Financialization, as it can be assumed one of the most current debated phenomenon of the economic discipline, has begun to lose out its gravity in that global crisis. However, the basic question in my opinion is that how come that the prominence of the finance has mislaid its power, from the period of 1980s to 2010s, especially in this economic turbulence. Of course, so many social scientists accuse the financial sector for causing to that crisis but once to understand this, we can primarily conceive the concept of financialization and what it refers to. Thus, the historical process and different perspectives are going to give us so many substantial informations. Before the beginning of these perspectives, financialization action implies some of the dimensions and characteristics. Briefly, we can categorize some of these just as economic factors below:
- The diminishing role of the government in an economic process
- Deregulation of free markets and privatization of public goods
- The abolishment of the borders for capital
- Free of the interest rates
- Incentive to the international financial connections and incentive to increase for technology and innovation for financial sector actors
These are some of the basic characteristics, particularly from the period of 1980s of Reagan and Thatcher's applications for the hole economic system to nowadays. Apart from the characteristics, there are so many important perspectives within the historical process which has laid different definitions to what is financialization. I am going to identify and discuss the fact within these bounds.
First of all, Greta Krippner gives us a comprehensive acquirements in a context of history of the financialization with pros and cons of the different meanings. For Krippner herself, the fact of finance indicates to the ''pattern of accumulation in which profit making occurs increasingly through channels rather than through trade and commodity production'' (Krippner, 2005). Moreover, she also gives weight to her definition by this argument ''financialization refers to the growing importance of financial activities as a source of profits in the economy'' (Krippner, 2011). She points that the financial sector is not employment-intensive and the outputs of this sector do not appear so clearly in an economical statistics. Simply thanks to these three but close related informations, we can apprehend to be sidelined of the real sector and overtaking it expressly. But is it suffice to understand the fact? Because of this reason, she broadens their financial viewpoint by analyzing it into three industries which are manufacturing, FIRE and services by questioning where profits are generated in the context of U.S. economic structure. She argues from her datas that services sector has increased its functions as a structural in lieu of the manufacturing. This point also espouses by the differences among the portfolio income (total earnings gathering by interest, dividends, realized capital gains) and corporate cash flow (profits plus depreciation allowances) to show the financialization process. From the beginning of 1980, the results prove that the nonfinancial firms corporate cash flow declines below to the portfolio income. Moreover, the dispersion of rate of profits among nonfinancial and financial sectors gives us some important clues about the way of financialization. For Krippner, besides the increasing weight of financial activities in generating revenue streams for nonfinancial firms, she also points mainly that the financial sector itself has become a central heart of accumulation for capital. From the beginning of 1950s, the firms difficulties related with the liberalization of depreciation allowances has made a downward effect on the corporate cash flows against the portfolio income. So, depreciation allowances were not evenly distributed, but would be highest for firms in capital-intensive industries, such as manufacturing (Krippner, 2011). I think that also because of this downward sloping rates, especially in leading sector which was a manufacturing, show a transference of capital from nonfinancial to financial firms. Hence, it mentions the increasing dominance over the nonfinancial firms and was being a central point to enhance to start again the previous levels of productivity. In conclusion, albeit her article stresses on the centric of the U.S., the general image after the 1980s in worldwide that the aspects of her for financialization ''pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production'' somewhat protects up to dateness. Alongside I find her financialization refers, it can be sticked up for the Epstein and Palley's financialization principles.
Epstein defines that ''financialization refers to the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its growing institutions, both at the national and international level'' (Epstein, 2011). The common point of these writers are the effects of the system on growth rates, fragility and unsustainability and its dimensions, income distribution, political and economic policy and commonly the macroeconomic changes. Refer to the Palley, financialization has transformed the functioning of the economic system for both of the micro and macro components. He specifies its principal impacts are:
(1) Elevate significance of the financial sector relative to the real sector
(2) Transfer income from the real sector to the financial sector
(3) Contribute to increased income inequality and wage stagnation (Palley, 2007)
These are, especially the first and second impacts, similar what Krippner showed in an evidence among the dispersion between industries; manufacturing, FIRE and services. James Crotty adds a similar point of view ''for the United States, the profits of financial institutions rose dramatically relative to the profits of non-financial corporations after 1984'' (Crotty, 1990). Moreover, Dumenil and Levy espouses the U.S. example for the France case that to the case of France, he indicates that the sources of increasing profit is the doubled of real interest rate between 1970 and 1990. For the third principal impacts, the Palley's countenance by the Epstein and Jadayev that they shows from the investigation of OECD countries data that the shape of national income accruing to financial institutions and holders of financial wealth. Also they add that the structural shifts of dramatic proportions took place in a number of countries that led to significant increases in financial transactions, real interest rates, the profitability of financial firms, and finally the distribution of income accruing mainly by the financial sectors, offers another similar meaning and evidence like in Krippner's viewpoint for her sectoral shares among financial and nonfinancial sectors. In addition to the Palley's agreement for the finacial sector's fragility and unsustainability, Dumenil and Levy suggests the same agreement that they argue finance benefits handsomely from the same process that create economic crises. Furthermore, these complications foster by the economic and political policies as Epstein identifies that ''important government policies that help to account for these significant increases in rentier income in OECD countries'' (Epstein, 2001). Furthermore, Palley refers that this unsustainability marked by more and more increasing household debt-income ratios and corporate debt ratios. For example, the defining characteristic of financialization in the U.S., the total debt rose from 140 to 328.6 percent of GDP (Palley, 2007). However, the period also shows that finacial sector debt rose much more than nonfinancial sector as 9.7 to 31.5 percent of total debt (Palley, 2007). These results, on the other hand, has somewhat adequate to be a similar with the Krippner and her financialization analysis. There is also another important evidence that is about the increasing rate of transference of resources from financial to nonfinancial sectors. It emanates from two different sources: usurious rise in household debt ratio/GDP and nonfinancial debt ratio/GDP. Between 1973 to 2005, firstly, the household debt ratio speed rose sharply by %45.2 to %94.0 respectively. Secondly, the other nonfinancial debt ratio speed rose by %30.3 to %42.4 (Palley, 2007). It is clear that the household debt ratio rose more than than the speed of nonfinancial debt ratio. However, in that situation, the main point is that the resource transference from household and nonfinancial sector to financial sector, is very obvious. Apart from the features of the fragility and unsustainability of the economy as a whole, there is also another important effects of financialization on the annual per capita income growth rates. Once again from the Palley's work, there is an important datas that shows from different industrialized countries such as U.S., Japan, Germany, France, Italy, U.K. and Canada among the 1960-2005 years, the general trend is a downward sloping in both countries for per capita income growth rates. That's why, it also supports the capital transference to financial sector. As a result, we can collect of these definitions an data evaluations into pot what Palley also summarizes:
(1) a slight shift in income toward capital ( it can be commented as the resource transfer from households and nonfinancial sector to financial sector)
(2) a change in the composition of payments to capital that has increased the interest share ( it can be assumed as a change of composition of growth rate of income shares)
(3) an increase in the financial sector's share of total profits (Palley, 2007) (finally, it can be pointed to the increasing hegemony of financial sector over real sector).
Nevertheless of the fundamental definitions and characteristics to seize to the financialization in the concept of systematical changes from real sector to financial sector in writings of Krippner, Epstein and Palley, I think that there are also another considerable and complementary observations to apprehend the context of financialization. Ronald Dore who wrote the Financialization of the Global Economy, specifies that financialization is being dominance over the real economy which is in itself a phenomenon that needs examining. In his article he traces ''the source of this dominance not just to the increasingly leveraged and increasingly incomprehensive forms of intermediation between savers those in the real economy who need credit and insurance, but also to the increasingly universal doctrine that maximizing ''shareholder value'' is the sole reason of the firm and the promotion by governments of an ''equity culture''. Some of the social consequences of financialization are exacerbating inequalities, greater security, misdirection of talent, and the erosion of trust'' (Dore, 2008). Even though his argument of financialization is somewhat different point of view but in my opinion it is also contributory to the arguments of systematic changes for financialization of Krippner, Epstein and particularly of Palley. When we approach to the case of the increasing dominance of financial sector over the real sector, his comments and method of approach to this issue is very advisable such as he denotes ''the increasing dominance of the finance industry in the sum total of economic activity, of financial controllers in the management of corporations, of financial assets among total assets, of marketised securities and particularly equities among financial assets, of stock market as a market for corporate control strategies, and of fluctuations in the stock market as a determinant of business cycles'' (Dore, 2002). Here as a footnote that it gives us another perspective to analyze in that way which is the increasing rate of impact on corporate government because of the finance triumph on real sector. Moreover, Stockhammer's diagnosis has a supportive quality to the dominance factor of finance: ''financialization is used to encompass phenomena as diverse as shareholder value orientation, increasing household debt, changes in attitudes of individuals, increasing incomes from financial activities, increasing frequency of financial crises, and increasing international capital mobility'' (Stockhammer, 2010). Finally, Kevin Phillips, in his 2006 book: American Theocracy, comments on the financialization term which is corroborative approach that it is a process whereby financial services, broadly construed, take over the dominant economic, cultural, and political role in an economy as a whole.
In a conclusion, both articles from two different perspectives of changes, systematic and corporate weighted, has an important quality to support each other. However, there is another prominent approach to use the financialization is Arrighi who specifies long waves of economic development in global capitalism that involve hegemonic and geographic shifts. He assumes that upward movement in an economy is indicated by the increasing rate of manufacturing and trade activity; however, in the downward movement, the financialization process is occured. Although, it has a broad explanation about financial process but also captures the real expansion for nations in a history of capitalism, as a subjective I prefered to use Epstein, Krippner and Palley's works together contributing of Dore, Stockhammer and Phillips' arguments about the financialization for analyzing size and profility of financial markets, income distribution among two sectors, total debt rates in the economy and its shares, the falling out of the hegemony of financial sector over real sector and finally the changing process in decision-making of corporate governance.
Bibliograhy:
Crotty, J; Structural Causes of the Global Financial Crisis: A Critical Assessment of the ''New Financial Architecture'', Cambridge Journal of Economics (2009), 33, pp.563-580.
Dore, R; Financialization of the Global Economy, ICC (2008), 17(6), pp.1097-1112.
Epstein, G.A.; Introduction: Financialization and the World Economy, Political Economy Research Institute (2005), pp.1-16.
Krippner, G.R.; Capitalizing on Crisis: The Political Origins of the Rise of Finance, 1st ed., Harvard University Press, 2011.
Krippner, G.R.; The Financialization of the American Economy, Socio-Economic Review (2005)3, pp.173-208.
Orhangazi, O.; Financialization and the U.S. Economy, Edward Elgar Publishing, 2008.
Palley, T.I.; Financialization: What It Is and Why It Matters, The Levy Economics Institute and Economics for Democratic and Open Societies, Working Paper No:525, 2007
Phillips, K.; American Theocracy, 2006.
Stockhammer, E.; Financialization and the Global Economy, Political Economy Research Institute (2010), No:240.
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