The Pervasiveness of Power: Financial Knowledge

The concept of financialization has gained an increasingly stable presence in the field of economic sociology over the last forty years. In particular, since the early 2000s, several structural changes in the structure of corporate governance, welfare state, processes of democracy, employment and in economies themselves have enhanced the necessity of more fitting descriptive concepts. Also social accounting, political economy and management all took interest in studying the economic upheaval impacting on Western economies after the 2008 crisis. Reviewing previous literature, Van der Zwan points out that three main trains of thought exist on the topic. The first one is of Marxist approach and interprets the process as a new accumulation pattern; the second one sees financialization as the emergence of shareholder value; the third one approaches the financialization of everyday life (Van der Zwan 2014).

Krippner (2005) lies into the Marxist approach and defines financialization “as a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production”. The word financial here stands for an array of activities aimed to transfer and provide liquid capital in exchange of future capital gains, an accumulation regime that goes beyond the simple supply of capital. The concept of accumulation as previously expressed here is better situated within the trade-market relation that opposes the rentier class representing the capital to the worker class. Resting in the Marxist approach, it seems that finance with its technical instruments justifies and reproduce the disparity among social classes.

Post-modernist literature already questioned itself on how the Fordist model based on the centrality and satisfaction of homogeneous demand gave way to a new model of social organization ordered around supply diversification. Economies of scale based on a single product typical of the Fordist era shifted towards economies of scope production with a diverse and multifaceted offer. Economies of scope are frequently the predominant catalyst behind the formation of worldwide conglomerates who can centralize a variety of commercial enterprise functions. Finance is no exception. In this respect, the penetration of finance into the everyday life correspond with the diffusion of new financial instruments that carry new meanings about the power owned by each individual against the always present risk associated with life.

Multinational finance enterprises propose and sell a broad spectrum of financial instruments to different groups in society, molding the way of dealing with uncertainty on a personal level and connecting individual households to the global financial markets. The biased nature of the finance industry emerges when we scour through its intricacies and contract law comes to the surface (Chambost 2019). As the following brief descriptions of financial products and securities in the next section will suggest, finance can be better described as a series of contracts and is therefore a matter of law, namely a socially accepted consolidation of hierarchies between parties and objects, often open to interpretation and reinterpretation. Financial technical instruments exert their intrinsic legal nature to rein corporations, governments and families to a newly framed market where private and economic life are treated as assets and should hence be managed.

The financialization of everyday life gives a fresh approach to understand the pervasiveness of the financial norm. With financialization, the same structural pressure is exercised on the actors on every side of the financial power spectrum: wage-earners, citizens, families, investors. It is worth to point out that financial products have saturated the everyday life as well, meddling with individual expectations, dreams, social positioning and perceived identity. As Van der Zwan (2014) stresses, “whether through capital-funded pension schemes, employee stock ownership plans or home mortgages, wage-earners increasingly rely on financial markets”. Although Montagne focuses on financialization as a phenomenon resulted from the fusion between capital/labor compromises and financial actors, it is reasonable to stress that also social protection has turned into an industry after being connected with welfare paternalistic programs and wealth management activities (Montagne 2016).

What can be drawn from these conceptualizations is that financial products and metrics are the most diffused way through which power is brought between actors within the current market frame. Despite making way for helpful insights, interpreting financialization merely within the Marxist approach of conflict does not do justice to the fact that relations of power are more deeply rooted than at the level of the superstructure and that power is not just a way to maintain or extend grasp on the means of production.

From a Foucauldian point of view, considering power as a relation between individuals allows us to analyze the processes that brought shareholder value to become the economic norm. Law, technical knowledge and discourse practices prescribe what can be accepted and what has to be excluded within a certain social system. Furthermore, performativity theorists in the economic field sustain that economics creates the phenomena it describes, rather than describing an already existing economy (Callon 1998). Since technical knowledge is often outside the manipulation of that given individuals, it is clear how those actors also lie into the same power system they aid to reproduce when they use that given knowledge. Considering risk and debt sustainability as key aspects to deal with in life is not something the single subject can avoid. Nevertheless, market culture is not fixed. It is because market culture must be continually reproduced through exchange relations that are vulnerable to change (Callon 1998).

Knowledge is produced within a concrete history, by concrete subjects, who have passions, instincts and interests. Subjects often keep choosing the narrative that shapes the reality they want to live in due to cultural or psychological factors, especially when they are elite actors that wield financial power (Chambost 2019). At the same time, following the idea Foucault (1991) proposes, power should not be analyzed at the level of intention or decision. Power relations are both intentional and outside of the single individual at the same time since subjects do not really acknowledge the extent of their actions. Although there is an event that applies them, this should not imply that they come from a rational judgment or choice of the subject. Moreover, Foucault (2003) suggest that power should be analyzed at its extremities where it newly approached and where it is fixed into techniques and consolidated practices – as well as commercial products. As also Callon points out, studying the active processes by which scientific knowledge is constructed and applied breaks down “the canonical view in which there is a world entirely distinct from language […] “ and exposes the concoction in which language has external tangible referents to which it points (Mackenzie 2008, p.22).

In the following section, we will take a look at those processes in the corporate realm that are heavily influenced by accounting performance measures and economics theory. In this sense, financialization is a performative phenomenon which elevates the role of technical knowledge in organizations.

Applied knowledge acts in the corporation

Regarding to the corporate field, some authors point at the ascendancy of shareholder value as one of the most evident transformations in corporate governance (Krippner 2005, Van der Zwan 2014, Chambost 2019).

Of course, security holders are important due to the fact that they have vested interests in the organization. This is especially true if an individual owns a majority of an organization’s securities: the organization consequently relies upon that person and that person conversely relies upon the organization. As one of the scholars that made the doctrine become popular and spread puts it, “shareholder are us” (Rappaport 1997). This is enough to paint the shareholder value narrative as a valid reciprocal duty to fulfill and to prioritize shareholders over other parties of the corporation and society.

Even if different interests are represented by different kind of securities, among those available on the market, some allow for voting rights in the board of directors, while others do not. The simplest type of private security that allows voting is the common share and represents a percentage of the ownership of a corporation’s equity. Those are seen as the most direct form of investing through which the public can acquire corporate voting rights. Companies sell shares to raise funds and the market price of issued securities is influenced by the corporation’s portrayed performance as well as projected expectations. Regarding assets in general, models like the Capital Assets Pricing Model (CAPM) and the Black-Scholes-Merton model are extensively taken as the pricing infrastructure basis of the market because of their simplicity, even if they rely on mere expectations about risk-free entities (Mackenzie 2008, p.250). The very same characteristics of share capital itself make for specific power relations to impact the corporation and may expose it to the market turmoil.

With a great number of outstanding shares available in the market, a need for order evolved from the stockholders representing the majority interest, especially in those corporations based on the one-tier system. In order to make managers comply with the majority interest’s objectives, optimal incentive contracts have been designed studying the extensively investigated principal-agent problem. According to the principal-agent theory, a conflict of interest due to separation in ownership originates between management and owners. Agency theorists argue that the optimal compensation contract should balance the benefits of increased effort versus the costs of increased risk, strengthening accountability towards principals. Nonetheless, the high cost of control compared to reduced benefits can discourage shareholders from carrying out controls, subsequently pushing them towards the optimization of opportunity costs and pondering other alternatives in the market (Chambost 2019). Although different performance financial measures exist, EPS (Earning Per Share), DPS (Dividends Per Share) and ROE (Return On Equity) ratios are still widely adopted when evaluating managers’ performance. Also, due to the shift away from salaries towards stock options, executive pay has grown exponentially since the 1980s (Van der Zwan 2014). This suggests that managers of multinational corporations play an important role in the recurring adoption of such financial instruments on a corporate level. It appears evident how this current system of evaluation and accountability does not take into account the full interests of the investors, and certainly not those of other stakeholders.

Trying to disentangle the core legal intimidating forces from its restrictive activity is an extremely hard task. Instead, we should focus on how power is consolidated in a set of local institutions and practices through techniques and crystallized knowledge (Foucault 1991). The enhanced relevance of the shareholder value expressed by the EPS ratio, among others, is evident when particular financial operations, such as buybacks or dilutions, are performed by companies. Share buybacks are a controversial measure the company puts in place when it buys back its own shares from the open market. Stocks are absorbed by the company and terminated, reducing therefore the number of outstanding stocks. Reducing the total amount of circulating stocks, buybacks increase the stock EPS ratio associated with the company. Although performing buybacks and paying back debt or equity are conceptually similar in the sense that obligations towards entities external to the company are extinguished, dealing with dividends or liabilities signals a will to maintain a long-term interest in the company from both parties, whereas buybacks do not. Furthermore, the liquidity the company uses to buy stocks could be used to improve the business and potentially redistribute the capital among stakeholders at large.

Cold to buybacks, the widely spread Modigliani-Miller theorem of irrelevance of dividends argues that the public does not care if the company is funded through debt or equity. The two economists created a fertile soil for the idea that the distribution of a dividend results in a reduction of share value, reinforcing capital appreciation as the most efficient and profitable mechanism for stock trading. This led to refuting the idea that the management of a dividend paying company is positively affected by their dividend return policy and that this produces better long-term results for investors (Mackenzie 2008). Often called the capital structure irrelevance principle, the theorem is implicitly considering the social fabric underlying every company and productive organization irrelevant. Especially in MNEs (Multinational Enterprises), top management incorporated these assumptions to perform actions aimed at tweaking EPS and DPS ratios for consolidating the focus on shareholder value. By doing so, shareholder value is preserved as well as the perception of the company on the markets. But, once again, capital appreciation as well as leveraged operations are promoted to the exclusion of a fair representation of societal interests in the company. Nonetheless, there is no reason to think that in emphasizing the maximization of market value Modigliani and Miller saw themselves as acting politically (Mackenzie 2008, p.260). As Modigliani himself explicitly puts, they simply followed the academic norm assuming the traditional criterion of profit maximization in a world of uncertainty (ibidem).

Institutionalized networks of intellectuals and advocacy think tanks – of which also the Nobel Foundation may be part of – function as a knowledge forge for the liberal market economies. They exert a normalizing power and pave the way for the blossoming of formalized knowledge that can be used for the interpretation of markets’ behavior and for the following decision making by actors in power. As illustrated, such accounting techniques and financial theories shape the concept of value inside predetermined categories aimed to enable investors and managers to pursue their individual interests.

Rating and accounting as applied power

Then, actors make use of and are – to some degree – also captured by the power that knowledge provides. Furthermore, changes in the behavior of state are often related to changes in the behavior of markets, and the other way around. To this extent, it is possible to notice how finance and its values have been shaping economic action both inside private and government spheres for more than 40 years.

To some degree, also governments with their agencies are part of the same mechanism that expresses and reproduces financial power. As Poon suggests, federal agencies in the United States assisted the rating agencies in their role of facilitators, reinforcing the same model other financial transactions depend on. After all, at least in the United States, rating agencies were born for profit and always had a close relation with governmental regulation entities. In fact the very first rating schemes packaged the content of lengthy texts more compactly into print copies in order to give access to more transparent financial knowledge and reduce the vaunted asymmetrical information (Poon 2012). Nonetheless, social factors not included in the regular conception of markets – back then as well as today –, such as social hierarchy, had a great relevance for regulating market coordination. Moreover, the American government never honed in on corporate governance and on the role ratings play in accounting and operations inside firms. The issue, Poon continues, “is not that the objectivity ratings has been distorted by conflicts of interest […], but rather that agencies act as financial engineers to guide the design and assembly of products with capital structures, cash-flow projections, and, indeed, ratings, that make them attractive to investors” (ibidem).

Financial actors – in this specific case, authorities and rating agencies – can impact market prices, therefore defining who can access to low-cost capital and who cannot. Hence, they can make subjects yield to accounting and financial practices that implement a set of values characterizing a growing regime of financial power.

It appears even more clear that there are some underlying relations of power, deeply intertwined with the necessity of expressing actors’ individual interests. The idea that a private ordering of public markets through NRSROs (Nationally Recognized Statistical Rating Organizations) and regular rating agencies will suffice is rooted in the economics theory that private and public actors – as well as the common citizen – contributed to reproduce.

Conclusions

As showed, it appears evident that defined accounting tools – as well as other technical activities and processes, such as marketing, but also strategy to some extent – shape the economic reality just by measuring it and by taking into account zones of calculativeness in the framing of decisions (Callon 1998). Among the measures used in the fundamental analysis, the profitability ratios previously mentioned are an evident example of how measurement tools effect economic dynamics and impact governance with their relations of power. This type of framing emphasizes the culturally and socially constructed dimension of calculative competence, facilitating the existence of certain social structures based upon calculation and selfish interests. An agent behavior is redirected by such a framing and led to developing new strategies for adapting to everchanging goals. From this perspective, financialization can be better described as a normalizing power expressing the peculiar identity of capitalism itself. History and its processes acted creating and performing a market model to which individuals needed to adapt. On the other hand, actors – let them be organizations, categories or individuals – propagate the financial narratives, eventually aggregating in groups of interest and consolidating the same meaning vehiculated by discursive practices (Foucault 2003). Nonetheless, retrieving and studying the history of shareholder value has turned out to be a cumbersome and complex task due to the extensiveness and concurrent lack of cohesiveness of the topic. The economics field supporting such doctrine is sparse and condensed more on business practices than on an academic level.

Still, even if limited, a resistance to this series of practices and the conveyed meanings is possible. Just as much as certain practices justify financialization and trigger its scathing consequences, also practices advocating a more socialized use of the financial tools can be put into action. Allowing social reproduction to happen based on politicized knowledge could take shape in working towards the so-called “Working control” along the same lines traced by the Rehn-Meidner model (Van der Zwan 2014).

If the corporate and governmental relations with power and financial discourse have been already explored, a further study of household choices regarding financial commitment is needed to better expose the normalizing power pervasively enacted over layers of society. In the same manner as previously mentioned, focusing on the recent events on the financial markets, such as the Gamestop short squeeze, holds the possibility to unmask the contradictory and biased nature of the current financial model. Moreover, analyzing how products and their bureaucracy are arranged, portrayed and sold in commercial banking can support the research.

The point of view of those actors outside the traditional centers of power and of those at the fringes of established financial practices can contribute to the evolving debate over the future of financialization.