Financialization

Introduction

Financialization may be the least well-known and yet most consequential change in capitalism over the past fifty years.

Most parts of the capitalism of the last fifty years are not new. Monopolization has been a feature of capitalism from its earliest phases. Adam Smith worried about it in his 1776 Wealth of Nations. A significant portion of the late 19th and early 20th centuries was occupied by the politics of trusts (or monopolies). The instability of the banking system was a persistent issue. Capitalists always resisted efforts by workers to gain bargaining power through unions.

On the other hand, financialization is a new feature. Neoliberalism, rooted in the past of capitalism, does not foretell this development.

What is financialization?

"Financialization" is at best a clumsy word. But, as you will see, this phenomenon is one of the most important contributors to the $79 Trillion Heist and the intensification of insecurities for the bottom 90% of the population.

From the production of goods and services to the extraction of money

Before delving deeper into the financialization of corporations and, later, the finance sector, it is essential to understand how the motivations and metrics underpinning contemporary capitalism have evolved. Financialization represents the logical conclusion of capitalists' belief that money has become paramount. It narrows every business's focus to how much profit can be extracted and how quickly it can be achieved. A company's products or services are entirely subordinated to the short-term goal of maximizing cash, specifically the quarterly results reported to Wall Street.

"Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic systems at both the macro and micro levels.

Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector, (2) transfer income from the real sector to the financial sector, and (3) increase income inequality and contribute to wage stagnation. Additionally, there are reasons to believe that financialization may put the economy at risk of debt deflation and prolonged recession.

Financialization operates through three different conduits: changes in the structure and operation of financial markets, changes in the behavior of nonfinancial corporations, and changes in economic policy."¹[bold emphasis added]

Now, let's examine how financialization manifests in the corporations of the real economy, where products and services are produced.

Footnotes

From summary of Thomas Palley, “Financialization: What It Is and Why It Matters,” Working Paper Levy Economics Institute at Bard College. No. 25 (December 2007).