fragile financing arrangements.

Debt commitments may increasingly depend upon refinancing or rising asset prices rather than cash flows generated by productive activity. Stability itself can encourage risk-taking until a reversal exposes the accumulated fragility. This is a theory of endogenous financial vulnerability, not a prediction that every credit expansion must end in collapse.[2]

The global financial crisis of 2007–09 illustrated the consequences of interconnected leverage, opaque instruments, inadequate supervision and the dependence of apparently sound institutions upon short-term funding. It also revealed why governments sometimes intervene to prevent a wider collapse.

Emergency support can protect payment systems and employment; it can also generate profound distributive injustice if shareholders and managers escape proportionate responsibility while the public absorbs the cost.

The proper lesson is neither that all rescues are illegitimate nor that every large institution must be preserved. It is that prudential rules, credible resolution procedures and accountability should limit the need for extraordinary rescue in the first place.[3]

Financialisation also reaches households through housing. A home is simultaneously shelter and an asset. When credit expansion, speculative demand and scarce serviced land drive prices ahead of wages, existing owners may gain on paper while younger and poorer households face rising rents or exclusion. The aggregate value of property can increase even as access to adequate housing deteriorates. A society that celebrates this increase as unqualified wealth creation confuses asset-price inflation with an improvement in human welfare.

Corporate governance presents a related question. Shareholders legitimately expect returns on capital and protection against managerial waste. But an excessive preoccupation with short-term financial targets may discourage patient investment in research, worker skills, resilient supply chains and maintenance.

Dividends and share repurchase are not inherently harmful; their economic significance depends upon whether firms retain access to profitable productive opportunities, how they finance distributions and whether their obligations to workers, creditors and society are met. What matters is the pattern of incentives, not the moral condemnation of a financial instrument.

At the international level, the distinction between productive finance and extractive dependence becomes particularly important. Developing economies need external capital, technology and access to markets. Yet borrowing in foreign currency creates vulnerabilities when export earnings are uncertain and exchange rates fluctuate.

Sudden reversals of capital flows can force contraction precisely when domestic investment is most necessary. International institutions have accordingly recognised that capital-flow management and macroprudential measures may have a role under specified circumstances, rather than assuming that unrestricted flows are always optimal.[4]

The distributive consequences are not confined to income statistics. Access to credit determines who can acquire land, establish an enterprise, survive an illness or pursue education. Where financial services are costly, opaque or concentrated, the affluent borrow against assets while the poor pay more for liquidity or remain excluded.

Digital payments and financial technology can lower barriers, but they cannot by themselves correct unequal ownership, weak consumer protection or predatory lending. Financial inclusion must be judged by whether it improves security and productive choice, not merely by the number of accounts opened.[5]

Pakistan offers a demanding illustration of these tensions. Public borrowing, energy-sector obligations, narrow fiscal capacity and the limited availability of patient investment capital interact with a banking system whose incentives are strongly affected by government financing needs. Yet a high stock of public debt alone does not establish that every lender is exploiting the state.

The relevant inquiry concerns the purposes for which debt was incurred, the distribution of its benefits, the transparency of contracts, the cost of refinancing and the public institutions responsible for expenditure and revenue. Debt used to build durable productive capacity differs fundamentally from debt repeatedly contracted to finance avoidable inefficiency and privileged consumption.

A credible reform programme must avoid two temptations: treating finance as an enemy of development and treating financial liberalisation as development itself. The appropriate objective is to channel savings into enterprises, infrastructure, affordable housing, agriculture, technology and human capabilities under rules that reward genuine risk-taking while preventing fraud, monopoly and public underwriting of private speculation.

Independent supervision, effective insolvency procedures, competitive access to credit, transparent public debt management and accountable fiscal institutions are not obstacles to markets. They are among the conditions of their legitimacy.

This argument returns us to the proposition developed throughout the series: distribution and production are mutually connected. When financial gains are concentrated among those already holding assets, while productive workers and small enterprises lack access to capital, the economy may report rising valuations without broadening its capacity to create prosperity.

Conversely, finance that supports education, innovation, secure housing and enterprise can enlarge both output and opportunity. The distinction cannot be resolved through ideology; it must be tested through evidence on investment, productivity, wages, access and risk.

An economic system should not be judged by the size of its financial sector or the speed at which asset prices rise. It should be judged by the extent to which financial claims remain answerable to the real economy and to the people whose labour, consumption, taxes and institutions sustain it.

Wealth that multiplies claims upon future production without strengthening the capacity to produce is a fragile achievement. Wealth that finances human development, productive enterprise and shared resilience is a more enduring one.

The next instalment will bring these comparative lessons to Pakistan, where poverty and privilege coexist with substantial productive potential. The challenge is to identify not only how resources are distributed, but how institutional arrangements repeatedly reproduce exclusion in the presence of abundance.

Notes

1. Gerald A. Epstein (ed.), Financialization and the World Economy, Edward Elgar, 2005; see also Greta R. Krippner, “The Financialization of the American Economy”, Socio-Economic Review 3(2), 2005, pp. 173–208.
2. Hyman P. Minsky, “The Financial Instability Hypothesis”, Levy Economics Institute, Working Paper No. 74, 1992. Online source
3. Financial Stability Board, Key Attributes of Effective Resolution Regimes for Financial Institutions, revised 2024; Bank for International Settlements, Annual Economic Report 2024.
4. International Monetary Fund, Review of the Institutional View on the Liberalization and Management of Capital Flows, 2022.
5. World Bank, Global Findex Database 2021: Financial Inclusion, Digital Payments, and Resilience in the Age of COVID-19, 2022.

[To be continued]

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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.