fbpx

Financialization Of The Economy – A Parasite Economy?

The financialization of the economy has brought about patterns of inequality, cultural and social change. Underpinning these changes is a particular shift in how capital is intermediated. The success of the financial sector has led to the failing of the ‘real economy’, existing of companies and individuals that produce goods and services which add real value to the economy. 
The financialization of the economy has brought about patterns of inequality, cultural and social change.

Underpinning these changes is a particular shift in how capital is intermediated. The success of the financial sector has led to the failing of the ‘real economy’, existing of companies and individuals that produce goods and services which add real value to the economy. 

Financialization Of The Economy
Photo by Roberto Júnior on Unsplash
great metaphor is made by M. Hudson, who compares the financialization of the economy with how parasites control a host’s brain.

“The most important aspect of parasitism is the need for parasites to control the host's brain. In nature, a parasite first dulls the host's awareness that it is under attack. Then, the 'free-luncher' produces enzymes that control the host's brain and make it think that it should protect the parasite - that the outsider is part of its own body, a crucial part of it which needs special protection. The financial sector resembles something similar by pretending to be part of the industrial production-and-consumption economy. In general, this means that most of the products and services offered by financial institutions are not contributing to - or representing - production as we know it. These goods and services exist outside of the real conomy but extract (feed on) profits, which are originating from the real economy." [1]

Financialization Of The Economy

Financialization is defined as ”the increasing role of financial motives, financial markets, commercial actors and financial institutions in the operation of the domestic and international economies.” [2] Power ultimately tends to flow towards the lenders (wealthy individuals, banks and financial institutions). So, in the end, the borrowers lose control of their systems – which become fundamentally less democratic

One of the topics which are frequently associated with financialization is increasing economic inequality. 

Research has shown that the phenomenon of growing financialization further boosts income inequality. Revenues from financial investments are, for the most part, not reinvested in the businesses that make up the bedrock of the real economy. Moreover, one of the consequences is that wages of workers stagnate and wage-earners are ever more indebted. [3] Also, most of the returns made by the financial sector go to the concentrated financially prosperous, further driving inequality in society. Therefore, this trend has essentially turned the United States from a nation of savers into a nation of borrowers. Personal savings are declining, and consumer debt is replacing the gap. It is created by stagnant or declining income (versus the ever-increasing cost of living).

 

Economic polarization on a bigger scale is occurring between creditor and debtor nations on the international level. The Eurozone, for example, is being divided with Germany, Netherlands, Norway, Sweden, Switzerland in the creditor camp, while Greece, Spain, Portugal, Ireland and Italy are sinking deeper into debt, unemployment and austerity – followed by social unrest, emigration and or capital flight.

Western countries used to have a booming real economy that went through periods of industrialization and expansion, flourished with a thriving middle class.

Research and development enabled the development of new technologies. So, it increased the productivity of the labour force. Moreover, it resulted in higher wages and generally created a more prosperous economy. This thriving economy slowed down significantly once the process of financialization began.

In the last decades, a considerable amount of (intellectual) energy went into the optimization of financial engineering. In turn, financial engineering has – for the most part – led to a stressed, over-indebted and fragile system. Where profits are made mainly in the financial sector. If only finance took back its supporting role, in the background, facilitating the development of the “real”, physical economy. So, it would have been a different story altogether. Will it truly take a major crisis, for finance to abdicate, and relinquish its leading role in the global economy?

 

Sources:

[1] Hudson, M. 2015. Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy. CounterPunch.

[2] Epstein, G.A. 2005. Financialization and the world economy. Edward Elgar Publishing. 

[3] Zwan, N. 2014. Making sense of financialization. Socio-Economic Review 12: 99129.

More Posts

Top Crypto Hardware Wallets 2020

Hardware wallets are not a new phenomenon in the tech industry. However, in the world of cryptocurrency, we consider hardware wallets to be amongst the most-secure cold storage solutions hand down. There is no doubt that hardware wallet growth has massively benefited from the rapid expansion of the crypto and blockchain spheres. Various hardware wallet manufacturers have been working overtime in the past years to create viable products to keep up with demand. As more people start to realise the potential of cryptocurrencies and proceed with buying their first crypto, they are also going to want to keep their crypto safe. Are you looking for a reliable hardware wallet for your crypto coins? Check out this comprehensive review for the best hardware wallets on the market today.

Become Your Own Central Bank

When you own cryptocurrencies, you store your assets in such a way that only you can access them, you have full control at any time, without counterparty risk. Banks usually keep a fraction of what is on their balance sheets as a reserve due to their business model of providing loans. Put plainly; banks can provide loans while maintaining very few funds on their balance sheet. This system is widely known as fractional reserve banking.

Not Your Keys; Not Your Crypto!

Centralized exchanges do not provide you with your private keys. Instead, they let you log-in with a well known username-password combination. Not owning your private keys implies that you do not truly own your assets. Instead, the exchanges are the “custodian” of your assets, and they hold your funds. Hardware wallets enable you to store your holdings while owning your private keys. This way, you can access your funds by yourself without the need of third parties.

4th, 3rd, 2nd, 1st – [R]evolution

The first wave of digitisation brought us the internet of information. The second wave is bringing us – amongst other things – the internet of value. The internet of value is characterised by an additional layer (protocol) which enables nearly free and instant transfer of value.


Leave a Reply

Your email address will not be published. Required fields are marked *