Financialization
Based on Wikipedia: Financialization
When Money Became the Product
In 1970, if you wanted to make a fortune in America, you built something. A car factory. A chain of restaurants. A better mousetrap. By 2007, the fastest path to extraordinary wealth was to trade pieces of paper that represented bets on other pieces of paper, which themselves were bets on whether ordinary people would pay their mortgages.
This transformation has a name: financialization.
The numbers tell a striking story. In the 1970s, the financial sector—banks, insurance companies, investment firms—made up about three and a half percent of the American economy. Three decades later, it had nearly doubled to six percent. But that understates the shift. Financial sector profits in 2009 were six times higher than in 1980, adjusted for inflation. Meanwhile, profits in every other industry combined had merely doubled.
Something fundamental changed in how wealthy nations create and distribute wealth. Understanding this change helps explain everything from why housing costs have spiraled beyond reach for so many families to why economic crashes seem to hit harder and recover slower than they once did.
What Financialization Actually Means
At its simplest, financialization means that making money from money has become more important than making money from making things.
Consider what a bank used to do. You deposited your paycheck. The bank paid you a small amount of interest for the privilege of holding your money. Then it lent that money to a family buying a house or a business expanding its factory, charging them higher interest. The bank's profit came from that difference—the "spread" between what it paid depositors and what it charged borrowers.
This was straightforward. Maybe even boring. Financial historians actually call the decades from the New Deal through the 1970s the era of "boring banking." Banks took deposits and made loans. That was it. Laws prevented them from doing much else.
Then the rules changed.
Starting in the 1980s, American regulators dismantled many restrictions on what financial institutions could do. Banks that took your deposits could now also gamble in complex markets. They could bundle thousands of mortgages together, slice them into pieces, and sell those pieces to investors around the world. They could create intricate financial instruments called derivatives—contracts whose value derived from something else, like interest rates or currency exchange rates or the price of wheat.
A Quadrillion Dollar Casino
The scale of this shift defies easy comprehension.
In 1970, trading in American stock markets totaled about one hundred thirty-six billion dollars—roughly thirteen percent of the entire national economy. By 1990, that figure had grown to nearly twenty-nine percent of a much larger economy. By 2000, stock trading reached fourteen trillion dollars, which was actually larger than the total value of everything the United States produced that year.
But stock trading was almost quaint compared to what happened in derivatives markets.
For a century after futures exchanges were founded in the mid-1800s, these markets existed to help farmers and food companies manage risk. A wheat farmer could sell a contract promising to deliver grain at harvest time for a price locked in today. A bread company could buy that contract and know exactly what its flour would cost six months from now. Both sides traded a bit of potential upside for protection against nasty surprises.
All of this trading was based on real, physical things. Wheat. Corn. Pork bellies. Cotton.
Then, in 1971, the United States abandoned the gold standard—the system where dollars could be exchanged for a fixed amount of gold. Suddenly, currency values floated freely against each other, changing by the minute. Companies doing business across borders faced a new kind of risk, and financial engineers created new contracts to manage it. Futures based on currency exchange rates. Futures based on interest rates. Futures based on stock market indexes.
These financial futures exploded in popularity. By 2006, derivatives trading—mostly bets on interest rates, currencies, and government bonds—reached one point two quadrillion dollars annually. That's one thousand two hundred trillion dollars. The entire American economy that year was about twelve and a half trillion.
To put this in perspective: the annual volume of derivatives trading was roughly one hundred times larger than the entire economic output of the United States.
The Great Divergence
What does it mean when betting on prices becomes a hundred times larger than the actual economy those prices reflect?
One Marxist economist, Elliot Goodell Ugalde, argues that financialization creates what he calls "fictitious capital"—a widening gap between what assets are theoretically worth and what they're actually useful for. Housing is his prime example. A house has a use value: it keeps you warm, gives you a place to sleep, provides stability for your family. But financialization transforms houses into speculative instruments—assets valued primarily for how much their price might increase rather than for the shelter they provide.
This isn't just academic theory. It describes a lived reality for millions of people who can afford their monthly rent or mortgage payment in terms of use—they could comfortably live in the house—but cannot afford the purchase price that speculation has pushed beyond their reach.
The writer Kevin Phillips, in his 2006 book "American Theocracy," saw something even more ominous. He argued that financialization marks a late stage in the life cycle of great economic powers. Habsburg Spain in the sixteenth century. The Dutch trading empire in the eighteenth. The British Empire in the nineteenth. Each shifted from producing real goods to shuffling financial claims as their moment of decline approached.
This pattern, Phillips suggested, was not coincidental. When an economy's most talented people find they can make more money trading financial instruments than building factories or inventing products, human capital flows toward finance. Innovation focuses on creating new derivatives rather than new medicines or machines. The economy becomes expert at rearranging existing wealth rather than creating new wealth.
The Roots Run Deep
The concentration of financial power in America is not new. What changed was how that power gets used.
In 1912, the Pujo Committee of the House of Representatives investigated whether a small group of Wall Street firms had accumulated dangerous control over the nation's credit. They concluded that, yes, a tight network of financiers effectively controlled who could borrow money and on what terms. A year later, Louis Brandeis—who would soon join the Supreme Court—wrote an article titled "Our Financial Oligarchy" arguing that no regulation could ever tame the threat posed by such concentrated private power.
Also in 1913, something remarkable happened on a small island off the coast of Georgia. Five of the most powerful bankers in the country gathered secretly at Jekyll Island with a United States Senator and an assistant Treasury Secretary. Together, they designed what would become the Federal Reserve System—the central bank of the United States.
The Fed, in other words, was partly designed by the very institutions it would regulate.
For decades, strict rules kept finance in check. The Glass-Steagall Act, passed during the Great Depression, built a wall between ordinary banking and investment banking. If you wanted to take deposits from regular people—money backed by government insurance—you could not also make risky bets in securities markets. The system was stable, if uninspiring.
Wall Street chafed at these restrictions. Starting in the 1980s, intense lobbying gradually dismantled them. Glass-Steagall was finally repealed in 1999. The financial sector was unleashed.
Winners and Losers
Financialization's defenders argue that it serves essential purposes. Financial markets allow people to convert hard-to-trade assets into cash. They let businesses and individuals manage risk. They channel savings toward productive investments. A farmer who can hedge against falling wheat prices can plant more confidently. A company that can lock in exchange rates can expand internationally without gambling on currency movements.
All true. Finance genuinely lubricates the economy in ways that create real value.
But the question is one of proportion. When derivatives trading reaches a hundred times the size of the underlying economy, the tail is wagging the dog. When the smartest graduates from the best universities flock to Wall Street rather than to engineering or medicine or science, something has gone wrong with incentives. When financial profits grow six-fold while everyone else's merely double, the gains from economic growth are being captured by a shrinking elite.
The sociologist Jean Cushen studied what financialization means for ordinary workers. Her research found that employees in financialized companies feel insecure and angry. Decisions that once balanced the interests of workers, customers, communities, and shareholders now focus relentlessly on "shareholder value"—a term that became ubiquitous in corporate boardrooms starting in the 1980s. Maximizing shareholder value often means cutting costs, and the biggest cost for most companies is labor.
The Warnings That Went Unheeded
Economists saw this coming.
In 1998, at a conference in Oslo, two researchers named Erik Reinert and Arno Daastøl presented a paper asking a prophetic question: What happens when more and more savings flow into bidding up the prices of existing assets—real estate and stocks—rather than creating new production and innovation?
Ten years later, the world found out.
The 2008 financial crisis was financialization's darkest chapter. Complex mortgage-backed securities—those bundles of home loans sliced and diced and sold worldwide—turned toxic when housing prices fell. Banks that had loaded up on these instruments faced catastrophic losses. The financial system froze. Governments around the world spent trillions bailing out institutions deemed "too big to fail."
Ordinary people lost their homes. Their jobs. Their savings. Recovery took years. In many ways, the political reverberations continue today.
The Intellectual Machinery
Financialization did not happen by accident. It was enabled by ideas.
The Chicago School of Economics, led by Milton Friedman, provided intellectual justification for dismantling financial regulation. Markets, in this view, were self-correcting. Government intervention only made things worse. The fewer rules constraining finance, the more efficiently capital would flow to its most productive uses.
These ideas proved extraordinarily influential. They shaped policy in the Reagan and Thatcher governments and spread globally through institutions like the International Monetary Fund and the World Bank. Developing countries seeking loans were often required to deregulate their financial sectors as a condition of receiving aid.
Thomas Marois, studying large emerging economies, describes what he calls "emerging finance capitalism"—a system where the interests of domestic and foreign financial capital become fused with the machinery of government itself. State officials come to see protecting and promoting financial interests as their primary task, often at the expense of workers and ordinary citizens.
Beyond the Numbers
Perhaps the most important thing to understand about financialization is that it represents a shift in power as much as a shift in how money gets made.
When companies prioritize shareholder value above all else, they are really prioritizing the interests of whoever holds their stock—increasingly, large institutional investors and wealthy individuals. When governments bail out failing banks because they are "systemically important," they are declaring that protecting the financial system matters more than protecting the people the economy is supposed to serve.
This is not a conspiracy. It is an emergent property of a system where financial logic has colonized domains once governed by other values. Hospitals optimize for financial metrics. Universities compete for endowment returns. Cities court real estate developers. Everything becomes a financial asset to be valued, traded, and optimized.
The alternative is not to abolish finance. That would be both impossible and unwise. Financial markets serve genuine purposes, and the modern economy cannot function without them.
The alternative is proportion. It is remembering that finance is supposed to serve the real economy—the economy of goods and services and jobs and homes—rather than the other way around. It is asking whether we want our brightest minds designing new derivatives or designing new vaccines. It is questioning whether housing should be primarily a place to live or primarily an investment vehicle.
These are not technical questions for economists. They are political and moral questions for everyone. The answers we give, collectively, will shape what kind of economy—and what kind of society—we build for the generations that follow.