Historical Changes in Financialization Analysis In your answer, be sure to define all analytic concepts you need to use, use specific examples from the req

Historical Changes in Financialization Analysis In your
answer, be sure to define all analytic concepts you need to use, use specific examples from the
required readings, apply relevant theories of social change, link the answer to the epochal
periods, and apply Noble’s framework.
1) Analyze historical changes in financialization. 2) Analyze changes in class structure in the United States. Socio-Economic Review (2005) 3, 173–208
10.1093/SER/mwi008
The financialization of the American
economy
Greta R. Krippner
Sociology Department, University of California, Los Angeles
Correspondence: Greta Krippner, Sociology Department, UCLA, Los Angeles, CA 90095-1551, USA.
E-mail: gkrippne@soc.ucla.edu
This paper presents systematic empirical evidence for the financialization of the US
economy in the post-1970s period. While numerous researchers have noted the
increasing salience of finance, there have been few systematic attempts to consider
what this shift means for the nature of the economy, considered broadly. In large
part, this omission reflects the considerable methodological difficulties associated
with using national economic data to assess the rise of finance as a macro-level
phenomenon shaping patterns of accumulation in the US economy. The paper
develops two discrete measures of financialization and applies these measures to
postwar US economic data in order to determine if, and to what extent, the US
economy is becoming financialized. The paper concludes by considering some of
the implications of financialization for two areas of ongoing debate in the social
sciences: (1) the question of who controls the modern corporation; and (2) the
controversy surrounding the extent to which globalization has eroded the
autonomy of the state.
Keywords: Economic sociology, financialization, economic change, macroeconomic data and indicators—United States
JEL classification: G3 Corporate finance and governance; N220 Economic
history, financial markets and institutions; L2 Industrial organization: firm objectives, organization and behaviour
1. Introduction
It is difficult to escape the impression that we live in a world of finance. Financial
news dominates the business press. The management of American corporations,
large and small, moves to the rhythm of Wall Street. In recent years, a series of
corporate scandals have dramatized the degree to which financial machinations
have superseded productive enterprise in the US economy. Consumers are
confronted daily with new financial products and financial ‘literacy’ is touted as a
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core competency. For many Americans, the leading stock market indices act as
a kind of barometer for the economy as a whole. Gains in the market generate
surges in consumer spending even where more tangible indicators of economic
vitality, such as job growth or wage levels, lag behind.
While many commentators in both popular and scholarly accounts have noted
these and related developments, there have been few attempts to explore the meaning of such phenomena for the nature of the economy, considered broadly. In large
part, this omission reflects the fact that the data that would allow a macro-level
examination of the growing weight of finance in the American economy—a development that I refer to as financialization—raise a host of difficult methodological
issues. As a result, even those accounts that are concerned with understanding the
rise of finance in structural terms typically assert the presence of this phenomenon
without providing any direct evidence for it. To take two prominent examples,
Arrighi’s (1994) The Long Twentieth Century explains financialization as resulting
from intensified intercapitalist and interstate competition during periods of hegemonic transition. More recently, Phillips (2002) argues in Wealth and Democracy
that the financialization of the US economy has produced extreme wealth
and income polarization in the US in recent years, eroding the social bases of
American democracy. Yet neither Arrighi nor Phillips establishes the existence
of financialization.
It stands to reason that before such provocative theses can be fully assessed, we
ought to first determine whether it is in fact accurate to characterize the US economy
as having been ‘financialized’. As Merton (1959, p. xiii) once remarked, ‘It might at
first seem needless to say that before social facts can be “explained”, it is advisable to
ensure that they actually are facts.Yet, in science as in everyday life, explanations are
provided for things that never were.’1 This paper, then, analyzes the available
data for what they reveal about the rise of finance in the US economy. As such, the
objectives of this paper are primarily descriptive and conceptual in nature—a full
causal analysis is left for other writings (see Krippner, 2003). The question
addressed here is how to characterize most usefully long-term structural change in
the US economy, not how to explain that change, given that it has occurred. While
the data problems involved in such an endeavour are daunting, I argue that we must
confront the data directly, for the underlying shift in the economy that they signal
is so dramatic—and so durable—that it challenges competing frameworks for
understanding the nature of contemporary capitalism.
I define financialization as a pattern of accumulation in which profits accrue
primarily through financial channels rather than through trade and commodity
production (see Arrighi, 1994). ‘Financial’ here refers to activities relating to the
provision (or transfer) of liquid capital in expectation of future interest, dividends,
1 For a similar use of Merton in the context of a related debate, see Zeitlin (1974).
Financialization of US economy
175
or capital gains.2 At issue is the following problem: What constitutes the relevant
evidence for financialization, and how should this evidence be evaluated? While there
is a range of social science research that points to the increasing salience of finance
in the economy, this problem has not been addressed by the literature, which has
tended to focus either on organizational developments at the level of the firm or on
activities inside financial markets. Fligstein’s (1990, 2001) work on the emergence
of the ‘shareholder conception of control’, for example, provides a compelling
account of the increasing influence of financial considerations in the governance
structures of large industrial corporations (cf., Davis and Stout, 1992; Davis and
Thompson, 1994; Useem, 1996; Zorn, 2004; Zorn et al., 2004). Other researchers
have documented the explosion of financial trading and the proliferation of new
financial instruments (Felix, 1998; Henwood, 1997; Sassen, 2001; Tickell, 1999).
Yet neither an examination of the growing orientation of managers to financial
variables nor of the changing nature of transacting in financial markets informs us
as to the overall shape assumed by an economy dominated by such activities.
In short, financialization has not been subject to the kind of close empirical scrutiny
that would illuminate the precise timing and magnitude of this widely-perceived, if
little-examined phenomenon.3
A careful examination of the financialization of the American economy requires
a different ‘lens’ than that typically used by scholars examining broad shifts in the
economy. While most characterizations of long-term shifts in the underlying
structure of the economy rely for evidence on changes in employment or in the mix
of goods and services produced (e.g. Clark, 1940; Bell, 1973; Castells, 1996), these
are not appropriate places to look for the rise of finance. The financial sector is not
employment-intensive and its ‘products’ do not show up in transparent ways in
national economic statistics (Block, 1987). Thus, in contrast to the dominant
perspective on long-term economic change, which is concerned with the tasks
performed or with what is produced in an economy, this paper engages another
vantage point on economic change by examining where profits are generated
in the US economy. For purposes of exposition, I label these two perspectives
2 I am indebted to Mark Suchman for this formulation.
3 There
is little research that attempts to document US financialization at the level of the macroeconomy, although interested readers will want to compare the results here with those reported by
Brenner (2002), Crotty (forthcoming) and Dumenil and Levy (2004). The important work of Epstein
and Jayadev (forthcoming) should also be mentioned in this context. Epstein and Jayadev examine the
‘rentier share’ of national income, which they define as profits of financial firms, plus interest income
generated by non-financial firms and households. While the objective of their research is somewhat
distinct, their results are broadly confirmatory of those reported in this paper. Their work is also useful
for showing that these trends extend broadly across the OECD countries.
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G. R. Krippner
‘activity-centred’ versus ‘accumulation-centred’ views, respectively.4 While the
activity-centred view highlights the rise of the service sector and is, therefore,
associated with post-industrialism (Bell, 1973), a focus on changing patterns of
profitability suggests that financialization is the key development in the US economy
in recent decades.5
In contrasting these two perspectives on economic change, it is important to
be clear that I am not arguing that one is somehow more ‘fundamental’—or more
‘true’—than the other. Post-industrialism and financialization both capture
aspects of what is changing in the US economy, as do other frameworks, such as
globalization or neo-liberalism. In this sense, how one conceptualizes structural
change in the economy depends very much on one’s theoretical purpose. But
neither is this to assume an entirely relativistic position on the problem of economic
change, where one ‘lens’ is just as good as the next. While different data will produce
any number of ways of understanding economic change, not all such understandings
are equally useful for motivating new problems for investigation or for resolving
impasses in problems currently under investigation. In what follows, I argue that
financialization not only offers an apt characterization of the world in which we
live, but a productive one, clarifying key issues in current areas of debate in the social
sciences. In particular, I explore the implications of financialization for two
ongoing controversies: (1) the issue of who controls the modern corporation; and
(2) the role of globalization in eroding the autonomy of the state.
The paper is organized in six sections. In the following section of the paper,
I compare the picture of structural change in the economy that emerges from
activity-centered versus accumulation-centered perspectives on economic change.
In Section 3, I develop two discrete measures of financialization and then apply
these measures to post-war US economic data in order to determine if and to what
extent the US economy is becoming financialized. In Section 4, I examine the issues
of outsourcing and subsidiary ownership, discussing how the measures I have
devised minimize the possibility that what appears in the data as ‘financialization’ is
merely an artifact of corporate reorganization. Section 5 of the paper engages
another potential objection to the results reported here: namely, that what I
describe as the financialization of the US economy is better understood as resulting
4 The intention here is not to reify these labels into higher-order abstractions but to describe reasonably
succinctly the kinds of data mobilized by these two perspectives in arguing for different interpretations
of economic change.
5 To
be sure, finance is generally considered to be a central component of the rise of the service sector.
But when profit data are adopted as the privileged lens on the economy, the rise of finance becomes so
central to characterizations of economic change that merely subsuming finance under a broader
category of service industries and occupations is, in fact, misleading.
Financialization of US economy
177
from the globalization of production. In a concluding section, I both summarize
the main findings of this research as well as illustrate the usefulness of the concept
of financialization by describing two areas of debate in the social sciences for which
these findings have relevance.
2. Two views of economic change
The primary purpose of this paper is to evaluate the evidence for the financialization of the American economy. Before turning to that task, I first want to motivate
this endeavour by contrasting two views on economic change. The standard way of
tracking long-term structural shifts in the basic composition of the economy has
been to examine changes in employment or in the ‘contribution’ of different sectors
to gross domestic product (GDP). This activity-centred view of economic change
spans several generations of research, from early work on the rise of the service
sector (Clark, 1940), to Bell’s (1973) famous thesis on post-industrialism, to recent
theorizations of the information economy (Castells, 1996). By contrast, in this
paper, I propose an accumulation-centred view of economic change, in which the
focus is on where profits are generated in the economy. My objective in this section
is to show how dramatically these two views diverge in terms of what they signal
about the fundamental shifts that characterize the contemporary US economy. I do
so through a simple comparison of the picture of structural change in the economy
that emerges from employment,6 GDP and profit data.
Two brief caveats are necessary. In the analyses reported in Figures 1–3, as well as
throughout the paper, I do not include the public sector as a component of the total
economy. I omit the government sector because, while public data is available for
employment and contribution to GDP growth, there is no concept analogous to
profits with which to gauge the ‘accumulation’ occurring in the public sector.
However, the inclusion or exclusion of the public sector makes little difference for
the relative levels of the other industries. For related reasons, self-employment is
also excluded from consideration here and throughout the paper. There is no way
(short of making ad hoc assumptions) to distill a profit concept from proprietary
income, which does not distinguish between profits and compensation. Were
it possible to include self-employed workers in the analysis, this would
6 In the following discussion, I use the term ‘employment’ to refer to only the sectoral—and not the
occupational—dimension of employment. While occupational data are also occasionally used to assess
shifts in the structure of the economy, I do not replicate these analyses here. Occupation is a property
that attaches to discrete jobs, whereas employment, GDP, and profit data are typically disaggregated by
industry. Thus, an examination of the shifting composition of occupations is not strictly comparable to
changing patterns of profitability because these measures involve different units of analysis.
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45%
Manufacturing
40%
FIRE
Services
35%
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15%
10%
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Figure 1 Relative industry shares of employment in US economy, 1950–2001.
40%
Manufacturing
35%
FIRE
Services
30%
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10%
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Figure 2 Relative industry shares of current-dollar GDP in US economy, 1950–2001.
probably increase the share of services in the economy, since the self-employed
disproportionately work in services. However, the difference is not likely to be
significant, as self-employed workers represent a relatively small share of the total
economy.
Financialization of US economy
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60%
Manufacturing
FIRE
50%
Services
40%
30%
20%
10%
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Figure 3 Relative industry shares of corporate profits in US economy, 1950–2001.
Employment data are the type of evidence most commonly marshalled in
debates about how to characterize the nature of contemporary economic change.
Because just three industries—manufacturing, FIRE7 and services8—account for
most of the change in the sectoral composition of the economy over the last
50 years, I report only these three industries here. Figure 1 shows relative industry
shares of total employment between 1950 and 2001.9 The steep decline of manufacturing is evident in this figure. Evident too is the stratospheric ascent of employment in services. But note that viewed through the lens of economic activity,
finance is not particularly significant. FIRE is neither very large relative to other
7 FIRE
is the industry group comprised by finance, insurance and real estate. For the moment, I follow
convention and report FIRE as an industry group rather than disaggregating finance and real estate.
In the more detailed empirical analysis presented in sections three and five, I exclude real estate as a component of the financial sector of the economy. Which practice is more appropriate is a complex matter—
real estate markets share many characteristics of financial markets, including their speculative nature.
At the boundary, the distinction between ‘financial’ and ‘non-financial’ sectors of the economy is
ambiguous. In the present context, my purpose is to ensure comparability between my analysis and the
analyses typical of the activity-centred view. In subsequent sections, where I am more concerned with
precision, my purpose is to construct a conservative estimate of financialization.
8 To
avoid confusion, here and throughout I refer to the broader category of industries comprising
the service sector (public utilities, transport, communications, wholesale, retail, FIRE and services) as
the service sector, the service economy, or service industries, while referring to the narrower industry
simply as services.
9 Data on full-time equivalent employees are from the National Income and Product Accounts, Table 6.5.
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G. R. Krippner
industries, nor does it register significant growth over the period. Thus, this
evidence is consistent with an interpretation of recent developments in the economy
as reflecting the rise of the service sector, post-industrialism, or (a little more tenuously) the information economy. These data do not point to financialization as an
apt way of understanding economic change in recent decades.
Another kind of evidence—less common than employment data—mobilized in
debates about how to characterize the evolution of the economy in recent decades
relies on shifts in the contribution of different sectors to GDP (e.g. Bell, 1973). GDP is
both a measure of what is produced and a measure of national income. In theory, the
two concepts are equivalent: the market value of goods and services produced should
equal the income earned in producing those goods and services. As such, the Bureau
of Economic Analysis (BEA) estimates GDP using two independent methods—the
first is based on adding up the value of output produced and the second is based on
adding up incomes, including profits. In practice, when the GDP data are assembled
there is a small discrepancy between the measure constructed on the basis of output
and the measure constructed on the basis of income (US Department of Commerce,
2002). For purposes of this paper, GDP is a hybrid measure, reflecting both economic
activity (output) and accumulation (the profit component of national income).
Figure 2 shows relative industry shares of current-dollar GDP between 1950 and
2001.10 I again report data for only thos…
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