Working Paper No. 525
Financialization: What It Is and Why It Matters* by Thomas I. Palley
The Levy Economics Institute and Economics for Democratic and Open Societies
Washington, D.C.
December 2007 …show more content…
FINANCIALIZATION: WHAT IT IS AND WHY IT IS OF CONCERN
This paper explores the construct of “financialization,” which Epstein (2001) defines as follows: “Financialization refers to the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, both at the national and international level (Epstein 2001, p.1).”
The paper focuses on the U.S. economy, which is where financialization seems to be most developed. However, judging by the increase in rentier income shares, financialization appears to have infected all industrialized economies (Power, Epstein &
Abrena 2003; Jayadev and Epstein 2007).
Financialization transforms the functioning of the economic system at both the macro and micro levels. Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector, (2) transfer income from the real sector to the financial sector, and (3) contribute to increased income inequality and wage stagnation.
Financialization raises public policy concerns at both the macroeconomic and microeconomic levels. At the macro level, the era of financialization has been …show more content…
This representation has had important consequences.
First, the agency approach envisages the solution to the corporate governance problem as one of aligning the interests of managers with those of financial market participants. That has been used to rationalize the explosion in top management compensation and stock option grants, and it has also been used to justify the rise of the takeover movement and private equity investment. Second, the agency approach promotes a legal view whereby the sole purpose of corporations—which are a societal construction—is to maximize shareholder returns within the confines of the law. That has served to restrict the focus of policy discussion to how to give shareholders greater control over managers. Meanwhile, broader questions regarding the purpose of corporations and the interest of other stakeholders have been kept completely off the policy table.
Conventional economic theory has also lent support for financialization, by arguing that the expansion of financial markets enhances economic efficiency.
Financialization: What It Is and Why It Matters* by Thomas I. Palley
The Levy Economics Institute and Economics for Democratic and Open Societies
Washington, D.C.
December 2007 …show more content…
FINANCIALIZATION: WHAT IT IS AND WHY IT IS OF CONCERN
This paper explores the construct of “financialization,” which Epstein (2001) defines as follows: “Financialization refers to the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, both at the national and international level (Epstein 2001, p.1).”
The paper focuses on the U.S. economy, which is where financialization seems to be most developed. However, judging by the increase in rentier income shares, financialization appears to have infected all industrialized economies (Power, Epstein &
Abrena 2003; Jayadev and Epstein 2007).
Financialization transforms the functioning of the economic system at both the macro and micro levels. Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector, (2) transfer income from the real sector to the financial sector, and (3) contribute to increased income inequality and wage stagnation.
Financialization raises public policy concerns at both the macroeconomic and microeconomic levels. At the macro level, the era of financialization has been …show more content…
This representation has had important consequences.
First, the agency approach envisages the solution to the corporate governance problem as one of aligning the interests of managers with those of financial market participants. That has been used to rationalize the explosion in top management compensation and stock option grants, and it has also been used to justify the rise of the takeover movement and private equity investment. Second, the agency approach promotes a legal view whereby the sole purpose of corporations—which are a societal construction—is to maximize shareholder returns within the confines of the law. That has served to restrict the focus of policy discussion to how to give shareholders greater control over managers. Meanwhile, broader questions regarding the purpose of corporations and the interest of other stakeholders have been kept completely off the policy table.
Conventional economic theory has also lent support for financialization, by arguing that the expansion of financial markets enhances economic efficiency.