Measuring finance for the economy and finance for finance

Abstract

This work proposes a new approach to measuring the creation of finance in excess of the quantity needed by the real economy, and to assess how finance is distributed across sectors. The methodology is validated by examining yearly changes that occurred in sectorial balance sheets in 14 founder countries of the European Union from 1995 to 2015. Measuring the superfluous amount of finance in Europe is relevant for at least three reasons. First, a general reason is that finance is crucial in economic analysis. In modern industrialised economies the economic system is a monetary economy of production, where the production of goods and services cannot take place without the opportune creation and circulation of financial capital. Finance is needed in each period to both reactivate existing real activities and provide funds for new activities (Schumpeter, 1912; Keynes, 1937; Graziani, 2003; Godley and Lavoie, 2007; Keen, 2010).1 The present study empirically identifies the flows of finance that are inessential to carry out the process of economic production and provides the basis for a discussion on reforms aimed at restoring and safeguarding the crucial role of the financial system. The second reason is that the role of finance has changed in quality and quantity over the last three decades. This has been investigated by a strand of studies on the financialisation of the economy which has addressed different aspects: single individuals enhancing indebtedness, risk-taking positions and participation in financial markets (Lapavistas, 2011; Martin, 2002); corporate management increasingly targeted at maximising shareholder value (Gallino, 2005; Krippner, 2005); financial assets increasingly used as sources of profitability instead of real production (Epstein, 2005; Erturk et al., 2008; Pollin, 2007; Van Treeck, 2009). The financialisation of the economy has also been associated with income polarisation and inequality (Onaran et al., 2011; Palma, 2009; Stockhammer, 2015), with endogenous financial instability and global imbalances (Crotty, 2008;