The gospel of financial literacy
Giorgos Gouzoulis critically explores the fraught logic and impact of financial literacy programmes.
From national governments and the OECD to academics and social media “finfluencers”, the concepts of financial literacy and financial education have become widely used buzzwords. But what are they all about? The very idea is simple yet vastly misleading: with the “right” education about how finance works all individuals can and must manage their own finances successfully.
For many decades, mainstream economic models of general equilibrium were built under the assumption that when identical, individual economic agents—an odd hybrid of consumer and investor—maximize their personal utility with perfect information about the operation of markets, then collective wellbeing reaches its maximum level. But, unlike most fairytales, this one does not have a happy ending.
Several major financial crises, like the burst of the dot-com bubble and the 2008 Global Financial Crisis, have proved emphatically that free, unregulated markets lead to systemic economic breakdowns. Logically, someone with a non-economics background would have assumed that this evidence must have led to a major rethinking of how we understand the economy and society, and challenged our assumptions.
The response of academic economists and economic policy experts though, was quite different: they started thinking about ways to fit people into their models, rather than the other way around. Focusing on the fundamentally flawed assumption that we all have “perfect” information about the economy and a "perfect” understanding of how the economy works across the board, financial literacy education was born.
Educating the plebs
The goal of financial education, according to financial literacy experts, is to close the gap between the financially “sophisticated” and “unsophisticated.” The infrastructure of this idea is vast and largely invisible precisely because it has been so thoroughly normalised. Governments designate entire weeks or months to celebrating "financial literacy" as a concept. The OECD produces free curriculum materials. Banks fund classroom programmes from primary school onward. In the United States, financial competence has been folded into federal education guidance at every level, including kindergarten. The premise underpinning all of it is deceptively simple: people are in financial trouble because they make bad decisions to take on more risk than they can handle, and these bad decisions are the product of ignorance, and ignorance can be fixed with the right training. One would reasonably assume that, if that’s the case, we must certainly look up at the most financially sophisticated. But should we?
In the autumn of 1997, Robert C. Merton and Myron Scholes, economics professors at MIT and Stanford respectively, collected the Nobel Prize for their work on financial risk. According to the Swedish Academy, the prize was awarded to them for producing tools so sophisticated they had fundamentally transformed how the world understood and managed uncertainty in markets. In an ironic turn of events, less than a year later, the Federal Reserve convened an emergency meeting on Wall Street to stop their hedge fund, Long-Term Capital Management, from detonating the global financial system. The bailout cost reached $3.6 billion.
The people most qualified, most credentialed, most richly rewarded for understanding financial risk still managed to get it catastrophically wrong. And yet the dominant political response to three decades of rising household debt, mass insolvency, and working families unable to absorb a single unexpected bill has been to conclude that the real problem is that ordinary people have not been taught to read a mortgage or a credit card agreement carefully enough or make the “right” career choice.
Notice who the targets of these programmes are. Not the institutions that design financial products so complex that their own risk models cannot price them accurately. Not the legislators who spent forty years unwinding the regulatory frameworks that once kept those products off the retail market. The targets are low- and middle-income households, consistently described in the literature as "high-risk" populations requiring "intervention." The language of public health has been borrowed to describe a condition that is, in practice, the predictable consequence of the political choice to fully liberalise financial, labour, and product markets.
The timing of the financial literacy boom is also instructive. Its rise in both policy and popular discourse maps neatly onto the same period in which welfare state retrenchment accelerated, real wages stagnated, unions became institutionally marginalized, and, thus, debt became the primary mechanism through which working people financed the basics of a decent life. As the state withdrew, a replacement narrative was required and financial literacy provided it. We are not going to restore the public provisions that once absorbed these risks, the logic runs, but we will teach you to manage on your own, and if you cannot, that is now a personal failing rather than a political one.
Theory, evidence and the possibility of an alternative financial education
Beyond informative, but anecdotal stories, like the Merton and Scholes hedge fund bankruptcy, what do studies find about the numerous financial literacy programmes that have been implemented? The research on whether financial literacy programmes actually improve financial outcomes is, charitably, inconclusive. Some studies find modest effects under narrow conditions. Others find the opposite: that financial education produces overconfidence, leading people to take on greater risks than they otherwise would have. What the literature does not produce, after decades of programmes and billions in funding, is robust evidence that teaching someone to read a compound interest table protects them from the structural forces that push households into debt in the first place.
Some researchers have gone further, noting that private banks are, in many documented cases, fully aware that these programmes do not improve financial decision-making. The function is disciplinary, rather than remedial. Punitive programmes targeted at bankrupt households, for instance, have been observed to operate primarily as mechanisms for reinforcing the moral responsibility of debtors, regardless of the circumstances that produced the debt. As a result, the precarious material conditions created by rising personal debt, combined with the social stigma that financial literacy discourse has attached to default, reinforce risk aversion across other domains of everyday life. This is particularly visible in the workplace, where indebted workers are more likely to avoid unionising and striking, to accept precarious work contracts, and to take lower pay in exchange for job security.
Over the past several years, alternatives have emerged. The most notable is, perhaps, the Jubilee School organized by the Debt Collective, the first union of debtors in the United States. Rather than focusing on the "correct ways" to manage a personal budget, the Jubilee School proceeds from the recognition that financial precarity is a structural condition before it is a personal one, and that the primary function of conventional financial education has been to invert that order, making the situation feel like a consequence of character. Drawing on the tradition of popular education associated with Paulo Freire, and on the practices of civil rights-era Freedom Schools, it offers free courses for debtors and the general public covering the class foundations of indebtedness and the mechanics of debt as a tool of control, precisely the conceptual vocabulary that standard financial literacy programmes exclude.
Whether this constitutes financial education in any recognizable sense depends on what one believes financial education is for. If the purpose is to produce more disciplined debtors, and thus workers and citizens, such an approach fails entirely. If the purpose, however, is to produce people who genuinely understand the financial world they actually inhabit, and who recognize that defending their human rights requires organizing around the conditions that the world systematically generates, then building these foundations into financial education is more essential than ever.
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Giorgos Gouzoulis is an Associate Professor in Human Resource Management at Queen Mary University of London. This short essay draws on part of the third chapter of his new book Debt and the Future of Workers: Financialization as Exploitation in the 21st Century (Bristol University Press), which explores how financialization reshapes class relations, disciplines labour, and why the debt economy has become one of the most effective but least examined mechanisms of economic control in today’s world.