Academic journal article World Review of Political Economy

Is the Financialization Hypothesis a Theoretical Blind Alley?

Academic journal article World Review of Political Economy

Is the Financialization Hypothesis a Theoretical Blind Alley?

Article excerpt


The Financialization Hypothesis (FH) is a popular argument in contemporary heterodox economics and also, we will argue, in mainstream economics. Its basic thesis is that over the past three decades at least, modern capitalism has undergone a radical transformation, with the financial system, through a series of innovative mechanisms, conquering the commanding heights of capitalism and transforming the whole system in line with its own prerogatives. This new financialized (or financial, finance-dominated, or fiduciary) capitalism, the FH contends, operates in a completely different fashion compared to traditional capitalism.

As empirical substantiation of its argument, the FH proposes four stylized facts:

1. The increased weight of the financial sector in contemporary advanced capitalist economies, exhibited in the increased share of this sector in GDP and profits, along with the proliferation and widespread use of complex new financial instruments (e.g., derivatives);

2. The recent trend among big firms to finance themselves through retained earnings and capital markets (rather than through banks), and the emergence of "shadow banking";

3. The widespread adoption by firms of policies of shareholder value maximization; policies that focus on enriching shareholders rather than addressing the productive prospects of the enterprise. This reflects the rise in prominence of institutional investors;

4. The increased indebtedness of working- and middle-class households in several advanced capitalist economies.

The combined result of these processes is twofold. First, productive enterprises depend almost totally on the financial system, and transform their modus operandi according to the latter's requirements. Second, working- and middle-class households depend directly on the financial system, which exploits them through usury and also transforms their modes of consumption in line with its prerogatives.

This new finance-dominated capitalism, as a result of its inherent financial instability, is prone to crises. Concomitantly, the global capitalist crisis of 2008 is considered to have been a financialization crisis. This crisis is held to have resulted from financial speculation and excessive leverage, and to have had no roots in real accumulation; it affected the sphere of production only subsequently, as the financial system contracted and deleveraged, thus stifling finance for productive investment.

Since its launch, the FH has achieved wide popularity and has become something of a leitmotif, often at the expense of analytical coherence. Different theoretical currents offer a variety of definitions and analyses of financialization, rendering the concept very fluid and problematic.

This article disputes the FH, arguing that it misconstrues the actual workings of modern capitalism and leads into an explanatory blind alley. The spectacular ballooning of the financial system during the recent decades of weak profitability and accumulation does not constitute a new epoch, let alone a new capitalism. Instead, it represents a familiar capitalist response to periods of weak profitability. This does not preclude the proliferation of new financial instruments that lend specific new forms to a well-known capitalist process. Contrary to the FH, it will be argued that the classical Marxist theory of crisis and fictitious capital offers an analytically and empirically superior understanding of this process.

A focal point of our critique of the FH is that it renders money capital (that is, the fraction of capital that operates in the financial system) completely autonomous from productive capital, and moreover, superimposes it on the latter. Furthermore, the FH maintains that money capital also acquires its means of existence and operation quite independently of productive capital. This FH argument creates no problems for mainstream financialization theory, as neoclassical economics considers the financial system to be an independent creator of wealth. …

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