Do you see neoliberalism as a valuable analytic for your field?
I haven't used the concept of neoliberalism very much, mostly because my type of empirical political economy work is very specific. Neoliberalism was always too general a term for me to use in studying, say, the interaction between central banks and financial markets. But I sometimes use it to denote the broader historical backdrop.
Yet there's a growing assumption that we're somehow exiting neoliberalism. Is that warranted by any of the trends you're observing in your corner of the global economy? Or would you say it's mostly overstated?
I would say there are some indications and some contraindications. If we talk about the role of the state in the economy, I see clear signs that we are about to exit – or have already exited – the previous regime. This started, of course, with the central bank interventions after the Global Financial Crisis (GFC). And now we see the government’s role in the economy increasing through the green transition and green industrial policy.
We have also entered a new regime in terms of the role of shareholders in the economy. I’ve written about the rise of asset manager capitalism, which marks a departure from conventional neoliberal understandings.
But in the political economy of central banking and financial markets, there is less change. The primacy of central banks remains intact, and the size of the financial sector has not been reduced at all. Both of these traits are hallmarks of neoliberalism in most accounts. So, at this big picture level, some of the core features are still there.
You've just given us three pillars that we can use to explore the question of post-neoliberalism. First is the state’s transformation as a result of the green transition and the pandemic. Second is the place of shareholders, and the question of whether they're still central to the neoliberal imagination. And third is financialization.
Let's start with the first, looking at the state over the last ten to 15 years. What have been some of the consistencies and changes in how the state relates to the market?
The enduring primacy of central banks in macroeconomic policymaking is an important continuity. We can currently see this in the response to surging inflation, where we are resorting to tried and tested – but nevertheless not very convincing – monetary policy measures. These include raising interest rates in order to choke off aggregate demand, and thereby reduce price pressures, even at the cost of higher unemployment and potentially lower investment. This is happening at a time when we would like to have more green investment. That's one aspect of the central bank story.
Another is that the infrastructural entanglement between central banks and financial markets – a core feature of financialized capitalism in the wake of the GFC – has increased. We've recently seen bailouts of banks that we would not have previously considered too big to fail. The liquidity support provided by the Federal Reserve is, if anything, even more generous than it was after 2008. This indicates that the state's dependence on an oversized financial sector has not been reduced.
But if we talk about discontinuities regarding the role of the state in the economy, we could start with the very notion that industrial policy is back in the mainstream political discourse. The fact that there have been actual, large-scale policy packages such as the Inflation Reduction Act (IRA) and the CHIPS Act in the United States – which the EU is now trying to match – in itself marks a change.
The idea that the state could and should direct the overall direction of capitalist development had been dead for a very long time. But the IRA is definitely an attempt to do that, even if we shouldn't jump to the conclusion that we’re seeing the same kind of the ambitious economic planning that we saw in the postwar decades.
To grasp this entanglement between central banks and financial markets, you have insightfully applied the concept of infrastructural power. What should we know about this form of power, and how come we haven't noticed it before?
Infrastructural power is a concept coined by Michael Mann, a historical sociologist. He showed that whereas states used to mostly rely on despotic power to implement state policy – meaning actual coercion – modern states, as the result of a long process, increasingly started to penetrate civil society. This began with basic infrastructural programs such as postal and transportation systems. And this allowed states to implement policy in non-coercive ways.
I was examining the European Central Bank’s (ECB) actions in the wake of the GFC. It had adamantly supported the securitization market in the euro area; and it had adamantly opposed a financial transactions tax that, according to the ECB, would have harmed the liquidity in the repo market. When I looked at these two cases, I immediately thought of infrastructure. These markets are the infrastructure through which the ECB implements its monetary policy – the infrastructure on which it therefore relies for policymaking purposes.
So, I used the term infrastructural power, but reversed the causal direction. It is now the financial sector that has infrastructural power vis-à-vis the state, because the state seeks to govern through the financial sector. The ECB can buy and sell assets, but in order for these monetary policy signals to be transmitted to the economy at large – to bring about the real economic outcomes the ECB is actually interested in, which are related to inflation, employment, growth, and investment – it needs those signals to be transmitted from the interbank repo market, through the securitization market, to the larger economy. That gives these private financial actors power.
But this is not how it always was. Central banks used to govern in a more corporatist way. Financial systems used to be much smaller, much more tightly regulated, and central bankers and private bankers would just talk to each other. Very simply put, central bankers told bankers what to do, how much money to create, and where to lend.
So, from this administrative way of implementing monetary policy, we've moved towards a market-based monetary policy implementation regime – just as the financial system itself moved towards a market-based system. That's how I think this infrastructural dependence became more pronounced and therefore more visible.
Sticking to the central banks as corporatist, you have also contributed to an intriguing discussion of central banking as a non-market form of social coordination. I always thought neoliberalism insisted that there is only one mode of social coordination: the price system. Could you tell us more about this Polanyian notion of central banking as non-market coordination?
Today, we look at central banks as bulwarks of market-based coordination, in both the financial system and in labor markets. But historically, Polanyi astutely writes about central banks the same way he writes about trade unions. It’s not the most prominent part of The Great Transformation, but he observes that both labor and money are fictitious commodities.
Just as the commodification of labor leads, through the countermovement, to the emergence of trade unions – which resist and oppose the commodification of labor – Polanyi argues that the international gold standard – a system designed to commodify money and subjugate national financial systems to a pure market logic – gives rise to central banks in much the same way. From this perspective, central banks are another product of the countermovement, whose original purpose was to insulate and protect national economies from the commodifying pressures of the gold standard.
There is very interesting recent research in economic history, by Éric Monnet and others, which shows that this is indeed how central banks operated and understood their role. They acted as buffers against the harsh adjustment pressures that were otherwise exercised by the gold standard. They tried to mitigate the impact of international developments on national labor markets.
I draw on this in my work because, for most of its first two decades, the ECB has actively pushed for structural labor market reforms. It was trying to get euro area member states to liberalize their labor markets and social policy regimes, so as to unleash the price mechanism on the labor market. In Polanyi's terms, the ECB has been part of the movement towards market society, rather than of the counter-movement against those pressures.
How does the ECB do something like that? For most people, a central bank seems many steps removed from the labor market.
Most of the time, the ECB cannot do anything directly in labor markets. However, it has used its perch and its epistemic authority – its expertise and credibility – to actively tell governments in various fora, such as the Eurogroup and elsewhere, that they had to liberalize the labor markets. They argued that this was needed to prevent national economies from diverging.
Their fear was that some economies would become more competitive and others would become less competitive, for example because their trade unions were unwilling to engage in wage restraint. The ECB considered the price mechanism to be the only way to enforce wage discipline in those countries, which would otherwise fall behind countries like Germany that had wage discipline in abundance. This was mostly discursive advocacy by the ECB.
But, in the aftermath of the sovereign debt crisis, the ECB played a very different role. It became part of the infamous troika alongside the European Commission and IMF, and it participated in the actual enforcement of structural reforms in deficit countries such as Greece, Portugal, and Italy. At this point, the ECB was able to act as a pillar in a system of non-market coordination that shaped wage setting in the euro area.
So, in the ECB’s telling of the story, it always wanted to keep its hands clean?
The truth is more complicated. We know from various historical documents, such as the Werner Report from 1970 and documents from the Delors Committee in 1988–89, that in the run up to the European Monetary Union, central bankers expected there to be non-market coordination. They wanted there to be high-level, euro area-wide coordination between the monetary authority, the fiscal authority, and the wage setters.
They thought that having a holistic way of managing this problem of divergence would be necessary for the EMU to function. And, to make sure that wage setting was aligned with the needs of euro area-wide macroeconomic management, they thought it would be necessary to have consultation between policymaking authorities, employer associations, and trade union associations.
That did not happen. Basically, from its very beginnings under Duisenberg in 1999, the ECB opposed this out of fear for its independence and credibility. But, in theory, central banks – including those in countries that are not transnational monetary unions – can and have historically played this coordinating role.
Moving to the second pillar, which concerns shareholder primacy as a defining characteristic of the neoliberal transformation. When did shareholders become this almost political subject, seen as a key agent in modern capitalism?
When it comes to the relationship between shareholders and stock market-listed corporations, the most important work is The Modern Corporation and Private Property, by Adolf Berle and Gardiner Means. They were writing in the 1930s, a moment when the shareholder structure in the US was as dispersed as it has ever been.
Even though shareholdings were still concentrated among the wealthiest households, it was mostly households holding shares. This is to say, the shareholders were individuals, and as such held relatively small stakes in corporations – which meant that shareholders were relatively powerless vis-à-vis corporate managers. So, this corporate governance regime came to be referred to as managerialism, as coined by the economic historian Alfred D. Chandler.
Then there was a regime change: the shareholder value regime. Its intellectual groundwork had been laid in the 1970s, but it only started to come into its own as an empirical, institutional reality in the 1990s. The foundational work there is by Law and Economics scholars – conservative legal scholars and economists – who argued that shareholders were the only stakeholders with a true long-term interest in the profitability of the corporation. Not managers, and not workers. Workers barely featured at all in this theory, which came to be known as the agency theory of corporate governance. And because shareholders are the ultimate stakeholders, the belief was that they should have all the power. This was put forward in a paper by Michael Jensen and William Meckling in 1976.
Through various processes and legal changes, this became the corporate governance system first in the US and then across the world. The idea was that minority shareholders had to be protected against “expropriation” by either majority shareholders – meaning founders or their families – or by managers in collusion with the workers. Who were these minority shareholders? Well, starting in the 1970s, institutional capital pools started to grow very fast in the US. These were mainly large public pension funds, and they started to push this agenda, to push for corporate governance reforms. They became quite a force in making the shareholder value regime a reality.
Shareholder value itself came to take on a particular meaning. Since companies are primarily run for the benefit of their shareholders, stock price was seen as the main metric of success, which could be increased through the continuous growth of the company. But shareholder value is usually maximized through other means: a combination of high dividend payments and stock buybacks.
These strategies enrich shareholders not only at the expense of workers, but also at the expense of the company’s own competitiveness and innovation capacity. This is a separate criticism of the regime: it values the short-term enrichment of shareholders more than the corporation's long-term capacity to grow and innovate.
Why would managers go along with a regime that nominally decentered them?
This conflict between managers and shareholders, which agency theorists drew so sharply, was arguably never more than a minor intra-class quibble. A class coalition was easily built by linking the remuneration of corporate managers and executives to the share price. Again, this happened first in the US and then elsewhere.
In theory, as the agency theorists argued, this alignment of interests was required for companies to run efficiently; in practice, this was a means to build an alliance between shareholders and managers. What’s more, by paying CEOs tens of millions every year, shareholders turned CEOs into shareholders themselves. Once you have a few dozen million in your personal portfolio for a few years, your income begins to come more from capital than from your work as a CEO.
Moving now to the contemporary era, why do you argue that the picture you've just drawn – where the primacy of shareholder value drives capitalism – is no longer relevant? What factors have made it obsolete?
In comparative political economy, scholars who study the role of shareholders typically start from the structure of the non-financial economy. They look at the types of companies that exist in an economy; at the financing needs they have, given their business models; and at the growth model of the economy as a whole. This is the context in which they place capital markets. That’s how the “varieties of capitalism” literature draws distinctions between liberal market economies with large capital market-based financial systems on the one hand, and coordinated market economies with bank-based financial systems on the other.
In contrast, I have focused on developments within the financial sector, and especially those that are not driven by developments in the non-financial economy. The same long-term trend that gave rise to institutional investors in the shareholder value regime subsequently fueled the rise of a new type of institutional investors: asset managers.
Following the ERISA legislation – a 1974 US law that set minimum standards for private sector pensions – pension funds began to delegate a significant amount of their investment decisions to third-party, for-profit asset managers. Simply put, they did this for regulatory reasons, in order to be on the safe side. The pension funds were encouraged to be fiduciaries for pensioners by delegating the management of this money to professionals – to Wall Street.
Pension funds already represented a significant concentration of shareholdings compared to the Berle–Means landscape of dispersed shareholdings by individual households. Now, asset managers like BlackRock and Vanguard are again orders of magnitude larger than even the largest public pension funds. This is a further concentration of shareholdings.
But this concentration came about for reasons that are completely internal to the financial system. They have more to do with the organization of the pension system, and the way it changed the structure of the financial system, than with any changes in the non-financial economy. We have a configuration today where the largest shareholders have very little in common with the shareholders envisioned by the agency theorists.
You also explain the growth of asset managers with reference to index investing. Can you tell us about why this form of investing matters?
Index funds have been around since the 1970s, but they were not mainstream investment products until the 2000s. Back then, active mutual funds – where portfolio managers pick individual stocks in order to outperform the market – were more common for both households and pension funds.
But about 20 years ago, we see a new variant of index fund – the exchange-traded fund (ETF) – whose main difference is its greater liquidity. You could buy and sell an ETF at any time, rather than just once a day, as was the case with the traditional index fund. Maybe it was because of this reason, or perhaps the timing was just ripe as technology progressed, but ETFs became a big deal. Since then, there has been a big migration of money out of active mutual funds and into index funds and ETFs.
This has benefited three firms in particular: BlackRock, Vanguard, and State Street. Especially the first two, the biggest asset managers, which up until the recent crash held almost $20 trillion in combined assets under management. Today, in the US, BlackRock and Vanguard together hold an almost 20 percent stake in the average S&P 500 company. These firms have become the largest shareholders in the world.
What’s more, asset management is basically a natural monopoly. Asset management in general, and index-based asset management in particular, is a scale business: you have a certain amount of fixed costs, but you only incur negligible marginal costs as you manage more money. This allows the largest firms to offer their products at the lowest possible fees.
What are some of the most notable pathologies that have resulted from this concentration of shareholding power?
Agency theory had a certain consistency to it. It insisted that shareholders were the ultimate stakeholders in the corporation – the ones with an interest in the long-term profitability of corporations – because they were active shareholders who had made bets on individual companies. They needed their companies to outperform the market in order to offer a market-beating return and make the most money for their beneficial owners, be they pension funds or active mutual funds.
Now, the biggest asset managers are, first and foremost, index trackers. They do not try to outperform the market. They do not buy and sell individual stocks. They also do not hold a few hundred stocks; they hold thousands of stocks, all over the world. Even if it were possible to monitor all of them, they would have no interest in doing so, because that would be extremely costly. And to them, cost is the single most important factor, since they want to offer their ETFs as cheaply as possible.
So, we have a paradoxical situation. Institutional shareholders are much stronger than ever before; their voice is very loud, as they hold huge stakes in individual corporations. At the same time, they have no exit option. They cannot buy or sell individual companies. In theory, this means they should be very engaged in corporate governance – they have the power to impose their will on corporate management – but, in practice, they are not. Despite the letters that Larry Fink writes to CEOs each year, there's very little evidence that asset managers push for anything in particular.
Do these developments offer any meaningful opportunities for progressive intervention?
The theory of universal ownership articulates the utopian promise of asset manager capitalism. It suggests that the asset managers should intervene. But it leads us to another paradox.
The problem with shareholder value was that shareholders wanted the individual companies they had bet on to maximize their profits – regardless of the societal, economic, and environmental costs. In other words, shareholders don’t care about the negative externalities of their individual-level profit maximization.
But today's dominant shareholders are universal owners. They are fully diversified and hold the entire stock market in their portfolios – not just in one country, but across the world – which means they should essentially behave the way a social planner would. In principle, BlackRock should act like a social planner and internalize the negative externalities that arise from the conduct of any individual corporation in their portfolio, because that negative externality hurts all the other companies in their portfolio.
The test case of this – the biggest externality of all – is, of course, greenhouse gas emissions. The hypothesis and expectation would be that BlackRock and Vanguard act as the world's most aggressive shareholders when it comes to pushing corporations to decarbonize their operations and invest in green technologies. But this has clearly been refuted, many times.
There's all kinds of evidence that, if anything, the largest asset managers vote in favor of climate-related shareholder resolutions less frequently than smaller shareholders. This is just one piece of evidence that over the last ten years – the period in which these asset managers have been the dominant shareholders – they have not used their power in this way.
Even with that empirical evidence clear, is there any theoretical explanation for why these asset managers aren't doing so? Could it be that they're instead focusing on levers like ESG?
The simplest theory is that social planning needs to have a long-term horizon, whereas BlackRock – not Vanguard, but BlackRock – is a publicly listed corporation, with its own shareholders and its own managers, who have share price-based compensation. BlackRock therefore has to value profits this year and next year much more than the long-term sustainability of the economy (and their own portfolio).
The other theory, which is similar in spirit, is that they want to protect their business model. As we have seen over the course of the last year, the biggest threat to the asset managers’ business model is agitation against them. In the US it used to be pressure from Democrats – for not being green enough, for perpetuating the regressive distributional consequences of shareholder value. But they have now become the targets of a campaign from the right, from the Republicans. The asset managers have been accused of spearheading the environmental movement – of threatening divestment from oil and gas companies, which are overwhelmingly located in red states.
So, laying low on these highly charged political issues is just a way for these companies to protect themselves against their biggest risk: regulation. It could take all kinds of forms, but regulation could lead to quite radical outcomes like the breaking up of these companies, or even the destruction of their business model, which is to hold shares in all companies without any limits.
The last of the three pillars we were discussing earlier is finance. One dimension of finance you emphasize in your work is technocracy and the undemocratic nature of decision-making within central banks.
Do you see this as a manifestation of a broader neoliberal apathy towards democracy and popular rule? Is there any way to circumvent it while still maintaining responsible monetary policy?
Managing the economy has always required expert knowledge – technocrats, as we call them today. It's a complicated business, and it requires a lot of expertise. Therefore, the main question is about the relationship between these technocrats and elected politicians. Under neoliberalism, politicians have been happily delegating power away to independent technocrats. This arrangement has been highly effective in eviscerating the capacity of parties, interest groups, and voters to even talk about – let alone campaign on – macroeconomic programs.
Central banks used to be part of the government – in many cases subordinated to finance ministries – and they became independent only relatively recently, during the 1980s and especially in the 1990s. Since then, governments have given them independence precisely to shield them from the electoral pressures that politicians are otherwise subject to. And today, we are feeling the longer-term consequence: a lot of the expertise needed to manage financialized economies is concentrated in central banks, who unfortunately are the mortal enemies of the one thing that could help us avoid catastrophic climate change: a re-politicization of the economy.
But this expertise has been geared towards very narrow goals, which is a problem I have encountered in my work again and again. Because central banks are independent, and because central bank independence is an exception from democracy, it is desirable to give them a narrow mandate. This prevents them from exercising non-democratic power too expansively. But that means that the considerable power and expertise of central banks is only put towards two goals: price stability and financial stability.
We're in a system where a small number of technocrats wield a lot of power, but they only use it to pursue these two things, at all cost. They never use their power to question and shape the overall institutional structure of the economy. It is very difficult to look at the past 15 years and not conclude that central banks have been the lenders of last resort to an unsustainable status quo.
So, we have a disconnect between technocracy and the overall vision for the economy, which has moved outside the scope of democratic politics, or indeed of any politics at all. There's no agent, no actor, who could combine the expertise and the political power needed to carry out a vision for the economy. Therefore, there's also no public with the capacity to debate such a vision.
To ask a potentially provocative follow-up question, if you were to choose between the US and Europe as an arena to implement this more ambitious vision, what would be the greater obstacle: the political gridlock in the US or all the treaties in Europe?
What I'll say is the grass is always greener on the other side. Looking at the Biden administration pulling off something like the IRA, and observing second-hand the role that progressive economists and thinkers have played in it, it seems like the bigger problem is the over-bureaucratized and constitutionalized nature of the European Union. Because the possibilities for such a relatively expansive vision are just not there.
Then again, what you mention about the US gridlock, plus the extreme inequality and the possibility that it might all be unwound if Republicans win the next election, is very real, too. Maybe the old model of failing forward in the European Union will prove workable yet again.
But at the moment, it looks to me as if the greater flexibility of the US model is the driver here. And if that's because of geopolitical competition between great powers... Well, that's unfortunate, but we very much live in a second- or third-best world at the moment.
It's interesting that you have Jerome Powell explicitly saying that climate change is not part of his mandate, and then you have Christine Lagarde insisting that it indeed is. They think of their own agendas differently, even though one has more tools than the other. Do you draw any significance from that?
Now I'm speculating, but one difference is that a lot of progressive thought among European political economy types like myself is directed towards the ECB. It’s the only institution in the macro-financial space that is identifiable as an actor with the power to do things – and therefore to do things differently. Whereas in the US, the Fed is simply not the most important actor. If you want to influence macro-financial thinking about the green transition, it's the government that can spend trillions on this stuff by simply getting a bill through Congress. So, Powell can say that climate change is not the Fed's main mandate partly because that's true.
Of course, I think that central banks should – and, in the future, will – deploy the many tools at their disposal to accelerate the green transition. But the impetus for that, in my view, has to come from democratic politics. And that has just not happened in the euro area, simply because central banking and monetary policy are highly constitutionalized. So, we're tinkering around the edges here.
Interviewed by Evgeny Morozov and Ekaitz Cancela
Edited by Marc Shkurovich