The institutional logic of the finance-led economy
L’espirit de moderation doit être celui du législateur; le bien politique, comme le bien moral, se trouve toujours entre deux limites.
Montesquieu (1788b: 1)
A popular story from the Hellenic period, arguably a piece of consolation for scholars who believe their work is underappreciated, King Dionysos once asked Diogenes, a renowned philosopher of the Cynic school, why philosophers come to knock on rich men’s doors, while the rich do not come to those of philosophers? “Because philosophers know what they have need of, while the rich do not,” Diogenes (2012: 136) responded. Part of wisdom is being able to value the access to money and other material resources, but a bountiful supply of monetary means does not of necessity translate into an understanding of the value of other, non-pecuniary resources. Regardless of such ancient exchanges, the relation between wisdom and knowledge, on the one hand, and economic wealth and welfare on the other, does not need to be disjointed, as Diogenes suggested. Know-how and expertise, albeit of a specific kind, are integral to economic affairs and business ventures. This final chapter will address some of the issues pertaining to this foundational relationship, especially accentuated in the contemporary economy wherein roughly 80 per cent of the economic value of public corporations consists of intangible assets (Haskel and Westlake, 2017; Brynjolfsson and Saunders, 2010; Pagano and Rossi, 2009: 670. figure 2.). However, when paying attention to the details of the finance-led economic system, it is possible to observe that what from afar may appear to belong to a similar class of objects (say risk, liquid assets, collateral) may display marked differences upon closer inspection, which indicates that what may appear to be unworthy of closer scholarly or regulatory inquiries during, for instance, the upward movement of the business cycle may in fact play a major difference in the succeeding downward phase. This means that species of, for example, finance market trade do in fact reveal considerably differences during, for instance, episodes of finance market liquidity contractions.
Such evidence indicates that the regulatory control of finance markets, characterized by a high degree of innovation such as new asset classes that are essentially illiquid, that is, are costly and/or complicated to price, especially in the absence of long-term price series, is a non-trivial assignment. To better address such regulatory challenges, a broader historical and institutional perspective on finance industry trade will be taken, so that for, instance, the question regarding rentier returns versus entrepreneurial and innovation-led growth is examined as a question pertaining to the finance-led economy. The end of the chapter summarizes the key contributions of the volume and points at further scholarly projects to be pursued and some of the regulatory and legislative implications.
The institutional logic of the finance industry
Institutional theory is a widespread and cross-disciplinary analytical framework that includes the concept of institutional logic. Friedlander and Alford’s (1991: 248) much-cited paper defines “logic” (the description “institutional” is already implied in the term) as a “set of material practices and symbolic constructions.” A rich literature has applied this term to shed light on practical work in a variety of settings. The various definitions that are provided in the literature include a number of concepts and constructs, and there is both consistency and variation in the use of the term. Thornton (2002: 82) says that institutional logic defines “the norms, values, and beliefs that structure the cognition of actors in organizations and provide a collective understanding of how strategic interests and decisions are formulated.” This definition underlines the cognitive dimension, both individual and collective, of the dominant institutional logic; the institutional logic shapes the cognition, and hence the perception and other sense impressions, of actors. Reay and Hinings (2009) and Dunn and Jones (2010) in turn underline the cultural element of institutional logic, and speak about how taken-for-granted rules (Reay and Hinings, 2009: 629) and cultural beliefs (Dunn and Jones, 2010: 114) shape the cognition of actors. Such “belief systems and associated practices”—the institutional logic rendered manifest—“define the content and meaning of institutions,” Reay and Hinings (2009: 631) say. The concept of institutional logic has been used to study science and research policy (Berman, 2012) and policymaking more broadly (Nigam and Ocasio, 2010), in studies of health practices and organizations (Goodrick and Reay, 2011; Dunn and Jones, 2010), and in studies of changes in professionalism (Lander, Koene, and Linssen, 2013; Meyer and Hammerschmid, 2006) or unionism (Martin, 2008). Furthermore, the concept of institutional logic has been applied in more analytical examinations of, for example, commensuration practices such as ranking and rating practices (Zhou, 2005) or identity work (Pache and Santos, 2013; Lok, 2011). Finally, and of relevance for this context, institutional theory has informed studies of finance industry and finance institutions, such as in the case of Yan, Ferraro,
Institutional logic of finance-led economy 129 and Almandoz’s (2019) study of socially responsible investment, the study of the risk exposure of banks (Almandoz, 2014), or the increased emphasis on financial objectives in the construction and real estate industries (Bryan, Rafferty, Toner, and Wright, 2017). These studies reveal that agents tend to consider a “financial logic” as being a set of guiding principles, norms, and beliefs that structure day-to-day work and decision-making.
Almandoz (2014: 458) reports that members of the board of banks who were more prone to act in accordance with a “financial logic” rather than the alternative, “community logic,” were more risk tolerant and accepted “risky deposits” to a higher degree. Yan, Ferraro, and Almandoz’s (2019: 473) study of socially responsible investment (SRI) professionals demonstrates a “a great deal of resistance toward SRI coming from actors deeply embedded in the financial logic.” This unwillingness to accept the SRI framework was partially explained by the epistemic difficulties these professionals encountered when they could no longer use an unambiguous measure—that of return-on-investment ratios, unmediated by measures of the degree of “social responsibility” taken in their portfolios and holdings—for how well they performed in comparison to other investors. Third and finally, Bryan, Rafferty, Toner, and Wright (2017: 502) argue that the construction and real estate industries now display “a financial logic of risk and risk shifting,” wherein the possibilities for high returns on investment objects are recognized in more favourable terms than they used to be. Seen in this view, the finance industry and “financialized” non-financial industries adhere to and reproduce a certain set of “norms, values, and beliefs” (Thornton, 2002: 82) that are consistent with finance theory descriptions of ideal finance markets and their calculative practices. The institutional logic of the finance-led economy therefore represents a departure from, perhaps even a rupture with, previous institutional logics. In the following sections, three consequences of the institutional logic of the finance-led economy are examined: (1) how rentier interests tend to overshadow those of entrepreneurs and enterprising activities in need of finance capital; (2) how the difficulty of regulating the finance industry and global finance markets increases; and (3) how policy-making that renders credit supply as social provision is no longer possible to maintain as a larger proportion of, for example, the US population and households is excluded from the credit supply circuit.