Sitzung 10 Brett Christophers Making Finance Productive 2011

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Making finance productive

Brett Christophers
Published online: 19 Feb 2011.
To cite this article: Brett Christophers (2011) Making finance productive, Economy and
Society, 40:1, 112-140, DOI: 10.1080/03085147.2011.529337
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Economy and Society Volume 40 Number 1 February 2011: 112140
Making finance productive
Brett Christophers
Abstract
Western governments’ response to ongoing economic crisis has demonstrated that

the financial services sector is seen to perform a critical and productive function in
today’s capitalist economies. This paper explores how this politically potent
perception of productiveness has come to achieve the hegemony that it now enjoys.
A principal forum for the ‘making’ of finance sector productiveness, it shows, has
been the tradition of national accounting and its reporting of key economic metrics
such as gross domestic product. By placing different activities on different sides of a
pivotal ‘production boundary’, national income statisticians effectively dictate what
counts as productive as adding value to the economy and what does not.
Finance’s contemporary representation as productive is predicated, the paper shows,
on a long and contested history of boundary negotiation.
Keywords: finance; representation; statistics; productiveness; national accounts;

value added.
The people of Goldman Sachs are among the most productive in the world.
(Lloyd Blankfein, Goldman Sachs chief executive, November 2009)
The laws and conditions of the production of wealth, partake of the character of
physical truths. There is nothing optional or arbitrary in them.
(John Stuart Mill, The principles of political economy, book 2, chapter 1, 1848)
One feature of contemporary Western capitalism thrown into especially sharp

relief by the economic crisis of the past three years is that how financial service
companies are treated politically is inextricably bound up with how they are
represented and understood economically. Take, as a prime example, the
political response of governments in territories such as the UK and the US,
Dr Brett Christophers, Department of Social and Economic Geography, Uppsala University,

Box 513, 75120 Uppsala, Sweden. E-mail: brett.christophers@kultgeog.uu.se
Copyright # 2011 Taylor & Francis

ISSN 0308-5147 print/1469-5766 online
DOI: 10.1080/03085147.2011.529337
Brett Christophers: Making finance productive 113
whose leading financial services institutions have been apportioned much of

the blame for triggering said crisis. These governments have been highly
critical of such companies’ actions but, thus far at least, have taken little in the
way of substantive action towards meaningful reform.1 Their main rationaliza-
tion for such inactivity, to the extent that they have provided one, is pivotal to
this paper. It is, in short, that, while we can readily question the financial
sector’s social contribution, its underlying economic contribution notwith-
standing periodic crises is beyond dispute.
Such a rationalization has been made particularly forcefully in the UK,
where politicians of all stripes have lined up to attack bankers’ perceived moral
shortcomings, but have fallen into line with ex-Chancellor Alistair Darling’s
(HM Treasury, 2009a, p. 2) insistence that ‘[f]inancial services are critical to
the UK’s future’. That the UK’s political establishment remains steadfast in its
beliefs about financial services’ productivity, and thus in its support of the UK
financial sector, was underlined most powerfully when Darling gave the
chancellor’s annual Mansion House Speech to the City in June 2009 (HM
Treasury, 2009b).The initial niceties out of the way, Darling rapidly came to
the crux of the matter: ‘Now, it is traditional at this point in the speech to
compliment the UK’s financial services sector. There may be some who think,
given the role of some banks in the global economic turmoil, that this tradition
should be broken tonight. I intend to keep to that tradition’. What this speech,
and the political climate more widely, has demonstrated, is that being seen as
economically vital makes financial institutions politically untouchable. The UK
economist Tim Congdon (2009) has articulated the prevailing consensus as
succinctly as anyone, warning that it would be ‘a form of national economic
suicide’ to stamp down politically on the ‘one part of our country [that] is so
fantastically productive’. Life peer Baroness Valentine had issued a similar
warning, in a different context, three years previously, saying that any political
action that risked this ‘most productive and global part of the [UK] economy’
would be simply ‘criminal’ (Hansard, 2006).
This paper asks what sorts of critical response we might be able to muster in
the face of this representation of economic productiveness and vitality. One
possibility is suggested by the influential political economist Karel Williams.
His argument is essentially that such a representation constitutes only one side
of a two-sided coin in the sense that it enumerates benefits, but elides costs.
Thus, in a recent report picked up on and cited approvingly by the Guardian,
Williams (2009) acknowledged the political arguments about finance’s
contribution to UK economic output, but explicitly counterposed to this
contribution the costs associated with finance, not least ‘when things go wrong’
and ‘the sector requires market subvention, system guarantee and corporate
bail out’. He went on to argue that weighing up the balance of ‘positive and
negative’ is strictly ‘an empirical matter’ and that his own calculations
intimated that, in terms of finance’s net contribution to the UK economy over
recent years, there was ‘considerable cause for concern’.
114 Economy and Society
A second possible response would be to return to classical political economy

in general, and Marx in particular. This would allow us directly to contest the
representation of banks, and financial service providers more broadly, as
economically productive. Such services, Marx held, entail the circulation of
value but not its production, and thus these activities, and the wage-labour
embodied in them, are categorically unproductive. Marx’s analysis of the
distinctions between productive and unproductive labour was considerably
richer and more careful than is typically allowed. Unlike Adam Smith he did
not, for instance, place all service activities in the unproductive basket, although
he is often alleged to have done so (e.g. Bootle, 2003, p. 134). Indeed, if we were
to marshal Marx’s analysis in the service of a critique of contemporary

representations of finance, disabusing ourselves of such misconceptions would
be a critically important first step. There is, for example, a considerable irony in
the fact that the Association of British Insurers labelled Adair Turner’s
comments ‘Marxist’ when the chair of the UK’s Financial Services Authority
called many of today’s banking activities ‘socially useless’ (Stevenson, 2009).
Marx actually suggested the opposite: banking belonged to a cluster of services
he saw as economically unproductive but in view of their role in reproducing
capitalist class relations socially necessary.
The thrust of this article, however, is to suggest that another form of
critique is available to us, which departs substantially from the two above
options, and which in doing so both opens up new understandings and political
possibilities and avoids the pitfalls associated with the aforementioned
approaches. For what those approaches share, fundamentally, is the conviction
that there is such a thing as a ‘correct’ representation of finance’s economic
contribution, and that our critique must focus on empirically countering
misrepresentations with true (or, at the very least, truer) ones. Where Williams
is concerned, the hegemonic discourse of ‘productive finance’ is untrue
because it is partial so, while an element of truth may reside in the
representation specifically of finance’s economic benefits, the fact that its costs
are ignored makes the overall representation a false one. For Marx, meanwhile,
the representation of productiveness is untrue per se.
But what if, instead of looking for a ‘better’ or ‘truer’ representation, we
simply acknowledge as we did above that such hegemonic representations
shape the world in powerful ways, and we then proceed to explore how these
representations have actually come to enjoy their hegemony? That is to say, we
contest and question representations not by trying to disprove them or by
debating their factual accuracy, but rather by examining their political and
cultural history. The present paper argues that such an approach has
considerable value in the case of the representation of ‘productive finance’.
What the paper shows is that this representation has a largely hidden history
shot through with political, economic and cultural contestation. It is, it turns
out, a combustible social artefact dependent on continual revalidation through
a modern techno-politics of expertise and calculation and, hence, thoroughly
contingent. In fact ‘productivity’, the paper proposes, is never something
innate. It is socially constructed and, as such, always has to be made. This paper
is concerned with the processes and practices of such making.
A central rationale for pursuing this alternative approach to representations
of finance, I maintain, is that it liberates us from what can otherwise become
an endless to-ing and fro-ing over what is ‘productive’ and what is not. The very
slipperiness of the term, the fact that it means different things to different
economists, and can be defined in innumerable different ways, means that a
conclusive answer to the question ‘is finance productive?’ can never realistically
be found. It is the false premise that an objectively true answer exists that lures
us into a merry dance involving competing statistical claims and calculative
technologies which, of course, can never be reconciled with one another.

The immediate stimulus to the approach taken here lies in the work
of the political theorist Timothy Mitchell. He has shown how such interminable
political debates over the rightness or wrongness of economic representations
often crystallize specifically in the setting and negotiation of boundaries. Thus, in
his critique of the work of the economist Hernando de Soto, Mitchell (2007)
shows how the policies championed by de Soto rely on the notion of clear
distinctions between capitalist and non-capitalist, or market and non-market,
economic realms. He goes on to argue that it is more useful to question where
these distinctions come from, how they are legitimated and what socio-
economies they help to organize, than it is to debate where such boundaries
should be placed and how we should partition particular activities accordingly. It
is, Mitchell says, ‘inadequate’ to criticize somebody else’s placement of an
activity in ‘the market’ as ‘a misrepresentation, for it implies the possibility of an
adequate representation of the nonmarket’ (2007, p. 248).
Where Mitchell discusses the market/non-market boundary and the politics
of its creation and validation, this paper questions the making of the boundary
between production and non-production, specifically in so far as financial
services are placed on one side or the other.2 It posits that, since the mid-
twentieth century, one particular domain of calculation and representation has
been overwhelmingly important, in the Western world, in the setting of this
boundary and the formal adjudication of what ‘is’ production and what is not.
This is the domain of national accounting: the formulation and publication of
statistics designed to capture the overall level and composition of the economic
activity of a nation-state. Foremost among these statistical measures are the
headline numbers for national income and output, including most recognizably
gross domestic product (GDP) and gross national product (GNP). As Helen
Boss, among others, has pointed out, the question of what constitutes wealth
production sits at the very core of the national accounting framework, since the
aim of these accounts is to measure output, and output is, quite simply, ‘what
designated producers produce’ (1990, p. 227).3 Moreover, the boundary issue
invoked in this paper in the investigation of national accounting is not just
metaphorical. In national accounts produced today the world over, what is
defined as economic activity is, literally, anything deemed to sit inside a
designated ‘production boundary’.
Emphasizing the contestability and restiveness of this boundary over time,

the argument of this paper proceeds broadly as follows. Pronouncements as to
the vital economic contribution of financial services in general, and banking in
particular, are almost invariably predicated on the ‘proof ’ provided by national
accounts data. But what these data say cannot be though of course, typically
is interpreted independently of where the production boundary is placed, and
what this placement implies about the productivity of finance. And, critically, it
transpires that the positioning of certain fundamental financial services vis-à-vis
the production boundary has long been a locus of bewilderment, debate and
even open conflict. The upshot is that the past sixty years have seen numerous
different treatments of such financial services in different national accounting

frameworks, with profoundly varying connotations for the representation of
banking as a productive economic activity. It is, indeed, only very recently that
any sort of consensus has emerged among the national accounting communities
of the world’s leading industrialized nations that banking is productive and
should be represented as being so.
The paper has four sections. The first provides background on the history of
national accounts, their relation to economic theory and their role
in modern society. It shows, in the process, the extent to which arguments
about the contribution and worth of different economic activities banking
included have become dominated by national accounting measures. The
second section discusses the materialization, very early in the history of modern
national accounting, of what one economist felicitously called ‘the banking
problem’ (Haig, 1986, p. 415). This ‘problem’ referred to the fact that if financial
services were treated like other industries, the banking sector as a whole would
be depicted as making a negligible, or perhaps even negative, contribution to
national economic output as being, effectively, unproductive. In addition to
delineating the nature of this ‘problem’, the paper asks the key question of why
such an outcome was regarded as problematic. The third section brings the story
up to the present day, when, with the productive representation of finance
hegemonic, the ‘banking problem’ seems to have been consigned to the dustbin
of history or, at the very least, to the dusty archives of national accounting. The
paper seeks to retrieve that history, showing that it took several decades and
numerous false starts for national accountants to move banking slowly,
hesitantly, but ultimately (it appears) decisively, across the production boundary.
There then follows a short conclusion.
Accounting for wealth
It would be difficult to overstate the importance of national accounting measures

in the contemporary world. With so many different aspects of society now
framed, debated and managed on the basis of statistical representations, with
what Ted Porter (1995) so aptly described as our ‘trust in numbers’ having
assumed the status of quasi-faith and with this quantification of society
occurring hand-in-hand with its financialization (Erturk, Froud, Johal

& Leaver, 2007)/economization (Callon & Çalışkan, 2009), economic statistics
are today located at the nub not only of economic, but also of social, political and
even cultural discourse and practice. And among all such numbers, GDP stands
out from the crowd for GDP is, as a recent primer from BBC
News (2009) noted, ‘arguably the most important of all economic statistics’.4
What is particularly notable about this pre-eminence, moreover, is that with
national wealth (as embodied in GDP data) so often seen as a proxy for
social wellbeing, GDP has long been invoked to ‘calibrate the welfare of the
nation’ as well as its economic prosperity (Rose, 1999, p. 229). Indeed,
the authority that such a mobilization accords to GDP data explains why
French President Nikolas Sarkozy focused explicitly on this metric in his recent
critique of both our ‘cult of figures’ and the ‘cult of the market’ that infuses it.
In the context of the present paper, the significance of this recognition of
the materiality of GDP data is this: when politicians, journalists, regulators and,
of course, bankers themselves, appeal to flattering GDP figures to demonstrate
the positive contribution of the financial services sector, they are drawing on a
discourse of immense social power. With that power in mind, let us examine, for
example, how UK ex-Chancellor Darling continued his Mansion House speech
after signalling his intent to keep to a strictly complimentary political tradition.
His next words were: ‘The City of London and other financial centres such as
Edinburgh and Leeds remain an immense asset to our country. The financial
sector makes up 8 per cent of our national economy’. In placing national
accounting data front-and-centre to his demonstration of the financial sector’s
contribution, Darling was, we should be clear, merely following a well-worn
tradition. Here is his predecessor (Chancellor Gordon Brown) opening his speech
to the same institution five years previously:
In thanking you for your invitation let me start My Lord Mayor by thanking you
for the work you and your staff do not just here in the City of London but round
the world in promoting the City and Britain. And let me at the outset pay tribute
to all the companies and institutions represented here today. Let me thank you
first for the scale of the contribution you make to the British economy the £50
billion of income, 4 per cent of national output, and the 1 million jobs that arise.
(HM Treasury, 2004)
And here, to cite just one further example from among a plethora of alternatives,
is Richard Roberts’ Economist guide to The City from the same year:
The City’s workforce of 345,000 comprises 1.2% of the total British labour
force. However, because of the vitality and efficiency of London’s international
financial services industry it makes a disproportionately important contribution
to the UK’s prosperity . . . UK wholesale financial services contribute £50
billion to UK GDP, 3.9% of the total.
(Roberts, 2004, pp. 1920)
For such a powerful statistical metric that is so frequently and materially

invoked, there is, however, a remarkable lack of knowledge, in political,
academic and popular circles, about what GDP actually is and how, where and
when it came into being. The late Hungarian statistician Zoltan Kenessey
articulated this incongruence thus: ‘Data pertaining to concepts such as
GDP (or GNP) are quoted daily by the media. Yet the genesis of these
concepts is not well known, not even among professional economists or
statisticians’ (1994, p. v, emphasis added). But if we want critically to discuss
national accounting data and their uses, it is vital to illuminate something of
this aetiology. After all, given the visibility and taken-for-grantedness of
measures such as GDP, one could be forgiven for thinking not only that these
measures have a long legacy, but that there was some sort of inevitability
or naturalness to their original materialization. Neither assumption, though,
is correct: national accounts are a relatively recent invention, emerging out
of a very particular configuration of economic, political and intellectual
circumstances.
To be sure, estimates of levels of national economic activity have been
produced since at least the mid-seventeenth century. But until well into the
twentieth century these estimates, the bulk of which emanated from France
and the UK, were intermittent, and were exclusively the products of individual
enterprise rather than any sort of systematic, state-sponsored initiative. Such
initiatives began to come together only after 1930, with the US, the UK and a
handful of continental European nations Sweden and the Netherlands
among them leading the way. Yet progress was slow, and it took twenty years
for the production of comprehensive national accounts on a continuing basis to
become firmly established in a critical mass of Western territories. Certainly
any moves towards international harmonization gathered pace only right
towards the end of that period, for, although the Committee of Statistical
Experts of the League of Nations had agreed in 1939 to work in such a
direction, collective endeavour was then stymied by war, and it thus took until
1953 for the United Nations Statistical Commission to publish its first
international standard, the System of National Accounts (SNA).
But what was it about the period from 1930 to 1950 that stimulated for the
first time the political will and drive, in the US and Europe, to seek to capture
‘the national economy’ systematically in statistical form? Most historians point
to the same constellation of developments.5 The Great Depression was one
major catalyst, leading the US Senate to call in June 1932 for estimates of US
national income, by industrial source, for the period 192931. Another, not
surprisingly, was the Second World War. And here the focus of developments
shifts to the UK and the key figure of John Maynard Keynes (Tily, 2009). For
national accounting was, in its earliest incarnations, almost as much an
academic phenomenon as it was a politico-economic one. True, where national
accounts were concerned, the two were inherently linked, most notably in the
shape of Keynes’s How to pay for the war (1980 [1940]). But at least as
important seems to have been Keynes’s more explicitly theoretical work in the
General theory (1973 [1936]). This was not just because his analysis was framed
at the scale of the nation, meaning that ‘attempts to test and apply his theory
gave an impetus to estimation of [national economic] aggregates’ (Kendrick,
1970, p. 305); it was also because, as Vanoli (2005, p. 19) has observed, Keynes
formulated the equations embedded in national accounts ever since
describing the relationships between ‘concepts such as income, consumption,
investment and saving’. Arguably, in so doing, Keynes initiated a complex,
multi-directional and ongoing interplay between economic theory, national
accounting metrics, economic policy and economic reality.
If this history remains shady, so too, to almost all of those who either rely on
or read about national accounting metrics, do the methods whereby those
numbers are today produced. Focusing, again, on GDP, it is well known that
this metric attempts to measure the overall level of national economic activity.
But as soon as one ventures beyond that headline description, things become
considerably more complicated and controversial. In this necessarily brief
background overview, two features of GDP’s derivation merit particular
emphasis: first, the difference between income and transfer items; and, second,
the three separate methods whereby GDP figures are generated.
To get at the income/transfer issue, let us ask what we mean by ‘economic
activity’. The first part of the answer to this question typically given by
national accounting experts helps to disclose why it is that GDP figures are
so often invoked when an attempt is being made to demonstrate a particular
activity’s productive nature since economic activity, those accountants tell
us, is, in the very widest sense, all activities involving the production of goods
or services. But in reality, of course, some sorts of production are excluded,
which is where the above-mentioned ‘production boundary’ comes into play:
only those on the ‘right’ side of this boundary are counted. What, then, is the
basis of the distinction between the two sides? While the distinction is an
interminably fuzzy one, continues to vary somewhat between jurisdictions
and its exact form is not material to this paper, what we can say is that,
in general, activities are included if they are deemed to produce a ‘useful
output’ and if a value can be assigned to that output through either
imputation or payment actually made. The issue of imputation of value is one
we will return to below. Here, the key question concerns situations where
payments are made but production is not considered to have taken place.
Such payments, in the terminology of national accounting, are treated not as
income but as ‘transfer’ items, the argument being that they represent ‘a
redistribution of existing incomes’ rather than ‘any addition to current
economic activity. To avoid double counting’, these payments which
include things like unemployment benefit and state pensions ‘are excluded
from the calculation of GDP’ (National Statistics, 2006, p. 21, emphasis in
original).
The determination of what is income and what is a transfer item is another
issue examined in greater depth in the following detailed discussion of the
finance industry. But it is important at this juncture to register quite how

significant this issue is. Consider the fact that champions of the financial
sector’s economic productivity frequently appeal not only to the sector’s GDP
contribution, but also to its revenues, profits and, not least, tax contribution.
In defending itself against criticism in the UK (as well as at ‘home’) in
late 2009, for instance, the US-headquartered bank Goldman Sachs ‘pointed
out that the bank and its employees are set to contribute £2bn to the public
coffers in Britain through corporation tax, personal tax, National Insurance
and other levies’ (Clark, 2009). The British Bankers’ Association, two years
earlier, made the industry’s case thus: ‘The corporation tax paid by our
financial institutions would pay annually for the building of some 36 hospitals’
(BBA, 2007). These are powerful and emotive arguments. The unstated
premise, however, is that just because net payments have been received, and
tax paid thereon, then wealth has been produced. But, in the UK and many
other countries, payments are also received, and tax paid, by recipients of
unemployment benefit and state pensions and yet nobody lines up to
trumpet their productivity. The point, of course, is that productivity is
something made, and that national accounts contribute substantially to
this making through their distinguishing between what is a transfer item
and what is ‘new’ income. In respect specifically of tax, the presumption in
national accounts is that tax levied on transfer payments constitutes either
money being returned to its source (as with social security) or tax that would
have been paid elsewhere in the system if the transfer payment had not taken
place.
Issues of transfer, production boundaries and potential double-counting
feature to varying degrees in each of the three methods generally used for
calculating a GDP figure, and familiarity with all three of these methods is also
important here. In reality, published GDP figures are based on the
reconciliation of estimates obtained from each (which, for various reasons,
rarely match up). The first method, and the most important in the context of
the present paper, is the output or product method. This arrives at an
aggregate GDP figure by summing output on an industry-by-industry basis.
The critical factor, however, is that, since the output of one industry is often
the input of another, double-counting concerns loom large; hence the accounts
sum, for each industry, only ‘final’ goods and services outputs or, more
commonly, ‘value added’ (essentially outputs minus inputs). The second
method is the expenditure method. Here, GDP represents monies spent on
final goods and services, summed not across industries but across the three key
categories of economic ‘actor’ government, business and consumers and
then adjusted for net trade flows. The third and final method is the income
method, where GDP is calculated as the sum, across all economic ‘producers’,
of the different primary sources of income: wages, corporate trading profits,
rent, interest and dividends.
We need to be cognizant of how GDP is derived and of how transfer
payments are differentiated from income because, as discussed, GDP data
matter. In this paper, the specific focus is on where the production boundary is
placed, and on how different placements necessarily entail different framings
of particular economic activities. For, as Anwar Shaikh and Ahmet Tonak
observe in their ‘political economy’ of national accounts, what counts as
‘productive’, and what does not, ‘changes the very nature of the accounts, the
picture that we see, and the conclusions that we draw’ (1994, p. 229). What is
especially interesting to note in this regard, however, is that, while there has
been a strong critique of recurrent exclusions from the productive domain, and
of the effects of such exclusions on the social valuation of the activities in
question, the classic example being household labour (e.g. Sangolt, 1999),
much less critical attention has been paid to what gets included. How and why
do certain activities come to be considered ‘productive’, and what are the
effects of these (mis)representations?
Shaikh and Tonak’s book is, interestingly, a notable exception in this regard.
Their argument is that plenty of activities are included in Western national
accounts that, from their critical perspective (for it is, always, a perspective),
do not constitute economic production. And one of these is financial services.
Such services, they claim, ‘derive their revenues from the recirculation of the
money flows generated by the [economy’s] primary sectors’, and hence merely
‘preserve or circulate [social] wealth, or help maintain and administer the social
structure in which it is embedded’ (ibid., pp. 52, 2). Thus, if we recall, from
the beginning of this paper, the varieties of critical response available to those
interested in interrogating the discourse of ‘productive finance’, the Shaikh
and Tonak stance falls firmly into the second camp. It insists that, if we follow
Marx, finance is unproductive and so must be excluded from GDP. Shaikh and
Tonak go on to show that this excluding finance was precisely the
approach of the material product national accounting system used in the
former Soviet Union, Eastern Bloc countries and, until 1993, China. They
rightly point out, furthermore, that there remains considerable confusion
around this system, particularly the widely-held view that the restriction of
‘production’ to physical goods was derived from Marx. And yet, while
disabusing readers of this particular misconception about the material product
system (and about Marx), they effectively reproduce another which is that
we need to look to the former Communist world for real-world examples of
national accounts that treat financial services income as a transfer item. As we
will see below, this is simply not the case.
The banking problem
Reviewing in the mid-1980s the various approaches taken internationally, over

the previous four decades, to the treatment of financial services in national
accounts, Bryan Haig reflected that all had made, to one extent or another,
attempts ‘to solve the banking problem’ (1986, p. 415). This so-called ‘banking
problem’ is the primary focus of the rest of this paper. The present section
discusses, first, what the problem actually is or, perhaps better, what it is
perceived to be. As we shall see, the problem centres on the question of how the
productivity (or otherwise) of financial services is to be represented in national
accounts. And, as such, it explicitly concerns the product/output method for
calculating GDP and the ‘production account’ that this method generates for
only under this method is GDP, or gross value-added (GVA), estimated and
apportioned on a sector-by-sector basis.6 The relative contributions of
different industries remain veiled, by contrast, where the expenditure or
income method is employed.
Before we can delineate the exact nature of the perceived banking problem,
however, we need to pause to enumerate, at a high level, the main types

of activities of financial services companies. It is vital to do so because not all
such activities have posed problems for national accounting economists; and
thus, although the ‘banking problem’ concerns, in the most tangible sense, the
way the contribution of the banking or finance sector as a whole is pictured in
national accounts, its underlying substance consists of the treatment of only a
particular subset of banking functions.
Financial sector activities can, of course, be segmented in various ways. The
approach taken here has been chosen purely to illuminate the issue in hand.
The first thing to point out is that we are not concerned with insurance
activities; our field of interest, rather, is banking, of all types. Broadly speaking,
banks engage in three types of activities and make money in different ways
from each. First, they provide services for which they are explicitly paid fees:
capital raising; mergers and acquisitions advice; fund management; currency
transfer; and so on. Second, they provide so-called intermediation services,
where their role is to facilitate exchange between buyers and sellers of financial
assets. The most obvious example of such market-making is the taking of
plain-old cash deposits and the making of cash loans where depositors are the
sellers of cash and borrowers are its buyers. Much of the difference between
traditional ‘high-street banks’ and ‘investment banks’, in fact, is located in the
fact that they simply make markets in different types of assets: the former in
cash, the latter in, inter alia, debt and equity securities and derivatives thereof.
The key point here, however, is that, with all such cases of financial
intermediation, banks generate positive net revenues only through setting a
margin between the prices at which assets can be bought and sold: either a
‘buy/sell margin’ (different cash prices, for instance, for the purchase or
disposal of company shares) or an interest margin (different interest rates, most
recognizably, on cash deposits or loans). Third, and last, banks strategically
buy and sell assets themselves, using their own funds. Sometimes this is called
trading (particularly over short time horizons), at other times investing (and at
still others, of course, speculating), but in all cases the aim is to profit from any
ongoing income generated by holding such an asset and/or from selling the
asset at a higher effective price than that at which it was purchased.
Of these three categories of activities, two pose no substantive problems for
the product/output method of estimating GDP. Services where an explicit,
direct fee is charged sit comfortably in the production account, since it is clear
what service has been provided, who has provided it and how much they have
been paid for it. All monies generated through the buying and selling of assets
with proprietary funds, meanwhile, whether in the form of interest, dividends
or capital gains, are excluded from this account just as they would be if it were
an individual doing the buying or selling. No service or product has been
tendered, and hence no value has been added. But what about the second
category of activity: intermediation services? These, it turns out, are where full
responsibility for the ‘banking problem’ lies.
Part of this problem is conceptual. What ‘service’, if any, is actually being
rendered by the banks here? Or, to turn this question around, if the holding of
deposits or the making of loans really were a commercial service of some kind,
would companies and individuals not be prepared to make explicit payments to
banks in kind? That no such payment is typically made, aside from occasional
ancillary fees such as for early loan repayment, has certainly not deterred
advocates of the inclusion of banking intermediation in the production account
from saying that a service of some kind is indeed being provided. ‘Some
explanations’, as Carson and Honsa observe, ‘refer to the services of liquidity
provided by the financial institution. Others stress checking and bookkeeping
services or safety’ (1990, p. 24). But the very fact that different protagonists
identify different services underlines the essential problem. There is, ultimately,
no agreement on what the core intermediation ‘service’ actually is. Carson and
Honsa usefully emphasize this, saying that the ‘precise nature of the services’
provided by the banks, and over which national accountants have struggled so
much, ‘is not clear’.
Yet such conceptual issues are not the primary concern either for the national
accountants who speak of the ‘banking problem’ or, therefore, of this paper.
Their and our concern, rather, is with how the banking sector comes to be
represented in the production account if intermediation is treated as a service.
The production account, we can recall, aims to ascertain each business sector’s
‘value added’ by deducting its inputs (costs of services procured and products
acquired from other commercial sectors) from its outputs (sales proceeds). But
precisely because explicit fees paid by discrete, identifiable customers are not
ordinarily levied in respect of intermediation, the issue arises of how to quantify
this service’s output value. One possible solution, as we shall see in the next
section, is some sort of imputation of the value realized through intermediation.
But, in the absence of such a solution, it must be assumed following the model
used in accounting for other sectors, where earnings from interest are not
considered part of corporations’ output or value added that because no
service-specific payment has been rendered, then no value has been generated.
In such a scenario, therefore, the only banking activity to register a positive
output entry in the national production account is the first of our three
categories: services for which banks are explicitly paid fees.
All of which leads to the crystallization of the ‘banking problem’. For if no
imputation in respect of intermediation output value is attempted, a large
component of banking sector revenue is disregarded in the production

account, with inevitable adverse consequences for the calculation and
representation of the value added by a sector whose entire cost base (its
‘inputs’) is incorporated. Those consequences were articulated as early as 1947
by the influential UK national income statistician Richard Stone in a famous
memorandum that underpinned the UN’s first SNA. ‘If we treated banks (and
other financial intermediaries) like ordinary businesses’, Stone wrote, ‘we
would show as their sales proceeds simply their charges to customers’, and,
since the quantum of these specific proceeds was very often lower than banks’
total costs, a sector ‘deficit rather than a surplus would appear’ (United
Nations, 1947, p. 40). The prospect identified by Stone, in other words, was
one of assigning negative value-added to the banking sector. Writing a decade
later, Paul Studenski put the matter even more starkly, noting that in the many
instances where financial sector costs were indeed greater than the sum of
explicit charges to customers, such an accounting approach would entail the
representation of banking as ‘a drain on national income rather than a
contribution’ (1958, p. 192).
That luminaries such as Stone and Studenski regarded the representation of
banking as contributing limited or perhaps even negative value to the national
economy due to the exclusion of intermediation-derived net interest
revenues from the production account as a problem is quite clear. Stone
made this plain, saying in the aforementioned memorandum that the idea of
banking not making a positive overall contribution was ‘clearly unsatisfactory’.
Studenski, the historian, agreed, affirming that such a notion was not only
unacceptable but, moreover, irrational. It would, he observed, ‘obviously make
no sense’.
Part of our task, it seems to me, is to understand why it was that such an
outcome was seen, and has ever since continued to be seen (e.g. Vanoli, 2005,
p. 156), as both unrealistic and intolerable. Some element of the opposition is
perhaps politically-informed. No industry wants to be perceived to be a drain on
the economy or, at best, as a very marginal positive contributor. One sense in
which showing banks as unproductive economic actors may have been regarded
as unsatisfactory is that such a picture would be likely to sit extremely uneasily
with what is often, in the form of the banking community, a very powerful
stakeholder group. Indeed, as the Swiss national income statistician Philippe
Stauffer has observed, ‘bankers are often critical and tend to question the
conventions for measuring banking output in [national accounts]’ (2004, p. 3).
More fundamental, however, have been the conceptual objections to the
notion of banking generating a marginal or negative economic output. The
reason why Studenski, among many others, saw such a notion as irrational is
that the banking sector is generally a highly profitable one. How can such
profitability be reconciled with the idea that banking does not positively
contribute to national product? The belief among national accounts economists
that the two cannot be reconciled lies behind the whole ensuing exercise
traced in the next section to ‘fix’ the banking problem, and was perhaps best
expressed in a reference made by the Organization for European Economic

Cooperation to the ‘paradox of a prosperous industry showing a negligibly
positive, or even negative, contribution to the national product’7 (OEEC, 1952,
p. 52). Indeed, so deep-seated have the objections to this paradox become that
economists at the UK’s Office of National Statistics recently elevated it to the
status of a ‘threat’ (Tily & Jenkinson, 2006, p. 2).
What or who is it, however, that is ‘threatened’ by the unflattering
representation of banking productivity, if not (only) the banks themselves?
This is an important question, and to answer it we need to recognize that the
concept of banks being profitable but not productive would not have struck
earlier generations of economists as the least bit paradoxical. In his famous

discussion of the Bank of Amsterdam, which is widely seen as the first
modern Western bank, Adam Smith noted that its various intermediation
services such as ‘selling bank money at five per cent agio, and buying it in
at four’ allowed the bank to earn ‘a good deal more than what is necessary
for paying the salaries of officers, and defraying the expense of management’
and thus to generate a profit. Yet this was not because there was anything
inherently productive about what the bank was doing. On the contrary:
‘Public utility, however, and not revenue, was the original object of this
institution . . . The revenue which has arisen from it was unforeseen, and may
be considered as accidental’ (Smith, 1804, p. 374). A century later, Marx was
also moved to comment on banking profitability, and was equally scathing
about the idea that such profits derived from productiveness. Where Smith
saw a benign accidentalness, however, Marx saw power the power of finance
capital.
But what Smith and Marx shared, critically, was the belief that it was
entirely possible for an activity to be revenue- and profit-generative without
actually contributing to the creation of value. There was no paradox. (Or
rather, for Marx at any rate, the paradox was not that banks made profits
without producing value, but that industrial capitalists allowed them to do so.)
This configuration of possibilities only came to appear paradoxical to
economists during the twentieth century, specifically as the classical theories
of Smith and Marx were supplanted by the synthesis of neo-classical micro-
economics and Keynesian macro-economics. This synthesis rested, most
notably, upon a very different theory of value to those offered by the classical
theorists: in place of the weak and strong labour theories associated with Smith
and Marx respectively, neo-classicism is grounded in subjective preference
theory, for which value is a function of relative utility rather than invested
labour. By definition, any activity which generates revenues in a competitive
marketplace has or has contributed to the generation of value. Schooled in
this worldview, national accounts economists of the mid- to late-twentieth
century could not see anything but paradox in the notion that such a
prosperous industry as banking, with such self-evident utility, either detracted
from the national output or added only marginal value to it; a negative or nil
output was unacceptable because, from the neo-classical perspective, it literally
made no sense. It is thus to the mainstream neo-classical economics tradition

and the value theory that underpins it, as well perhaps as to the banking
industry, that the ‘banking problem’ poses a perceived threat.
Having identified the nature of that problem, we can now turn to the matter
of how it has been confronted and, apparently, overcome.
Border-crossing
The previous section demonstrated that the crux of the ‘banking problem’ is
that if national income accountants treat financial services like any other
industry, then the banking sector is shown to add little or no value to the
national economy or even, sometimes, to erode it. We have seen, moreover,
that the reason for this is that, according to standard national accounting
conventions (where interest-related revenue is excluded from the definition of
output), financial intermediation services sit on the ‘wrong’ side of the
production boundary. Making finance productive, therefore, has explicitly
required shifting those services to the other side of the production/non-
production dividing line. It has required, in short, a process of border-crossing.
The fact that, today, Western bankers and politicians can routinely and
without obstruction eulogize the finance sector’s contribution to national
output suggests that, since the banking problem was first articulated in the late
1940s, this border-crossing has been successfully negotiated. For what
specifically allows those individuals to make such claims, of course, is that
contemporary national accounting data consistently underwrite them. But
what is it, in turn, that enables these data themselves to sustain the argument
that finance is productive? The data do not materialize in a sealed academic
vacuum; they are the product of socially situated techno-political practices. It
is, thus, at the level of these practices, and of the networks of statisticians
through which they are embodied, that we need to trace the routeing of the
border-crossing that has seemingly taken place.
Ultimately, what now enables the data to ‘make’ finance productive, and
politicians to laud this productivity, has been the emergence of consensus: the
widespread belief among national income economists that financial inter-
mediation is a productive activity and that it can be reliably represented
as such. At the most general of levels, an influential 1996 paper written by
one national accounting practitioner for the Organization for Economic
Co-operation and Development (OECD) described this consensus as ‘taken
for granted’ and summarized it thus: ‘Financial intermediaries are actually
engaged in production’ (Hill, 1996, p. 3). The more specific implications of the
consensus, meanwhile, were spelled out in a paper published three years later,
also by practitioners: ‘it is reasonably clear that the total value of output of
financial institutions includes the net interest income on financial asset and
liability products (such as loans and deposits for banks)’ (Fixler & Zieschang,
1999, p. 547).
The aim of this final section of the paper is to indicate three important
things about this consensus. First, it is remarkably recent dating only to the
decade in which the two aforementioned papers were written. Second, the
border-crossing that presaged the crystallization of this consensus was a slow
and halting one, characterized by the taking of two steps back almost as often
as that of three steps forward. Third, the crossing was, at more-or-less every
key juncture, complex and contested. ‘The services of financial intermediaries
not explicitly charged’, wrote André Vanoli in his brief overview of the relevant
history, ‘have given rise to perplexity, stress, reversals and memorable rows’
(2005, p. 154). Or, as Carson and Honsa had earlier put it: ‘Measuring the
product of banking has been a continuing source of bedevilment to economic

accountants’ (1990, p. 24). Hill, for his part, referred merely to ‘a long and
troubled history’ (1996, p. 1). That history, then, is the subject of the present
section. The conclusion which follows it serves, briefly, to suggest that the
‘troubles’ alluded to by Hill and others are not necessarily just historical. For
the statisticians’ ‘consensus’ that finance is productive remains, in some
respects, a fragile one and in this regard, the use of the word ‘reasonably’ by
Fixler and Zieschang spoke, and continues to speak, volumes.
In reviewing the history of how, in Western national accounts, finance in
general and intermediation services in particular became productive, it is
suggested that the process of border-crossing that this involved can be divided
into three main sequential stages. To do so is, of course, to oversimplify: not all
countries, by any means, have passed through each of the stages identified;
and, where they have, they have tended to do so at different times and at
different rates. But the sequencing does, nonetheless, capture the overall
direction and substance of the movement towards productivity in the
treatment of financial intermediation services in the Western national
accounting canon. It also helps us to identify some of the main national
anomalies. Perhaps foremost among these, it is asserted, is the UK, which
despite being home today to some of the most forceful industry and political
rhetoric about ‘productive finance’, has long been a laggard in the enterprise of
shifting finance from the ‘wrong’ to the ‘right’ side of national accounting’s
pivotal production boundary.
Intermediation as unproductive
The first of the three stages is that in which financial intermediation revenues
are explicitly or implicitly excluded from the finance sector’s output: national
accounts thus representing intermediation services as essentially unproductive.
To be sure, there exist countries that, identifying early on the gravity of the
‘banking problem’, pioneered methods for imputing an output value to banks’
interest-based revenues and for including this value within the reported sector
product, and which hence skipped this unproductive stage altogether. But a
central aim of this paper is to emphasize that many countries did not, and that
these were not just those Eastern Bloc nations using the material product
system. Instead, in such Western countries, for varying periods of time, the
product/output method for estimating GDP treated the net revenues earned
by banks through financial intermediation not as produced wealth but as de jure
or de facto transfer items.
Taking the former, de jure type first, one example of a country that passed
through this stage is Australia. Prior to 1948, all output-based estimates for
Australian national product treated interest flows in the banking sector, as in
other sectors of the economy, as pure transfer items resulting in the country’s
banks, collectively, being represented as loss-making (Arndt, 1996; Studenski,
1958, p. 192). But the more prominent, enduring and important example is
unquestionably France. For there, too, until 1975, all revenues derived from
financial intermediation were omitted from the calculation of value-added and
thus from national output (Vanoli, 2005, p. 154).
Where France and, more briefly, Australia, have both treated intermediation
services as de jure mechanisms of wealth transfer regarded as ‘contributing’, as
Shelp wrote of the French system, ‘to the redistribution of income rather than
to the generation of output’ (1981, p. 61) a larger number of countries have, at
points, considered them as de facto methods of transfer. Here, the revenue flows
associated with these services are not excluded from the production account
altogether, as they are in the de jure scenario. Rather, an output value is imputed
to such services, typically by deducting banks’ interest payments on liabilities
acquired from third parties (e.g. cash deposits) from their third-party-derived
interest income (e.g. on loans). But, instead of treating this net interest revenue
as an input (or, in the lexicon of national accounting, ‘intermediate consump-
tion’) of one or more other sectors of the economy, it is considered, somewhat
perversely, to be an input of the finance sector itself. In other words, net interest
receipts feature here as both outputs and inputs of the same sector, thus
cancelling each other out in the process with the result that the reported value
added by the finance sector is the same as if those interest flows were treated as
actual transfers and simply excluded from the production account accordingly.
Perverse it may be, but this, nevertheless, was the approach to financial
intermediation services long utilized in the UK (Feinstein, 1972, p. 142; Haig,
1973, p. 626) until, in fact, the early 1980s. Hence only financial services for
which UK banks explicitly charged their customers made a net positive
contribution to the national production account. (Pre-1980s chancellors would
have struggled, then, to acclaim the value-added by the finance sector in the
manner of a Darling or Brown, for the simple reason that the national accounts
rarely documented any, and then only of very modest proportions.)8 Other
countries to have pursued the same approach, with the same outcome of a
minimal or negative deemed output for the banking sector, include Denmark,
Germany and Greece. All three, moreover, were still employing this approach
as late as the year 2001 (OECD, 2001, p. 8).
All of which is to say that, in these countries, there have been long periods of
time when the banking ‘problem’ was either not recognized as such or was
deemed less problematic than the statistical machinations which we turn to

presently required to nullify it. As the UK’s Central Statistical Office put it,
a hypothetical allocation of banks’ net interest revenues to other economic
sectors, making those net revenues an output of the former and an input of the
latter, ‘would be more misleading than the paradox of financial concerns
appearing to make a steady annual loss’ (1968, p. 205). Much of the subsequent
history of re-engineering of accounting for financial intermediation in those
countries can be read as a reversal of this perspective: the paradox, or ‘threat’,
of a seemingly unproductive banking sector ultimately coming to be seen as
much the greater concern.
Equally, and as already indicated, there are countries that have never
experienced this ‘problem’ of representing their banks as marginal or negative
contributors to national output. In these countries, the ‘banking problem’ was
quickly recognized as such and ways were immediately found to mitigate it.
The US is probably the most important example of such a country. Up to
1947, it used a treatment of finance that was, and remains, unique (Arndt,
1996), whereby the financial sector’s overall contribution to national product
was considered to be equal to the sum of its profits and of wages paid.9 For
more than half a century, the US then followed a method for treating
intermediation services that also came to be used through much of the rest of
the Western world. This was the method recommended in the original (1953)
SNA. And if the treatment of banking intermediation as unproductive
represents the first of the three stages of our ‘border-crossing’, then SNA
1953 represents one of the two main treatments of intermediation as implicitly
productive that comprise the second stage.
Intermediation as implicitly productive
The approach recommended by the 1953 SNA differed in one central and
critical respect from the de facto transfer approach described above for the UK
and others. Specifically, the net interest revenue derived from intermediation
services, termed now the imputed bank service charge (IBSC), was to be
treated as an input not of the finance sector but of other economic units. These
units included both other business sectors and consumers, with the allocation
between the two based upon respective levels of deposit ownership. The
upshot, in terms of the representation of sectoral value-added in the
production account, was twofold. First, other business sectors were each
shown to generate less value than where no value was imputed to financial
intermediation (France) or where such value was netted off against bank
profits (the UK), since, aside from that component deemed consumed by the
public, banks’ collective net interest revenue was apportioned between those
other sectors as inputs. Second, and most importantly for our purposes, value
added by the finance sector was commensurately greater to the tune of the
entire IBSC.
While some countries, such as the UK and Australia, never used the SNA
1953 treatment of financial intermediation services, most other Western
countries have done so at some point in their national accounting history
(though none, to the best knowledge of the author, continues to do so today).
Yet, although the method enjoyed a remarkable durability in the US, where it
was supplanted only as recently as 2003, the US case is very much an anomaly.
The treatment in question received heavy criticism from practitioners in other
territories, typically on the grounds that in allocating the IBSC on the basis of
levels of deposit ownership it effectively misconceived the main functions of
banks (e.g. Haig, 1973). The result was that SNA 1953’s usage in accounting
for the output of the finance sector was, outside the US, short-lived.
In most countries where SNA 1953 had been employed, it was replaced, in
the shape of SNA 1968 (United Nations, 1968), by a second approach to
financial intermediation services that is considered in this paper under the
heading ‘implicitly productive’. This recommendation, too, separated out the
IBSC on the basis of the differential between banks’ intermediation-derived
interest earned and interest paid. But it suggested yet another different
placement in the national production account for this imputed net interest
income: not as an input of the finance sector itself and not as a distributed
input of the consumer and other business sector accounts, but, rather, as
the input of a new, notional industry sector with no output. That is to say, the
IBSC was still to be considered a valuable output of the finance sector, but,
instead of being traceable to other, tangible parts of the national economy, it
now disappeared into what was effectively the black hole of a dummy industry
with a negative value-added equal (but opposite in sign) to the IBSC.
Thus, if one consults national product accounts where this method has been
used, what one finds is a list of positive GVA figures for all the different
recognized industries (including finance), together with a single anomalous
negative entry for the notional sector that the treatment recommended by
SNA 1968 introduced. Take, as an example, the figures for the UK in 2003.10
These showed total national GVA for the year of £981.7bn at current prices
(compared with an estimated GDP of £1,099.9bn). Within the mix, they
showed a GVA of £39.8bn for the ‘banking and finance’ sector a healthy
4.1 per cent contribution, on the face of it. But they also showed, on the very
last line, a negative GVA of £45.9bn for the IBSC.11 In other words, had the
UK still been using its previous approach, whereby financial intermediation
net revenues were treated as implicit transfer items and effectively excluded
from sector value-added, the banking and finance sector would have been
reported as making a £6.1bn negative contribution to the national economy in
2003 a vastly different picture from the one painted in the quotations
reproduced in the first section of this paper. Adopting SNA 1968 had, in
effect, made UK finance productive.
This method of ascribing a negative income to an imaginary industry sector,
it should be noted, has probably been the most used for financial intermedia-
tion services in the entire history of Western national accounting. The UN
only came up with a new official recommendation in 1993 (see below), meaning
that SNA 1968 was in place for twenty-five years. Moreover, many of
the countries that have since adopted the newer UN treatment did so only
very recently. Once more, the UK stands out in this respect: having belatedly
moved onto the 1968 system more than a decade after its introduction, a
similar period of time passed before the 1993 approach to banking services
was incorporated, finally, in 2008 (Akritidis, 2007). While few countries
have been quite as unhurried as the UK in their response to these external
changes, it remains the case that a large number of Western nations Finland,
France, Italy, the Netherlands, Norway and Spain among them were
still using the dummy sector method into the new millennium (OECD,
2001).
In this discussion of both SNA 1953 and 1968, however, one key issue
remains unaddressed. Why have these treatments of financial intermediation
been discussed under the heading implicitly productive? By making net interest
revenue an output but not an input of the banking sector, both approaches,
it could be argued, placed financial intermediation firmly within the
production boundary. But there are, it is submitted here, important reasons
for entering a caveat about the extent to which the treatments in question
effected the border-crossing that concerns us. For the issue of accounting for
intermediation clearly remained, in 1968 as much as in 1953, a highly and
explicitly troublesome one. Neither SNA reads as if the authors, and the
statisticians who contributed to its formulation, had come to a consensus
that intermediation services were productive and that the methods for showing
this were self-evident. It would take until 1993 for something resembling such
a consensus to crystallize. In contrast to this subsequent iteration, SNA 1953
and 1968 give the cumulative impression of intermediation being nudged
tentatively if not quite covertly towards the productive domain, not lodged
there by right. Writing in 1986, Bryan Haig perfectly captured this sense
of intermediation services having been ‘made’ productive not so much because
they were genuinely and unanimously believed to be so, but because their
representation as unproductive was so discomfiting. The arguments hitherto
advanced for treating interest as anything other than a transfer item, he
argued, ‘amount often to little more than the assertion that a change in
treatment of interest is necessary in order to solve the banking problem’ (1986,
p. 415).
Where SNA 1968, in particular, was concerned, the introduction of a
fictitious sector was undeniably awkward, bearing all the appearance of a
fudge, and it was castigated as such by many practitioners, particularly those of
the US and Canada. Peter Hill echoed a large number of his peers in later
calling it an ‘expedient’ and, hence, ‘no solution’ to the banking problem. He
continued: ‘It is debatable whether inventing an imaginary industry with
negative value added is much better than recording negative value added for
financial intermediaries. It is certainly much less transparent to users’ (1996,
p. 2). Yet, arguably, even Hill misses the most important point of all here.
Inventing this imaginary industry to ‘absorb’ value-added in order for the

value shown to be added by finance to be inflated accordingly may not be
conceptually superior (Hill’s worry). But, in an environment where the banking
industry wields considerable political influence, it is, patently, politically
superior, and the lack of transparency referred to by Hill is, in this regard, of
little or no import.
Intermediation as explicitly productive

SNA 1953 and 1968 made financial intermediation only ‘implicitly produc-
tive’, then, in the sense that, while these banking services now counted as
productive, there remained a certain hesitancy and unsatisfactoriness both
about the treatments through which they did so and about the intellectual
justifications thereof. This is perhaps most evident in the language used to
discuss what financial intermediation services actually were. At no point did
either SNA actually describe and define those services as explicitly productive.
This changed decisively, however, with SNA 1993, the third and latest UN
System (United Nations, 1993).12 Paragraph 4.78 of this SNA begins as
follows (emphasis added), leaving no reader in any doubt as to how the service
of intermediation is now to be considered:
Financial intermediation may be defined as a productive activity in which an
institutional unit incurs liabilities on its own account for the purpose of
acquiring financial assets by engaging in financial transactions on the market.
The role of financial intermediaries is to channel funds from lenders to
borrowers by intermediating between them.
With SNA 1993, in other words, no ambiguity outwardly, at any rate
remained.
Methodologically, the treatment of financial intermediation services recom-
mended in SNA 1993 was, in one respect, something of a throwback to the past
(though one would be unlikely to find many national accounting practitioners
who would ever describe it as such). Specifically, its suggestion for how the
output of such intermediation services should be allocated between users, as
those users’ respective inputs, harked back directly to SNA 1953. The latter,
we saw above, advised that the IBSC should be apportioned to both consumers
(as final demand) and other business sectors (as intermediate demand)
according to relative levels of deposit ownership. SNA 1993 recommended
much the same approach a consumer allocation, having been eliminated in
SNA 1968, thus retaking a place in the preferred SNA treatment. Where SNA
1993’s recommendation for allocation differed from the 1953 method was
primarily in the fact that the split of the IBSC between consumers and
business and, within the business category, between industries was now to
factor in respective levels of borrowing from, as well as lending to, financial
intermediaries.
This issue of allocation made the recommended SNA 1993 treatment an

especially contentious one. Based on work carried out in large part by the
International Monetary Fund, the proposal to allocate the output of inter-
mediation services in such a manner was first presented to the UN Statistical
Commission in 1991. This presentation caused, it has been said, ‘upheaval’
among European Union national accountants, who claimed the methodology
was ‘too complicated, too imprecise’ (Vanoli, 2005, p. 155). The most important
implication of this hostile reception was that, by threatening not to vote in favour
of the recommendation, these practitioners secured a compromise position:
SNA 1993 would allow countries to continue to use the ‘nominal industry’
treatment of SNA 1968 if they preferred. The granting of this alternative

treatment helps to explain why many countries, the UK included, had still not
switched to the favoured SNA 1993 methodology a decade or more later.
Unfortunately, the contentious nature of the approach to allocation
recommended in SNA 1993 has tended to divert critical attention away
from what was, arguably, the new guidelines’ more important suggested change
to accounting for financial intermediation services. This concerned not the
allocation but the derivation of the imputed value of the banks’ output. With
both SNA 1953 and 1968 having based this value on the difference between
interest earned from borrowers and that paid to lenders, SNA 1993 now
recommended a new derivation. And a new name: FISIM (financial
intermediation services indirectly measured).
This new name was, in some ways, no less important than the new
methodology for both were indicative of a considerably greater confidence
in what SNA 1993 newly asserted: that financial intermediation was a
productive activity. The phrase ‘imputed bank service charge’ was now
regarded as altogether too tentative: it intimated that banks performed valuable
services, but it did not specify what those services were, and in requiring a value
to be ‘externally’ attributed to those services it communicated the fact that this
value could not simply be measured. ‘FISIM’ was subtly, but crucially,
different. Not only were the services in question now labelled, but a rather
abstract and cautious exercise in ‘imputation’ had now become a putatively
robust and transparent process of measurement albeit, still, an ‘indirect’ one.
This shift was most clearly manifested in the recommended new
methodology for deriving FISIM.13 Instead of assessing banks’ borrowing
and lending activities together, and intimating that the combination constituted
a portfolio of services whose collective value could be imputed by deducting
interest paid on the former from interest generated by the latter, SNA 1993
separates the two functions and defines each independently as a productive
activity whose output can be measured. It does this by introducing the pivotal
idea of a ‘reference’ rate of interest, which is defined as ‘the pure cost of
borrowing funds’, and for which, it is suggested, either the inter-bank lending
rate or the central bank repo rate could serve as a meaningful proxy. The
productive output of financial intermediaries’ borrowing activities (which
consist not only of taking deposits, of course, but also ‘issuing bills, bonds or
other securities’) is then defined as ‘the difference between the interest

[creditors] would receive if a reference rate were used and the interest they
actually receive’; and the output of the banks’ lending activities becomes ‘the
difference between the interest actually charged on loans, etc. and the amount
that would be paid if a reference rate were used’.
This mobilization of a ‘reference rate’, enabling the output of borrowing and
lending activities to be measured independently of one another, is absolutely
fundamental to the attempt, in SNA 1993, to show intermediation services as
explicitly productive. For the very notion of ‘production’ requires a base of some
kind against which the extent of productive activity can be assessed. In the
world of material goods production, this base is the raw commodities whose
transformation into final goods constitutes the productive process. SNA 1993
claims that financial intermediation represents something similar: the quantum
of ‘production’ effected by banks is represented by the differential between the
reference rate and the actual rate of interest, because the former is the rate that
would be payable/receivable were no ‘productive work’ performed.
But this still leaves one open question a question that returns us to the very
genesis of the ‘banking problem’. If this interest rate differential represents the
quantum of productive output, what is the essential nature of the productive
work herein performed? What is the underlying service for which intermediaries
are being paid, and which justifies that interest rate spread? It is, SNA 1993 says,
the taking of risk. ‘Financial intermediaries . . . intermediate between lenders
and borrowers by channelling funds from one to the other, putting themselves at
risk in the process’ (para. 6.121). And the reference rate of interest is that ‘from
which the risk premium has been eliminated to the greatest extent possible and
which does not include any intermediation services’. Financial intermediaries
contribute to economic output, in other words, by assuming financial risk; and
we are able to measure the amount of such output because the gap between
actual and ‘base’ interest rates signals the level of risk and hence ‘the extent of
intermediation supplied’ (Begg, Bournay, Weale & Wright, 1996, p. 455).
Conclusion or perhaps not
What is most striking about the SNA 1993 approach to defining and
measuring the services of financial intermediation is how far things had
come since contemplation of such services first led to the emergence of the
‘banking problem’ in the mid-twentieth century. By conspicuously disentan-
gling the activities of borrowing and lending, and thus muddying the links
between them, SNA 1993 was able to define each as explicitly productive in its
own right. Forty years previously, by contrast, it had been perceived that, given
the profits they generated, intermediation services must be in some way
productive, but that it was difficult enough to identify the nature of this
output, let alone value it. To fully appreciate the distance travelled in the
course of the subsequent border-crossing, one need only compare SNA 1993’s
analysis of how intermediaries make money by assuming risks, of varying

scales, on both borrowing and lending activities with the analysis offered by
Studenski in 1958. Studenski, note, was no critic of banking; as we saw above,
he believed that showing banks as a drain on the economy made ‘no sense’.
Nevertheless, his pithy conceptualization of banks’ profitable modus operandi,
one shared by the national accounting community about which he wrote, was
that of ‘withholding all or a large part of the interest earned on the loans
and investments made with their depositors’ funds’ (1958, p. 192). Through
the mutations effected by SNA 1953, 1968 and, most importantly, 1993,
‘withholding’ had thus been transformed into ‘producing’.
It would be easy to imagine that SNA 1993, and the subsequent, staggered
adoption of its recommendations across not only the Western world but also, in
large measure, the ex-command economies of Russia, China and other previous
users of the material product system, represents the natural conclusion to the
border-crossing we have traced here the end of the history of accounting for
finance, mirroring the purported ‘end of history’ more broadly. Certainly no
other system for national accounting has ever achieved anything close to the
breadth of international acceptance enjoyed by this latest UN blueprint.
Yet it is evident that, where accounting for financial intermediation services
is concerned, questions do remain. Some of these, moreover, are ‘big’
questions. Thus, although national accounting statisticians are generally
agreed that these services are productive and need to be reported as such,
some still query the very essence of the SNA approach to this matter. Three
years after SNA 1993 was published, for example, the influential Peter Hill
(1996, pp. 34) continued to argue that what made financial intermediation
‘productive’ was the ancillary services provided (e.g. security and convenience
for depositors, timeliness and flexibility for borrowers) and not the fact à la
SNA 1953, 1968 and 1993 that the interest earned and paid was on
‘intermediated’ rather than ‘own funds’. After all, as he pointed out, it seems
curious to insist that lending constitutes production only if a bank lends third-
party funds, when ‘the institution itself may be incapable of identifying the
origin of the particular funds in question and even though the activities
involved may be the same whatever the origin of the funds’. (One might also
note, as Frits Bos [2006, p. 194] does, the oddity that ‘lending money by a bank
is production’ while ‘lending money by non-financial producers or households
is no production.’) Alongside these large questions, a number of ‘niggles’ also
linger, in the practitioner community, concerning the specific treatment of
FISIM contained in SNA 1993.14
It would be extremely misguided to dismiss such questioning as mere
academic navel-gazing by economists, with little or no relevance to the
‘real world’. With banks in North America and Europe generating record
profits and paying out billions of dollars in bonuses so soon after the entire
Western banking system avoided meltdown only by virtue of government
support, being able to argue that such profits and bonuses are justified by
productive contributions to the economy is, for the stakeholders in question, not
only important but essential. It is precisely such an argument that extant Western
national accounting systems, and their conventions for estimating banks’ share
of national output, actively allow. To recognize this is to provide further
evidence, if any were still needed, of Michel Callon’s claim that economists
‘contribute toward enacting the realities that they describe’ (2007, p. 315).15 But
the fact that debate about financial intermediation services persists among
practising economists suggests that the consensus underpinning bank-friendly
GDP and GVA data may be more fragile, and more vulnerable, than one would
otherwise have imagined. This is the importance of that debate.
The debate is also of interest, however, in terms of what it says more generally
about our persistent desire even compulsion as a society to delimit what is

economically productive and what is not. Looking back, over a period of six
decades, at how the West has developed and ‘advanced’ its approaches to
accounting for the output of the finance sector, it is hard not to wonder what
Marx would have made of the disputes and, in particular, of the ever more
intricate statistical manoeuvrings.16 For, reading now his brief comments on the
distinctions between productive and unproductive labour, it is apparent that he
was interested as much, if not more, in understanding why making such
distinctions is so difficult, as he was in trying to draw such distinctions himself.
What he realized, critically, was that there is nothing incidental about our
perennial confusion over what is and is not productive. Such confusion, he
claimed, actually ‘arises from’ the capitalist mode of production ‘and is typical of
it’ (1976, p. 1042). Furthermore, he said, this confusion spreads, and intensifies,
as capitalism develops and as more and more services become ‘embraced’ by the
market economy. In all likelihood, then, Marx would have seen the tortuous
history of accounting for financial intermediation services the confusions over
where exactly the production boundary lies and over how to measure the value
of activities on the ‘right’ side of it as an entirely predictable one. The lesson
we should take from Marx, therefore, is to resist the compulsion to ‘place’
finance; we should, instead, interrogate how, where and by whom hegemonic
placements are established, and what effects these placements have.
Acknowledgements
Many thanks to Julian Dickens and to two anonymous referees for reading and
making helpful comments on this paper. I am also grateful to audiences in
Bristol, Liverpool, London, Lund, Uppsala and Washington DC for listening
to me present various versions of it. The usual disclaimers apply.
Notes
1 This is especially true in the UK, yet even in the case of the US and President
Obama’s high-profile financial sector reforms, most commentators and industry
insiders appear to believe that the recommended changes will have only marginal
effects. As The New York Times (2010) reported in May 2010 (when the final edits to
this paper were being made), ‘Wall Street’s initial verdict seems to be that [the
legislation] could have been much more draconian’, leaving bank executives ‘relieved
that the bill does not do more to fundamentally change how the industry does business’.
2 Cf. Preda (2009) on constructions of the boundary between the stock market and
‘society’.
3 Tomlinson (1994) provides an important and fascinating analysis of the parallel
historical development, from the 1940s, of economic productivity as a policy
problematic and national accounting as a calculative technology. Prior to 1939, ‘concern
with productivity was episodic, underdeveloped and ill-focused’. The subsequent rise
of the productivity concept ‘to a wholly new prominence in discourse about the
economy’ was indelibly linked to ‘the rise of measurement of the national economy’
(1994, pp. 1689).
4 It is certainly more frequently invoked than close relation GNP, which is why
the present paper emphasizes it. The difference between the two is that GDP is based
on location (output produced within a country’s borders), while GNP is based on
ownership (the output of enterprises owned by a country’s citizens).
5 I draw on three main sources here. Paul Studenski’s magisterial The income of
nations (1958) remains the authoritative account of the period up to 1950. Kendrick
(1970) is shorter and more accessible, but, likewise, dated. André Vanoli’s A history
of national accounting (2005) is the fullest attempt to trace developments up to the
present day.
6 Like GDP and GNP, GDP and GVA are very close relations, but are not identical.
Strictly speaking, only GVA is calculated and reported for individual sectors or
industries. This, however, does not stop economists, politicians and others from talking
about industry ‘shares of GDP’. To derive GDP from cumulative all-sector GVA, it is
necessary to add total product-based taxes and deduct total product-based subsidies.
Hopwood, Burchell and Chubb (1994) offer a useful account of the political-economic
history of the concept of ‘value added’ in accounting practices.
7 The OEEC was the precursor organization to the Organization for Economic Co-
operation and Development (OECD), which replaced it in 1961.
8 In this regard it is interesting to note that if one visits the website of the UK’s Office
for National Statistics (www.statistics.gov.uk), and sets about retrieving historical data
for GVA by industry (‘Gross value added at chained volume measures basic prices, by
category of output’), one stumbles upon the following fact: these data are available all
the way back to 1948 for the vast majority of sectors, whereas for ‘Business services and
finance’, the pertinent data series does not begin until 1983.
9 A somewhat similar approach was used in Australia from 1948 to 1972, except that
there profits were excluded from the calculation of banking output on the grounds that
they were deemed transfer items.
10 Retrieved from http://statistics.gov.uk/about/methodology_by_theme/input
output/downloads/Change_in_GVA_by_industry_2005_edition.xls.
11 In the UK, the IBSC was termed the financial services adjustment. However,
in the document in question, it is given yet another label, namely FISIM a term
introduced by SNA 1993, and which is discussed in the next subsection of the paper.
12 Though an update was published in 2008 (similarly, revised versions of SNA 1953
were published in both 1960 and 1964).
13 The key paragraphs in SNA 1993 are 6.126 to 6.128. All subsequent quotations
from SNA 1993 are taken from these paragraphs, except where noted otherwise.
14 For example, Moulton (2004) and articles referenced therein.
15 A claim, it is worth emphasizing, that is hardly novel, especially where
the economics of accounting is concerned. As far back as 1988, Ruth Hines, in a
seminal paper, said of financial accountants: ‘In communicating reality, we construct

reality. And in his introduction to an invaluable edited collection published in 1994,
Peter Miller likewise scotched the notion that accounting can ever be regarded as ‘a
neutral device that merely documents and reports ‘‘the facts’’ of economic activity’.
Rather, ‘the ‘economic’ domain is constituted and reconstituted by the changing
calculative practices that provide a knowledge of it’ (1994, pp. 1, 4, emphasis in
original).
16 Which the SNA 2008 revision of SNA 1993, at paragraphs 6.163 to 6.169, takes to
arguably an even more involved level.
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Brett Christophers is Research Fellow in the Department of Social and

Economic Geography at Uppsala University, and author of Positioning the
missionary (University of British Columbia Press, 1998) and Envisioning media
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part of a wider piece of work on representations and practices of finance, to be
published as a book entitled Banking across boundaries (Wiley-Blackwell).

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Economy and Society

Making finance productive

To link to this article: http://dx.doi.org/10.1080/03085147.2011.529337

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Making finance productive

Western governments’ response to ongoing economic crisis has demonstrated that

Keywords: finance; representation; statistics; productiveness; national accounts;

One feature of contemporary Western capitalism thrown into especially sharp

Dr Brett Christophers, Department of Social and Economic Geography, Uppsala University,

Copyright # 2011 Taylor & Francis

whose leading financial services institutions have been apportioned much of

A second possible response would be to return to classical political economy

to marshal Marx’s analysis in the service of a critique of contemporary

technologies which, of course, can never be reconciled with one another.

Emphasizing the contestability and restiveness of this boundary over time,

different treatments of such financial services in different national accounting

Accounting for wealth

It would be difficult to overstate the importance of national accounting measures

occurring hand-in-hand with its financialization (Erturk, Froud, Johal

For such a powerful statistical metric that is so frequently and materially

finance industry. But it is important at this juncture to register quite how

The banking problem

Reviewing in the mid-1980s the various approaches taken internationally, over

however, we need to pause to enumerate, at a high level, the main types

component of banking sector revenue is disregarded in the production

expressed in a reference made by the Organization for European Economic

earlier generations of economists as the least bit paradoxical. In his famous

made no sense. It is thus to the mainstream neo-classical economics tradition

product of banking has been a continuing source of bedevilment to economic

deemed less problematic than the statistical machinations which we turn to

Intermediation as implicitly productive

Inventing this imaginary industry to ‘absorb’ value-added in order for the

Intermediation as explicitly productive

This issue of allocation made the recommended SNA 1993 treatment an

treatment of SNA 1968 if they preferred. The granting of this alternative

other securities’) is then defined as ‘the difference between the interest

Conclusion or perhaps not

analysis of how intermediaries make money by assuming risks, of varying

about our persistent desire even compulsion as a society to delimit what is

seminal paper, said of financial accountants: ‘In communicating reality, we construct

Akritidis, L. (2007). Improving the performativity of economics (pp. 31157).

national accounts of Australia. Review of Miller, P. (1994). Accounting as social and

27900661.pdf. Moulton, B. (2004). The system of

service economy. Westport, CT: uk/articles/nojournal/

Stevenson, D. (2009). Is a ‘Tobin tax’ the United Nations. (1953). A system of

Brett Christophers is Research Fellow in the Department of Social and

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