The financialization of the economy is a series of changes that have occurred in our savings, power, wealth and society over the past 35 years.
The financial sector is responsible for taking our savings and putting it towards economically productive uses. The term financialization, however, describes the realization that this sector has grown larger, more profitable, and less efficient over the past 35 years. Its goal of providing needed capital to citizens and businesses has been lost amidst an explosion of toxic mortgage deals and the predatory pursuit of excessive fees. Beyond the wasted financial resources, it also draws talent and energy away from more productive fields.
Although it may seem arcane, the transformation of the financial sector has grave implications for us all. Financialization impacts anyone who has an investment or savings account topped with expensive fees, anyone who lives in a neighborhood wrecked by foreclosures, and everyone who suffered through the endless consequences of the Great Recession. The size and power of the financial sector itself, and what it does with our savings, are a major concern for everyone.
Perhaps more importantly, financialization is also about the increasing control of finance over our productive economy and traditional businesses. This was shown most powerfully with the “shareholder revolution” of the 1980s. This intellectual, ideological and legal revolution has pushed CEOs to prioritize the transfer of cash to shareholders over regular, important investment in productive expansion, and has resulted in an economy that no longer works for everyone.
The financial sector’s power over corporate decision-making impacts all of us even more than even more than more visible fees and foreclosures do. At the height of the 2007 bubble, corporations paid 9 percent of GDP out in buybacks and dividends. This is the highest rate of the last 70 years, and is more than 1.7 times corporate earnings of that year. The added expenditure of historically high payouts drains resources away from productive investment. Instead of engaging in corporate spending aimed at expanding operations and hiring people to do the productive work that will build out our economy, firms now must focus on the short-term demands of their shareholders.
Financialization is also a story about wealth. Wealth inequality has increased dramatically in the past 35 years. But even beyond this, there’s been an overhaul in how our laws and regulations protect and expand the interests of those earning income from their wealth at the expense everyone else. Together, these factors dramatically redistribute power and wealth upward. They also put the less wealthy at a significant disadvantage.
Consider examples from the past 15 years alone. The government passed a bankruptcy bill designed to protect creditors and Wall Street firms at the expense of debtors, including those overwhelmed by student loans, a radical reduction of dividend and capital gains taxes that benefited the wealthy without bringing any new investments, intellectual property laws that protected the wealth of people who own the ideas that should be driving the economy and our culture forward. This is how wealth inequality happens.
Finally, financialization is also a story about how we view society. Following Gerald Davis, we focus on how financialization has brought about a “market society”, one where “entire categories of social life have been securitized, turned into a kind of capital” or an investment to be managed. We now view our education and labor as “human capital”, and we imagine every person as a little corporation set to manage his or her own investments. In this view, public functions and responsibilities are mere services, ones that should be run for profit or privatized, or both.
Rather than just an abstract concept, this results in a radical reworking of society. Social insurance once provided across society is deemphasized in favor of individual, market solutions. Students take on an ever-increasing amount of student debt to educate themselves. Social services are increasingly privatized and paid out of fees, creating potential rent-seeking enterprises and redistributing income and wealth upward. This inequality spiral saps our democracy and our ability to collectively address the nation’s greatest problems.