Financialization

Financialization does not just mean that banks and securities firms grew. It names the whole change in which a car maker earns more from instalment credit or financial investments than from building and selling cars, corporate management is geared to raising the share price, and households are tied to financial markets through mortgages, student loans, credit-card debt and pension funds. In the United States the financial sector was 3.5 percent of GDP in 1978 and 5.9 percent in 2007, and financial-sector profits grew by 800 percent, adjusted for inflation, from 1980 to 2005. American financial deregulation in the 1980s paved the way for this growth.

Definitions vary. The economist Gerald Epstein defined financialization as "the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, both at the national and international levels." Narrower uses mean only the ascendancy of shareholder value in corporate governance, or the growing dominance of capital-market financial systems over bank-based ones.

The best-known study that put numbers on the change is Greta Krippner's 2005 article "The financialization of the American economy". Following the world-systems theorist Giovanni Arrighi, Krippner defined financialization as "a pattern of accumulation in which profit-making occurs increasingly through financial channels rather than through trade and commodity production" and built two measures. One compares the "portfolio income" that non-financial firms earn from interest, dividends and capital gains with their cash flow (profits plus depreciation); the other compares financial with non-financial profits. To take an illustrative assumption: if in the 1960s a manufacturer earning a cash flow of 100 from production earned 10 from financial investments, by the 1980s and 1990s it would be earning 30 to 50 from finance against the same 100. Krippner measured the ratio in the 1980s and 1990s at roughly three to five times its level in the 1950s and 1960s. Her point was that the usual accounts of deindustrialisation and the service economy, which look at employment and output, barely register this shift.

The worry that finance overwhelms industry is not new. Early in the twentieth century John A. Hobson saw finance as what made British imperialism possible, and Rudolf Hilferding analysed "finance capital" in Germany, where banks dominated industry. Today's theorists of financialization stress the difference: in Hilferding's day banks dominated industry by lending to big firms, whereas since the 1980s big firms have relied less on bank borrowing and invested out of retained profits, while banks have turned to households for other sources of profit.

The Monthly Review school starts from stagnation. In Monopoly Capital (1966) Paul Baran and Paul Sweezy argued that an economy dominated by monopolistic corporations tends towards stagnation because it cannot find investment outlets to absorb its rising surplus. In Stagnation and the Financial Explosion (1987) Harry Magdoff and Sweezy held that stagnation was the norm for mature monopolistic economies and rapid growth the exception, and that the growth of finance, together with military and civilian state spending and epoch-making innovations, partly offset it. A financial explosion of long duration was lifting the economy in the 1980s and 1990s, they argued, but it would compound the system's contradictions, produce ever bigger speculative bubbles and lead to a resumption of overt stagnation. John Bellamy Foster carried the argument forward in "Monopoly-Finance Capital" (2006), "The Financialization of Capitalism" (2007) and, with Fred Magdoff, The Great Financial Crisis (2009), which explained the 2008 crisis in these terms.

The British Marxist economist Costas Lapavitsas focuses on the change within finance itself. In a 2008 interview he explained that banks traditionally lent to productive enterprises and earned a share of the surplus value generated in production as interest, but that the big businesses at the core of real accumulation now rely less and less on bank borrowing and external finance and invest out of retained profits. Financial institutions therefore moved into areas not directly connected with the generation of value and surplus value, consumer credit, mortgage lending and fees for helping corporations float securities, and since their interest now came from wages and salaries rather than surplus value they acquired an incentive to create bubbles. In Profiting Without Producing (2013) he called this way of making profit "financial expropriation", in place of his earlier "direct exploitation".

There are objections. Joseph Choonara divided the Marxist debate after the crisis of 2007–08 into two positions. One finds the roots of the crisis in long-term tendencies of production, above all a fall in the rate of profit in the post-war decades that was never fully reversed; Robert Brenner, Anwar Shaikh, Michael Roberts, Guglielmo Carchedi, Andrew Kliman and Chris Harman belong here. The other concentrates on the financial dimension of the crisis and plays down the tendency of the rate of profit to fall; Lapavitsas is its most sophisticated representative. Choonara rated Lapavitsas's book far above most work on financialisation but judged the notion of financial expropriation untenable. Kliman and Shannon Williams argued that financialisation had not depressed US productive investment.

David Harvey counts financialization, alongside privatization, the management and manipulation of crises and state redistribution, among the main practices of "accumulation by dispossession" in the neoliberal era. Financialization has thus become a key word for interpreting the 2008 global financial crisis, and it runs into recent discussions such as the real-financial divergence between the real economy and financial asset prices and platform capitalism.