A better definition of financialization

Brad DeLong posted yesterday on “The Financialization of the American Economy,” and included some graphs that made similar points about the increasing role of the FIRE (finance, insurance & real estate) sector in US GDP. For example, this image shows the increase in employment:

This is all to the good but I think his definition is much too narrow. I mentioned economic sociologist Greta Krippner’s work in an earlier post and think it’s worth mentioning again.

In her book Capitalizing on Crisis, Krippner shows how the financialization of the American economy has been far more extensive than accounts like DeLong’s (alarming as they already are) would indicate. She does this by focusing on financialization as a business, economic and political process that spans the entire economy rather than simply the growth of the financial sector itself. From the introduction:

There is little question that the U.S. economy has experienced a remarkable turn toward financial activities in recent years. By the time the U.S. stock market was cresting in 2001, financial sector profits had rocketed up to represent more than 40 percent of total profits in the U.S. economy. This figure, although striking, actually underestimates the importance of financial activities in the U.S. economy, as nonfinancial firms too have become increasingly dependent on financial revenues as supplement to – or at times substitute for – earnings from traditional productive activities. One careful study, for example, showed that the Ford Motor Company, the quintessential American manufacturing company, has in recent years generated its profits primarily by selling loans to purchase cars rather than through the sale of cars themselves (Four et al. 2006). Like Ford, General Motors, and General Electric, many U.S. nonfinancial firms own captive financial companies, and even for those firms that are not owners of financial service operations, managing financial investments has become a major focus of activity – and profits (see Davis 2009; Fligstein 2001).

There’s much more to the book than that – it is well worth reading, and I am using it as a support for my own thesis on the financialization of food markets – but I think the main point here is that the secular shift in the economy away from production and toward trading pieces of paper was much more pervasive than the FIRE sector itself. If anything, you could say that the FIRE sector’s growth was in large part conditioned on their usefulness in facilitating (and charging fees for) the ability of the rest of the economy to make that shift.

Or in much fewer words, a chart from an earlier paper by Krippner:

Source: Krippner, G. (2005) The financialization of America,. Socio-Economic Review (3), 173–208

It’s not clear to me how we walk back from this, but it will require much more than simply shrinking the investment banks.