Less than 1% of the Indian public has substantial share holdings. But the recent crash in the stockmarket makes front page headlines. Why? Every day the evening news broadcasts by major TV channels will be followed by a slot devoted to Sensex and Nifty average share price levels, as if these daily ups and downs are of vital importance for the people of India, although for huge sections of the population their own mundane, routine and prolonged sufferings carry on unaffected by these ‘bull’ and ‘bear’ runs. Reams are currently being written on the US recession caused in part by the subprime mortgage payments crisis and how because of this, stock exchanges throughout the world including in India are being negatively affected. But don’t worry, the stockmarket will rebound and then the ordinary India citizen should feel better, even if you have absolutely no inkling about what really makes the stockmarket tick or if you sometimes wonder what the hype is all about? So why the enormous importance given to stockmarkets, not just in India but globally? In the ‘golden age’ of capitalism (roughly 1948-74) average annual global growth rates were significantly higher than in the neoliberal era (roughly early 80s onwards) regardless of the high average growth rates in China and India in this latter period. The weight of Japan, the EU and North America together in the world economy remains much greater. Average levels of unemployment were lower and welfare benefits greater in the advanced industrialized countries during this golden age. One of the most important reasons for this superiority (which neoliberals don’t like to be reminded of) was the use of Keynesian macro-management at the national level, itself made possible because capital was not allowed the free international mobility it has today. The great business ‘guru’, Peter Drucker, pointed out long ago that up to the late 70s over 90% of all financial activity was related (credit and insurance provider, trade lubricant) to the real economy of production of goods and services. In the neoliberal era well over 90% of all financial activity is not related to this real economy but is money making money from money and that too at great speeds so why bother about the difficult and time-consuming process of actually producing things? The most striking dimension of today’s world economy is its historically unique, extraordinary huge and uncontrolled financialization. To defend this neoliberal order as necessary and desirable you then have to defend this financialization as basically positive (you can allow yourself secondary criticisms) and therefore to emphasize, even glorify, the stockmarket which along with other capital markets is at the heart of this financialization of the global economy. The US economy is most strongly stockmarket-based. Other economies like Japan and Germany have historically been more bank-based but everywhere the trend has been set by the US. The stockmarket is supposed to be a very important barometer of the general health of an economy because it is supposed to be the most efficient allocator of capital investment between good and bad firms and sectors as well as for generating new capital through linking savers with investors. Profits should go to stockholders and creditors through high dividends and interest payments and thus be divorced from the managers of firms (except the top guys who get stock options) so that capital can circulate as freely as possible according to stockmarket signals such as rising share prices, price-earnings ratios, etc. Is the stockmarket as efficient as it claims to be? Of course not. In fact, the stockmarket even in the US is not about capital formation but about changes in capital ownership. The primary share market is dwarfed by secondary trading in existing shares dominated by the big time financial players and brokers – investment banks, established commercial banks, hedge funds, mutual funds, insurance companies, pension funds, super-rich individuals financial services sections of big TNCs, etc. For example, in 2004-05 the stockmarket turnover in India when capitalized was 11 times greater than fresh capital formation by private corporate houses. But doesn’t this buying and selling mean that capital is going to good firms and sectors? Only to a limited extent. Most such activity is guided simply by expectations about which share prices are going to rise, by how much and how fast? To make money you do not need to study the ‘economic fundamentals of the companies whose shares you want to trade in. Where’s the time? Indeed, there are various ways companies can keep share prices up including by buying their own shares. You have to sense which shares are likely to be in high demand and vice versa and therefore whether you buy or sell to subsequently sell or buy. You have to have correct expectations about the expectations of others! And these expectations change hourly, daily, weekly, because of all sorts of rumours and fears, fluctuations in share prices. You are in a kind of casino where you are betting on what others are betting! Does this mean that the real economy exercises no check whatsoever on the stockmarket? No, in the longer term (but one never knows how long) an economic reckoning of sorts arrives. What this means is that the capacity of a stockmarket collapse to do harm – debt burdens forcing bankruptcies of companies with spiraling declines in production and employment – is much greater than any good from a ‘booming’ stockmarket for ordinary people. But a booming stockmarket means proportionately few people obtain proportionately huge incomes and wealth distribution becomes ever more unequal. Is it surprising then that to emphasize the importance of the stockmarket inevitably leads to glorifying multi-millionaires and multi-billionaires and pretending that they deserve this because they are supposed to be the ‘true’ creators of wealth via the stockmarket and the current financial system? The financialization of the world economy has raised one absolutely central question. Does today’s global financial system finance finance or does it finance investment? The answer is unequivocal. World rates of investment are lower than in the golden age even though average profit rates in the advanced countries has over the last 15-odd years been restored to what it was in the 60s. Even the ratio of investment to retained profits (what is left after firms pay off interest and dividends) is approximately the same. In short, the growing money wealth of all kinds of financial entities is not flowing back into productive investment. In memory of Mr. Sarkozy’s visit, let us take France as a paradigmatic example of Europe following the US. In the 70s on average, French firms borrowed 55% of their funds, 39% came from self-financing, and 6% by issuing stock. In the late 90s, self-financing’s share rose to 65%, stock issues to 23% and borrowing to 12% -- the rising importance of the stockmarket. But most funds from stocks simply went into buying other stock so the contribution to productive investment decreased. In the US the paragon of a stockmarket based economy, stock issuances financed less than 10% of productive investment. Comparing our neoliberal age to the golden age, interest rates, dividends, stock prices are on average significantly higher. But so too are the world levels of inequality, unemployment and absolute poverty.

Achin Vanaik is a fellow of the Transnational Institute and Professor of International Relations and Global Politics (South Campus) at the Political Science Department of Delhi University. He is the editor of Selling US wars, Interlink, 2007.