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The most destructive historical transformation of Capitalism

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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