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How financialization hindered the development of the early solar energy industry

NEW PAPER PUBLISHED: Today’s financialized economy is ill-suited to develop technologies to replace fossil fuels. This is what Max Jerneck finds in his newly published study of the early American solar energy industry. His paper on how financialization harms the climate was published today 2017-03-29 in Science Advances, the online offshoot of Science. Below is an interview Max Jerneck, researcher at Misum. 

Today’s financialized economy is ill-suited to develop technologies to replace fossil fuels. This is what Max Jerneck finds in his newly published study of the early American solar energy industry. It emerged in the same era as financialization, in the 1970s and 1980s, and was greatly harmed by it, he finds. The case is contrasted with Japan, where financialization was not allowed to affect corporate governance in the same way. The article is published inScience Advances, the online offshoot of Science. This means that it reaches a more general audience than just social scientists, in line with the interdisciplinary mission of Misum.

The article is open access, available here: http://advances.sciencemag.org/content/3/3/e1601861

What did you find?

I found that the American solar energy industry was greatly affected by changes to the corporate landscape caused by financialization. 

In the 1970s, the industry became concentrated among financial conglomerates, which were rich in cash but operationally and strategically flawed. They governed their solar divisions with financial metrics from central headquarters and aimed for a big payoff in a future utility market, which never emerged, instead of the small off-grid markets the original solar entrepreneurs had in mind. In the 1980s, financialization moved into high gear and the conglomerates were dismantled or restructured by corporate raiders armed with new debt instruments. Corporate governance changed to maximize shareholder value, which meant that most solar divisions were dismantled or sold off to foreign firms. Corporations would rather spend money on buying back their own shares. In contrast, the solar industry continued to develop in Japan where corporate governance remained geared toward long-term technological development.

My initial research focus was on industrial policy. The difference between the US and Japan seemed obvious enough. Solar energy in Japan was promoted by the famous Ministry of International Trade and Industry, MITI, the template for the so-called “the developmental state” which was known for its proficiency in promoting industrial upgrading. Meanwhile solar energy in the US was under the jurisdiction of the contested Department of Energy (DOE), which in many ways was a failed experiment at Japanese-style industrial policy, and was stripped of resources and almost dismantled by the Reagan administration in the early 1980s.

I later found that the weaknesses of the American solar energy industry went much deeper, and were caused to a large extent by flaws in corporate structure. And the successes of Japanese firms were caused to a large extent by certain institutional arrangements governing private firms and the financial system, rather than just narrow industrial policy. Of course, if the US had kept its industrial policy as it was in the 1950s and 1960s when semiconductors were promoted by enhancing competition between firms of various sizes, things would probably have been different. At the root of the problem was what sociologist Greta Krippner calls “depoliticization,” which means the removal of overt political control over the economy. This marked a move away from financial regulation, competition policy and proactive industrial policy, all of which would have been needed for the young solar industry to develop. It was also behind the doctrine of monetarism, which led to the extraordinary high interest rates in the late 1970s and early 1980s, doing a lot of damage to American manufacturing including solar.

 What do you make of the results?

An implication is that any policy to promote alternatives to fossil fuels must be attentive to corporate structure and governance, and how it is affected by the financial system, “the headquarters of capitalism” as Schumpeter put it, where many business decisions are made. There is no point in trying to promote innovation in alternative technologies by introducing a carbon tax if businesses are not organized to innovate and if investors find it easier to spend their money speculating on existing assets.

 Who do you think should be interested in your findings?

Anyone who is concerned with avoiding the collapse of human civilization.  

What would you like to do next to follow up?

I would like to do a similar study on China, where the global solar industry is now centered, and maybe Taiwan, which has also been very successful at developing the technology. I would also like to do a detailed study of the Swedish solar industry, to find out whether we are translating our scientific discoveries into growing businesses. This could be useful for coming up with policy proposals to influence the Swedish debate about climate change.