Blog Democracy and Economy
Don’t confuse: financial development and financialization are two distinct things
by Norberto Montani Martins
Defining financialization in a few words, we could say it’s the process marked by institutional changes associated with the way wealth is produced, valued, and redistributed in capitalism, which prioritizes financial dominance. Financialization takes on different contours in various jurisdictions, but it shares the primacy of asset accumulation and the valuation of financial wealth, which subordinates the economic process to its own logic, detached from what happens in the “real” economy.
There is a debate in the literature about the novelty of the processes associated with financialization in capitalism. Notably, the question that arises is whether financialization would characterize a new stage of capitalism or if it would be just an expression of inherent phenomena in capital accumulation. Heterodox economists like Cédric Durand and Yanis Varoufakis go further and ask if the prevalence of returns from property rights in wealth production does not point to the end of the capitalist mode of production, whose expansion was achieved through production, generating profit and exploiting labor.
As an illustrative example, we can recall that the British Financial Times newspaper began circulating in the City of London on February 13, 1888. The top-left corner of the first edition proudly proclaimed itself “the friend of the honest financier, the worthy investor, the respectable broker, the genuine director, and the legitimate speculator.” The rise of these figures in the world’s main financial center at the time indicated that capitalism was undergoing profound transformations, with greater prominence of finance.
The rise of finance since then has been a phenomenon that has permeated the evolution of capitalism. There were moments when this process ran unchecked, such as in the years leading up to the 1929 Great Depression, and moments when finance grew with state mediation, embodied in the existence of public financial institutions, greater regulatory constraints, and greater control over financial practices, as in the post-World War II experience in the center.
Notably, there was a moment in the history of capitalism when the movement of the system and the expansion of finance were accompanied by a significant improvement in people’s lives, although this process was limited to certain geographic spaces. These were the so-called thirty glorious years of the Fordist social contract, in which social welfare expanded as a result of greater economic growth, better income distribution, and a set of policies that associated economic stability with security and prosperity.
However, in the last four decades, the movement of the system and the deepening of finance have led to successive crises, first in the periphery, then within the borders of Wall Street and the developed center, interspersed with brief periods of economic growth, far below the post-war levels. This has also led to a climate emergency of great proportions, which will be difficult to overcome if we assume the reproduction of the status quo.
The COVID-19 pandemic can also be interpreted as a byproduct of the current stage of the capitalist system, as suggested by Bruno Theret. The author suggests that COVID-19 only became a global and systemic problem due to years of austerity policies and changes in public management objectives and practices that eroded public health systems around the world.
Therefore, if we draw inspiration from the past, it is not a mere exercise in nostalgia or reactionism, as suggested by Professor Fernando Nogueira da Costa, in a recent article in this journal. It is not about “resisting” the evolution of the complex capitalist system, but about trying to shape how this evolution takes shape, so that its results are not destructive for societies – and the planet.
We can understand financialization as a potentiality of capitalism, inherent to its functioning logic, as illuminated by Marx, Luxemburg, Schumpeter, Keynes, Robinson, Minsky, Sweezy, among others, but which can manifest in different ways depending on the institutional characteristics of the occasion. Finance is at the heart of capitalism, but the way the accumulation process relates to it will depend on the state’s actions and the definition of present institutional forms.
In this sense, it is essential not to confuse financial development – an evolutionary phenomenon – with financialization, in the sense described above. Analyzing financialization critically does not imply rejecting the benefits of innovations like Pix, a system of instant payments, which facilitated payment realization and daily life for people. Nor does it imply rejecting the use of credit, whether as a means of payment or as a device to smooth consumption trajectories and enable the acquisition of high-value goods, but certainly not as a mechanism for financing immediate subsistence for people.
Criticizing financialization has a specific element of “restoring the past,” but it is a specific one: the search for a process of accumulation that incorporates evolutionary practices and technology, but benefits societies, with better material conditions, greater well-being, and less uncertainty about the future.
This is not about retreating to the same practices and institutions of the thirty glorious years, which, certainly, in the present, would be insufficient to deliver the desired results. It is about thinking about new institutional forms, new regulatory forms, new ways of producing, valuing, and redistributing wealth to create a more just social fabric, without destroying the planet.
This is the challenge that the recently launched book “Financialization: Crisis, Stagnation, and Inequality” (Contracorrente and Celso Furtado International Center, 2024) addresses. The book brings together contributions from 66 authors in 35 chapters to discuss critically the advancement of financialization under various aspects, from macroeconomics to public policy and daily life management. As noted by Professor Carlos Vainer, in a generous review, the book endeavors to develop a critical thought that illuminates paths for a more prosperous and solidary future.
Norberto Montani Martins – Professor at the Institute of Economics at UFRJ and coordinator of the Observatory of the Financial System.
Blog Democracy and Economy
The FINDE Research Group brings together researchers from universities and other research and teaching institutions, interested in discussing academic issues related to the advancement of financialization and its impacts on socio-economic development in modern economies. Twitter: @Finde_UFF
The GEEP Research Group at IESP/UERJ is formed by political scientists and economists. The group aims to stimulate dialogue and interaction between Economy and Politics, both in theoretical formulation and in the analysis of the reality of Brazil and other countries. Twitter: @Geep_iesp
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