Financialization

Definition

Financialization is the process by which financial motives, financial markets, and financial actors become increasingly dominant in the operation of domestic and global economies. This shift often prioritizes profits from financial activities over traditional manufacturing or production, leading to significant changes in business practices and economic policy. It also has implications for wealth distribution and income levels, influencing issues like wage stagnation and income inequality.

5 Must Know Facts For Your Next Test

1. Financialization gained momentum in the late 20th century, particularly during the 1980s, as deregulation policies were implemented across various sectors.
2. It has led to a focus on shareholder value, where businesses prioritize stock performance over employee wages and long-term growth strategies.
3. The rise of financialization is linked to increasing income inequality, as wealth becomes concentrated among those who benefit from financial markets rather than traditional wage earners.
4. Financialization has transformed the banking sector, shifting its focus from traditional lending practices to investment in securities and derivatives.
5. The impact of financialization can be seen in wage stagnation, as profits generated through financial activities do not necessarily translate into higher wages for workers.

Review Questions

• How does financialization affect corporate behavior and decision-making?
  • Financialization alters corporate behavior by shifting the focus towards maximizing shareholder value and short-term profit gains rather than investing in long-term growth or workforce welfare. Companies increasingly engage in practices like stock buybacks to inflate stock prices rather than reinvesting in their operations or employees. This creates an environment where financial metrics overshadow traditional business priorities, ultimately affecting the broader economy.
• In what ways has financialization contributed to income inequality and wage stagnation?
  • Financialization contributes to income inequality by disproportionately benefiting those with access to capital markets, such as investors and corporate executives, while leaving many wage earners with stagnant wages. As companies emphasize profits from financial activities, they may underinvest in their workforce, leading to minimal wage growth. Consequently, the wealth gap widens as income generated from investments significantly outpaces growth in regular salaries.
• Evaluate the broader economic implications of financialization on society and policymaking.
  • The broader economic implications of financialization are profound, impacting both societal structures and policymaking. As financial interests dominate economic priorities, policies often favor deregulation and reduced government intervention, potentially leading to instability in the financial system. This can result in economic crises that disproportionately affect lower-income populations while benefiting wealthy individuals who are more engaged with financial markets. The challenge for policymakers is to balance these interests while promoting equitable growth that addresses the negative effects of financialization on society.

Related terms

Neoliberalism: A political and economic philosophy that emphasizes free-market capitalism, deregulation, and a reduction in government spending, often leading to increased financialization in the economy.

Stock Buybacks: A financial strategy where companies repurchase their own shares from the marketplace to boost share prices, often associated with financialization as it emphasizes short-term profits over long-term investment.

Asset Bubble: A market phenomenon where the prices of assets rise far above their intrinsic value, often driven by speculation and excessive investment in financial instruments typical of a financialized economy.