Financialization

Financialization refers to the increase in size and importance of a country’s financial sector relative to its overall economy. Financialization has occurred as countries have shifted away from industrial capitalism. This impacts both the macroeconomy and the microeconomy by changing how financial markets are structured and operated and by influencing corporate behavior and economic policy.

In the United States, the size of the financial sector as a percentage of gross domestic product has grown from 2.8 percent in 1950 to 7.9 percent in 2012. Financialization has also caused incomes to increase more in the financial sector than in other sectors of the economy. Individuals working in the U.S. finance sector have experienced a 70 percent increase in their incomes relative to workers in other sector since 1980.  

As such, since the 1980s, the financial industry has chased short term financial returns over long term goals, which would require investment in technology and product development. One of the biggest reasons for this was simply a matter of Wall Street following its capitalistic instincts, which told them there was more profit in making money from money rather than in engineered products. Financial instruments provided quick returns with little fuss. They invested in software that facilitated this approach rather than investing in costly brick and mortar needed to build factories. They were also supportive of products that could be sold at Wal-Mart and manufactured overseas. As a result, the financial industry has played a major role in the decline of manufacturing in the U.S. for a variety of reasons.

Financial services are also an important source of exports for the United States. But while the United States has the world’s largest and most liquid financial markets, financialization has also occurred in many other countries around the world, even in emerging markets such as Mexico and Turkey.

In the United States and abroad, the growth of banking, asset management, insurance and venture capital—the components that make up the financial sector—can contribute to growth in other sectors of the economy as well. Large and liquid financial markets with a diverse offering of financial products make it easier to fund investment and growth and protect purchases and investments through insurance. They also facilitate international trade: The daily volume of foreign exchange transactions has increased from $570 billion in 1989 to $5.3 trillion in 2013. Financialization has also led to significant job growth in the financial sector, and this job growth is expected to continue.