Definition
Financialization refers to the increasing influence of financial markets, institutions, and elites on the workings of the global economy and individual economies. This includes the expansion of financial services within the economy, such as lending and investing. It’s a trend seen especially since the late 20th century where activities like the handling of mortgages and pensions have become financial commodities.
Key Takeaways
- Financialization refers to the process in which financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes.
- It is characterized by an increased role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.
- While financialization can lead to economic growth and global economic integration, it can also increase income inequality, make economies more susceptible to financial crises, and potentially lead to the neglect of real sectors of the economy.
Importance
Financialization is a crucial term in finance due to its transformative impact on the global economy.
It refers to the growing influence of financial markets, institutions, and elites over economic policy and economic outcomes.
With financialization, the financial industry becomes dominant, converting the real economy into one managed by financial markets, insurance companies, and investment firms.
This process influences the structure and trajectory of economies and can contribute to increasing income and wealth inequalities.
Understanding financialization is essential for comprehending complex economic mechanisms, shifts in economic power, and the potential risks associated with an economy overly dependent on the financial sector.
Explanation
Financialization represents a fundamental shift in the engine of economic growth, where the financial sector predominates over the other areas of the economy. The primary purpose of this process is to foster economic growth by increasing the role of financial markets, financial institutions, and financial elites in the operation of the global economy.
This means that the financial sector becomes the key driver of economic policy and development. This shift can lead to increased productivity and economic growth, with the financial services sector providing the necessary capital for investments in various sectors.
One profound use of financialization is the creation of new financial instruments that can stimulate economic growth. For instance, the creation of derivatives or other complex financial instruments allows for sophisticated risk management strategies that can promote stability within the economy.
Furthermore, financialization has its presence in everyday life, such as in the housing market, where a house is not just a place to live, but also a financial investment. However, it’s important to note that financialization also has its downsides, such as prompting financial crises when the increased emphasis on financial profit and speculation oversteps real economic growth.
Examples of Financialization
Eastman Kodak: Eastman Kodak is traditionally a photography technology company, however, towards the end of the 20th century, they began making significant investments in financial markets. In some years, their earnings from these financial assets even surpassed their earnings from their traditional business. This is a classic example of financialization.
Housing Market: Financialization is shown in the housing sector as well, where houses and apartments are not just places to live but are seen as investments. This was evident in the 2008 financial crisis, where a boom in the housing market led to a creation of a variety of financial products tied to mortgage loans.
Higher Education: Universities and colleges have become increasingly financialized. They have come to rely more and more on tuition fees (and so student loans), and they sometimes invest in financial products to make money. For example, in the U.S., some universities hold extensive endowments that are invested in financial markets. These investments, in turn, can influence the types of programs and research these institutions prioritize.
FAQ on Financialization
What is Financialization?
Financialization is the increasing importance of finance, financial markets, financial institutions and financial elites in the operation of the economy and its governing institutions, both at the national and international levels.
What is the impact of Financialization on the economy?
Financialization has transformative impact on the economy. It changes the way economies operate, often prioritizing financial services even when it conflicts with the productive economy. This can exacerbate income inequality, make economies more prone to financial crisis, and reduce economic stability.
How does Financialization affect individuals?
Financialization can have direct and indirect effects on individuals. On one hand, it provides more opportunities for investment and wealth growth. On the other hand, it can also result in economic instability and has potential to increase income and wealth inequality.
What are the main driving forces behind Financialization?
The main driving forces behind financialization are changes in policy and regulation, the development of new financial technologies and innovations, and the shift in orientation of large corporations towards shareholder value as the primary goal.
How can we mitigate the negative impacts of Financialization?
Negative impacts of financialization can be mitigated through appropriate regulatory policies, promotion of financial literacy, ensuring access to finance for all and through banks evaluating their role in serving real economy rather than focusing primarily on advanced financial products.
Related Entrepreneurship Terms
- Securitization
- Financial Instruments
- Capital Market
- Financial Regulation
- Financial Services
Sources for More Information
- Investopedia – A comprehensive resource for financial information and terms definitions.
- McKinsey & Company – A global consultancy that publishes detailed reports and insights on global financial trends.
- The Economist – A well-regarded economic and finance publication that offers news and analysis on global developments.
- The Brookings Institution – A nonprofit public policy organization that conducts high-quality, independent research.
