Financialization gives us a vital perspective on the current state of the economy and the influences driving it. Although financialization is loosely defined, the fundamental concept remains the same.
One widely accepted generic definition of financialization is ‘the valuation of everything that is exchanged in terms of a financial instrument or a derivative of a financial instrument.’ As such financialization has a very valid and necessary function: the facilitation of trade in goods and services. Money is one such instrument.
Greta Krippner, author of Capitalizing on Crisis: The Political Origins of the Rise of Finance, views financialization more as the “pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production.”
Gerald Epstein, Economics Chair at UMASS Amherst and co-director of the Political Economy Research Institute, goes one step further: “Financialization refers to the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operations of the economy and its governing institutions, both at the national and international levels.”
These are by no means inclusive, but they illustrate the range of the concept.
The first establishes the system. Krippner puts the system in motion, in which she sees a shift in profits to the financial sector. Epstein does likewise, but he sees the shift as one of power and control.
Regardless of its manifestation, financialization helps explain current economic conditions. In less than a century we have seen the instrument of financialization move from notes redeemable in gold and silver to notes redeemable in nothing. And we have witnessed investments move from productive sectors to the futures market.
More important, however, is where financialization may be leading us.
To Ozgur Orhangazi, author of Financialization and the U.S. Economy, financialization is no less than “one of the indicators of the decline of the hegemonic power.” Historical precedent abounds, says Vanity Fair. Empires such as “imperial Venice, Genoa, Holland, and Britain all saw their power rise on the back of productive industrial capitalism, followed by domination of the financial sector, which eventually began to cannibalize the productive sector in pursuit of financial returns – a process that ended in weakness and collapse.”
Have we learned the lesson of financialization from history, or are we repeating it?