A
brief, simple, but very enlightening explanation by Costas Lapavitsas
on The Real News
Financialization is basically a
profound historical transformation of modern capitalism that really
began in the 1970s, and it's now been running for about four decades.
There are three key root economic
changes of this transformation:
The first, funnily enough, doesn't
relate to finance itself, but it relates to industry and commerce. In
other words, it relates to nonfinancial economic activity. One must
start there to understand the historical transformation. What's
happened to big business is very interesting. Two things have
happened to it. First, big business has become increasingly capable
of financing investment out of retained earnings. It retains its
profits, and on a net basis it finances investment pretty much out of
that. Of course, it still uses banks, but it doesn't rely on banks on
a net basis to finance investment. That gives it a certain degree of
independence from banks.
In addition to that, big business
has made so much in retained profits - currently U.S. big business is
sitting on piles of cash - that it can use those funds to play
financial games, to engage in financial transactions and financial
activities on its own account. So big business has financialized. The
key element that we've got to understand first, is the
financialization of big business. Large enterprises have acquired
some of the character of financial institutions, have become
bank-like, and they engage in these transactions, and they change the
structure of their own organization as they do that.
Second economic change, and very
important, too, relates to banks. If big businesses is doing that,
banks must do something else to make profit. Banks are profit-making
institutions. So if big business becomes increasingly independent of
banks, banks must do something else. What have banks done? They lend
less to businesses for investment and so on, and they play more games
in the financial markets. They become transactors in financial
assets, and they make profits increasingly not from lending, but from
fees, commissions, and trading. They become traders in financial
assets.
At the same time, banks have also
turned to households. Households have become a very profitable
activity of banks, a new activity. This is a new phenomenon in the
development of capitalism.
The third change has to do with
households, workers, ordinary people. And what we see there in the
last three to four decades is that ordinary people have been drawn
into the former financial system like never before. Households have
become financialized. Finance has become a fundamental part of
household life. Why is that? Partly because wages have been stagnant.
Real wages have been absolutely flat in the US for decades. So,
partly because of that, people have turned to debt. But also people
have got assets, financial assets.
So the financialization of
everyday life, of households, is a bit of a complex story. What is
actually happening there, is not simply that you borrow in order to
consume. That also happens. It's a more complex story than that. What
is actually happening is people need access to health, education,
housing, and a variety of other needs. Every country has systems of
provision for these things. Each country differs from the next
country, but pretty much there are similarities. These modes of
provision have historically, traditionally, incorporated public
provision, some methods of public provision, for everything - for
housing, for health, for education, and so on. What we've witnessed
the last three to four decades is a retreat of public provision.
Public provision has retreated, private provision has taken its
place. As this happened, finance has emerged as the facilitator of
that. So we turn to private provision to solve our housing needs, our
health needs, our education needs, and finance makes profits out of
that, basically, without even having any skills in doing these
things.
These changes together have
basically transformed the foundations of the economy. This is a new
type of capitalism.
At the same time, we had changes
in institutions and in ideology. We had wave after wave of
deregulation. Labor market has become more deregulated, and financial
markets have become more deregulated.
And in addition to deregulation,
we had the rise of the ideology of neoliberalism. Deregulation goes
hand in hand with neoliberalism, the idea that the market is good,
the state is bad. In the US it's extraordinary how powerful this
perception is and how a lot of social issues are understood in this
way.
These changes, seen very clearly
in the US, have created, firstly, a deeply unequal country, a deeply
unequal society. Financialization is fundamentally about inequality.
We see this inequality in terms of income, where the top 10 percent
and the top 1 percent draw an extraordinary proportion of income
annually. But we see it in terms of the functional distribution, the
distribution of income between capital and labor, where labor has
lost - and lost dramatically - during the last three to four decades
in this country and in just about every other mature capitalist
country that has financialized.
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