Key extracts from a scientific paper
This blog is a collection of choice extracts from a detailed scientific paper/article published by Science Advances. I’ve decided to create this summary version, selecting only key lines and stripping out the references, as I found this paper elaborates nicely on some of the points I made in my last blog titled, “Why must finance complicate things so much?”. If this topic interests you, I urge you to read the full paper (URL below).
Source URL: http://advances.sciencemag.org/content/3/3/e1601861.full
Author: Max Jerneck et al
Science Advances 29 Mar 2017:
Vol. 3, no. 3, e1601861
DOI: 10.1126/sciadv.1601861
As long as hoarding and speculation are available as options to financiers, their willingness to invest in innovation is limited. It is safer to live off the income streams of past investments, as “rentiers.”
A fully production-oriented economy is only possible if the financial component of capitalism is entirely subordinated to the entrepreneurial function, in which case it might no longer be recognizable as capitalism at all, but rather a centrally planned economy where decentralized financial decisions are curtailed. [Solarise notes, for example, China and to a lesser extent India now]
…investments in innovation must be based on more elaborate “fictional constructions” of future states.
Creative destruction is a power struggle between incumbents and challengers, which devise strategies by taking each other’s presumed actions into account. The power balance is observed by financiers, who restrict finance to what they perceive to be the winning side. As Weber argued, finance is a weapon in the struggle for economic existence.Investment decisions have signaling effects.
As Kenney and Hargadon demonstrate, private venture capital is not a viable model for most low-carbon technologies, which are capital-intensive and in direct competition with existing alternatives.
The goal of the entrepreneur is to expand production, and money is a mean to this end. The goal of the financier is to make money, and production is one, but not the only, mean to this end. If the financier could, he would rather skip the production phase altogether and turn money directly into more money.
In Japan, (male) blue collar workers were integrated into the innovation process. Iwata argues that the elimination of shareholder control after the Asia-Pacific War turned the Japanese enterprise into a “unified body of employees.” Lifetime employment turned the worker from “an external seller of his labor” to a “corporatist who shares the responsibilities of management”.
Separation of ownership and control can lead to concern about excessive autonomy of managers to pursue growth strategies that do not necessarily make economic sense or only do so on a long-time horizon.
The function of finance, it may be argued, is to keep this from happening. During the 1980s “shareholder revolution,” financiers reasserted control.
Financialization is caused by nothing more than the removal of political constraints on finance. By deregulating finance and letting markets decide where finance should flow, politicians freed themselves from the responsibility of choice. Decision-making was moved from the realm of politics, where policy makers bear responsibility, to the realm of impersonal decision-making, either through technocratic control or to market forces.
In the early 1970s, when the American solar energy industry did not yet exist, there were two competing visions of where it should head. One camp consisted of a small number of entrepreneurs who had been involved in producing solar cells for the space program or pioneered their application on Earth. They envisioned an industry of small-scale energy production off the grid. Solar energy was too expensive to compete with conventional sources but had the advantage of being usable in remote locations or at sea.
The other camp consisted of the energy policy bureaucracy and closely affiliated large manufacturing and energy corporations along with utilities. This camp was wedded to the idea of utility-scale PV generation, competing directly with conventional sources of energy.
The first American PV firm to focus on the terrestrial market was Solar Power Corporation (SPC), founded in 1973 by Elliot Berman. He originally took his idea to a number of venture capitalists, but they “weren’t very venturesome” and declined the offer. Instead, he turned to the oil company Exxon, which made SPC a subsidiary after Berman had convinced executives that solar panels were cost-effective for offshore oil platform lighting, pipeline corrosion protection, and surveying equipment. Others took notice and the oil industry soon became one of the most important markets for solar cells. However, the involvement of oil companies would prove a mixed blessing.
The initial involvement of large financial conglomerates was ambiguous because they provided needed financial support but steered the industry away from existing markets toward a large-scale utility market that never emerged. By focusing almost exclusively on creating a future market for centralized energy generation, American firms missed the opportunity to develop the small off-grid and consumer electronics markets that were already available. There was an alternative path that was not taken toward decentralized solar energy, which would not have to compete with conventional sources. We know this because that is how the industry developed in Japan, where solar cells were applied mainly for off-grid use and consumer electronics, allowing the technology to mature gradually without much reliance on subsidies or record-level energy prices. This article demonstrates that the main reason this path was not taken in the United States was a disconnect between industry and finance.
Keynes noted that the ever-present tendency toward financialization calls for a substantial share of public investment. This is particularly true of extra-market goals, such as the mitigation of climate. Perhaps, the recently expanded role of central banks in economic governance could play a role in developing low-carbon technology, a topic worthy of future investigation.
A political strategy to bring productive and financial capital together is needed. It is necessary to close off easy ways of making money off money, such as speculation and stock buybacks. This article has examined ways in which financialization impedes the development of low-carbon industries. It has not examined ways in which financialization may aid it. This interesting issue needs to be addressed in further studies.
The original version of this blog post can be found on the Solarise website.
