Written evidence submitted by Mariana Mazzucato (IGR0105)

 

The Dual Face of Financialization in the UK

 

 

  1. Introduction

 

Financialization is a term that refers both to the structure of the financial sector, and corporate governance structures. In the case of the financial sector, it refers to the degree to which finance is financing the real economy. In the case of corporate governance, it refers to the degree to which profits are reinvested back into productive structures versus financial areas, such as dividends and share buybacks. In Mazzucato (2013) this ‘double face’ of financialization is discussed. As Keynes says, ’When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done’’ (Keynes, 1936).   

 

  1. A Global Perspective

 

Financialization is a global issue. Global finance is decoupled from the real economy (it has become a gambling casino) and disconnected from national economies (it has become global). It has escaped taxation so much so that the burden of tax in every country is falling much more on the income of employees that on the rents, profits, dividends and capital gains of the wealthy. Between 2010 and 2019, total spending by all publicly traded companies on stock buybacks added up to $6.3 trillion (Palladino and Lazonick, 2021).  Between 2012 and 2021, share buybacks of the 14 biggest pharmaceutical companies amounted to $747 billion – much more than the $600 billion they invested in R&D over the same period. In 2022, the top 500 global asset managers held $132 trillion in assets under management—$25 trillion more than global GDP. Massive accumulation of financialized wealth, neoliberal narratives and austerity mantras have fuelled the belief that private financial capital can (must) fill development gaps without stricter regulation.   Lacking the political will to regulate markets, we rely on de-risking schemes, hoping capital will flow to development. It does not—financialized capital chases return, not development (Mazzucato, 2025).  

 

Figure 1: Finance is financing FIRE (The Transnational Institute, 2018)

 A chart of financial assets Description automatically generated

 

  1. The impact of financialization on economies 

 

Since the 1980s, financialization has impacted the structure and dynamics of economies across the globe. Financial activities have dominated the global economy, while underlying GDP growth has slowed (Tran, 2024). This imbalance leaves economies more dependent on fiscal and monetary interventions, despite governments facing high debt and stretched resources (Tran, 2024). Financial profits crowd out real investment due to higher liquidity and short-term returns in financial assets (Bonizzi, Kaltenbrunner,and Powell, 2022).  Dividends and buybacks prioritize value extraction over value creation, reducing R&D and innovation quality (Bonizzi, Kaltenbrunner, and Powell, 2022).  In emerging markets, deepened financialization correlates with higher household debt, stagnant wages, and reduced corporate investment in productive sectors (Bonizzi, Kaltenbrunner, and Powell, 2022). Financialization also impacts the productivity of labour. According to the International Labour Organisation, hourly labour costs in Britain were the equivalent of $30, lower than most European countries (ILO, 2024). The speculation inherent to financialised economies exacerbates volatility, creating inequities in access to essential goods like food and energy (Friel, 2024). This also happened with basic commodities: in the UK, food prices like bread and pasta increased by 60% between 2021 and 2022 due to speculative investments (Friel, 2024). Post-Russia’s 2022 invasion of Ukraine, investors bet on rising food prices, and the top 10 global hedge funds profited nearly $2 billion from speculative trading on grain and soybean prices. None of this profit stemmed from agricultural investment (Friel, 2024). To combat this, we need to move from this narrow vision of shareholder capitalism towards a more capacious and collaborative form of stakeholder capitalism (Mazzucato, 2018). 

 

 

 

  1. Financialization of the financial sector and corporate governance in the UK

 

The UK economy is financialized on both sides, and this is a key driver of the UK’s economic stagnation. Over 80% of finance in the UK goes to finance, insurance and real estate (FIRE) instead of financing production in the ‘real economy’ (Ryan Collins, 2018).

 

 Figure 2: Financial services economic output in the UK, Source: ONS, 2022

A line graph showing the growth of the economy Description automatically generated

 

 

Share buybacks have replaced investment for many businesses in the UK. Add together ordinary dividends, special dividends and buybacks and FTSE 100 firms are primed to return £137.2 billion to their shareholders in 2023, a tiny fraction below 2022’s all-time high of £137.6 billion. The banking sector’s share of GDP rose from 9.3% in 1971 to 18.7% by 1989. There was a widening trade deficit, combined with policies aimed at reducing inflation and extinguishing the power of the unions.  UK is catching up with the US on share buybacks: Goodacre estimates that nearly half of all large US companies bought back at least 1% of their shares in issue in 2022. What is unusual is that the UK came close to matching the US last year, as a record high percentage of UK companies bought back at least 1% of their own shares. By 2016, Britain ranked 116th out of 141 countries for capital investment as a percentage of GDP. the UK, financialization has had a large impact on public utilities. As Brett Christopher argues, when public services become assets under management, companies begin to prioritise shareholder value over stakeholder value (Christopher, 2020). The goal of public utilities becomes to pay out to shareholders, and not the quality-of-service provision. For example, annual profits at British Gas have soared more than tenfold after it tried to recoup costs from the energy crisis, while its parent company announced another £144m payout to shareholders.  Centrica released figures on Thursday showing that British Gas, which supplies energy to UK households and businesses, showed its profits jumped to £751m in 2023, up from £72m a year earlier (Guardian, 2023). The big increase in earnings came after the regulator, Ofgem, raised the energy price cap and allowed the company to recoup some of the costs. Thames Water has transformed from a debt-free public utility into what critics argue is a privately owned investment vehicle carrying the highest debt in the industry. By the time Macquarie sold its stake in Thames Water in 2017, debts had more than tripled from £3.2bn to £10.5bn, unadjusted for inflation. The average yearly dividends paid during the Macquarie period were five times higher than those paid after it sold its final stake in 2017. Tesco raised its dividend by 11 per cent and announced plans to buy back £1bn-worth of shares as its volume performance improved in the context of easing food price inflation, with Britain's biggest supermarket forecasting another uptick in profit in 2024. 

 

  1. What can be done? Conditionality as a tool to de-financialise economies

 

Conditionalities attached to public financing have been instrumental in ensuring that state-backed investments drive industrial upgrading, social benefits, and environmental sustainability. By shaping private sector behaviour, progressive conditionalities ensure that public investments contribute to long-term economic transformation rather than merely subsidizing private profits (Mazzucato and Rodrik, 2023). The CHIPS and Science Act in the USA was a $250 billion funding programme for semi-conductor production, with conditionalities around prohibiting share buy backs, strengthening worker training and childcare provision, and improving water and energy efficiency (Mazzucato et al, 2024). In Germany, firms receiving KfW loans for energy efficiency projects must comply with environmental performance standards aligned with the Paris Agreement, ensuring tangible green outcomes (Mazzucato et al, 2024). Similarly, BNDES attaches conditions to its pharmaceutical sector financing, requiring firms to invest in domestic production of essential medicines to strengthen local supply chains (Mazzucato and McFarlane, 2023). France has also implemented progressive conditionalities in its crisis response; during the COVID-19 pandemic, bailout funds for Air France and Renault were contingent on emission reduction commitments, reinforcing the country’s green transition goals (Financial Times, 2019). These mechanisms demonstrate how the state can leverage financing conditions to steer private sector activity toward public interest objectives. 

10 March 2025

References