Financialization: When Finance Dominates the Economy

In recent decades, a silent transformation has reshaped the global economic landscape, shifting priorities from production to speculation.

This process, known as financialization, represents the increasing dominance of financial markets over real sectors like manufacturing and agriculture.

It touches every aspect of our lives, from job security to housing affordability, and demands our attention for a sustainable future.

What is Financialization?

At its core, financialization is an economic shift where finance gains precedence over tangible production.

Academics define it in various ways, but common threads highlight its pervasive influence.

• Greta Krippner views it as a pattern where profits increasingly come through financial channels, not traditional trade.
• Gerald A. Epstein emphasizes the rising role of financial motives and institutions in economic operations.
• Ronald Dore points to the dominance of financial controllers in corporate management and stock market fluctuations.

These definitions underscore a move away from value creation towards speculative gains.

A Historical Perspective

Financialization accelerated post-1980, driven by neoliberal policies and the ascent of shareholder value.

This era marked a shift from bank-based systems to capital markets, altering economic dynamics.

• In the UK from 1995 to 2020, nominal wages doubled, but financial asset valuations rose fivefold, benefiting the wealthy.
• The US saw financial profits' share of corporate profits skyrocket since the 1970s, contributing to labor share decline.
• Globally, this trend linked to unprecedented income inequality from 1967 to 2010, highlighting its social costs.

Understanding this history helps us grasp why our economies feel increasingly volatile and unequal.

The Data Behind the Trend

Numbers reveal the stark reality of financialization's impact on economies and societies.

This table shows how financialization extracts resources from productive sectors, exacerbating disparities.

Macroeconomic Fallout

At a broad level, financialization stifles growth and increases economic instability.

It elevates the financial sector, leading to reduced GDP growth and lower tax revenues.

• Higher financial development in developed countries enhances volatility, making economies more prone to crises.
• In the US, it has contributed to racial and ethnic disparities, impeding global growth through speculative bloat.
• Prices become distorted from fundamentals, allowing speculators to profit at society's expense.

These impacts undermine long-term prosperity and social cohesion.

Corporate Consequences

Firms often shift from innovation to financial engineering, prioritizing short-term gains.

Moderate financialization can boost efficiency, but excess leads to de-realization and crowds out investment.

• Practices like debt financing and stock buybacks over dividends reduce employment and innovation.
• In sectors like manufacturing, even low financialization poses high risks, hurting profits and stability.
• This funnels financial income to the top 1%, widening the wealth gap.

Businesses must balance financial strategies with real value creation to thrive.

The Human Cost: Inequality and Social Strain

Financialization deepens social divides, affecting everyday people through wage stagnation and debt.

It transforms assets like housing into speculative tools, exacerbating instability for families.

• Benefits accrue to the wealthy via capital gains, while others face lower productivity and rising debt burdens.
• Non-financial income growth slows, making it harder for workers to achieve financial security.
• This erosion of economic fairness fuels social unrest and diminishes trust in institutions.

Addressing these issues is crucial for building a more equitable society.

Unraveling the Causes

Several factors drive financialization, from corporate practices to policy shifts.

The rise of shareholder value governance and financial markets over banks is a key driver.

• Corporate strategies focus on debt for tax advantages and stock options for management.
• Neoliberal economic policies incentivize speculation over sustainable growth.
• Commodification of risks via derivatives separates production from finance, intensifying the cycle.

Recognizing these mechanisms empowers us to advocate for change.

Charting a Way Forward: Policy and Practical Steps

Solutions exist to curb financialization and restore balance to our economies.

Governments can signal a commitment to financial services for the real economy through regulation.

• Invest in infrastructure and care sectors to boost productive capacity.
• Build worker power through stronger unions and fair wages.
• Implement robust financial regulations to prevent excessive speculation.
• Enact fairer tax policies to reduce inequality and fund public services.

Individuals can support ethical investing and demand corporate accountability.

Variations Across Sectors and Regions

Financialization's impact is not uniform, varying by industry and geography.

In manufacturing, it poses high risks, while in agriculture, even low levels are detrimental.

• Eastern regions like China may see moderate positive effects, but central and western areas suffer suppression.
• Developed countries experience enhanced volatility from high finance, affecting stability.

This diversity underscores the need for tailored approaches in policy and business strategies.

By understanding financialization, we can work towards economies that prioritize people over profits.

Embrace this knowledge to advocate for reforms and make informed choices in your financial life.