The term financialization refers to the increasing dominance of financial institutions and markets over the economy, with a shift away from productive investment in real assets to speculative investments in financial assets. While financialization has been a key driver of economic growth and development in the 20th century, it has also had a number of negative consequences, particularly for the average citizen. In this blog post, we’ll explore how the financialization of the economy hurts the average citizen, and what can be done to address these issues.

1. The Concentration of Economic Power

One of the main consequences of financialization is the concentration of economic power in the hands of a small group of financial elites. These elites have used their power to manipulate financial markets and promote their own interests, at the expense of the broader public. This concentration of power has contributed to growing inequality and social unrest in the Western world.

For example, in the United States, the top 1% of households own more wealth than the bottom 90% combined. This concentration of wealth has led to a growing sense of dissatisfaction and disillusionment among the average citizen, who feel that the economy is rigged against them.

2. Economic Instability and Crisis

Financialization has also encouraged speculation and risk-taking, which has contributed to financial instability and economic crises. The financial crisis of 2008 is a prime example of this phenomenon, as the housing bubble and subsequent collapse of the subprime mortgage market led to a global financial crisis that caused widespread job losses and economic hardship.

Furthermore, the reliance on debt and financial engineering to generate profits has led to a shift away from productive investment in real assets, which has contributed to a decline in manufacturing and other productive industries. This shift has made the economy more vulnerable to economic shocks, and has made it harder for the average citizen to find stable, well-paying jobs.

3. A Shift in Priorities

Financialization has also led to a shift in priorities, where the focus of economic activity has shifted from productive investment in real assets to speculative investments in financial assets. This shift has led to a disconnect between the financial sector and the real economy, as financial institutions have become more focused on short-term profits than on creating long-term value.

This shift in priorities has had a number of negative consequences for the average citizen, including a decline in the quality of public goods and services, such as education and healthcare. As financial institutions have become more dominant in the economy, they have been able to use their power to shape public policy in ways that benefit their interests, rather than the interests of the broader public.

4. The Decline of the Middle Class

Finally, financialization has contributed to the decline of the middle class, which has traditionally been the backbone of the Western economy. As financial elites have become more dominant in the economy, they have been able to use their power to shape public policy in ways that benefit them, at the expense of the middle class.

For example, financialization has led to a decline in unionization and collective bargaining, which has made it harder for workers to negotiate for higher wages and better benefits. Furthermore, financialization has led to a decline in job security, as companies have become more focused on short-term profits and cost-cutting measures.

What Can Be Done?

Addressing the negative consequences of financialization will require a comprehensive approach that addresses the underlying economic, social, and political factors. Some potential solutions include:

1. Regulation:

The government can play a key role in regulating the financial sector, to ensure that financial institutions are not engaging in risky behavior that could lead to economic instability and crisis.

2. Taxation:

The government can also use taxation as a tool to reduce economic inequality and redistribute wealth from the financial elites to the broader public. This could include higher taxes on the wealthy, as well as taxes on financial transactions.

3. Investment in Real Assets:

To promote long-term economic growth and stability, the government could invest in real assets, such as infrastructure, education, and healthcare. This would help to create jobs and stimulate economic activity, while also improving the quality of public goods and services.

4. Strengthening Worker Protections: 

To support the middle class, the government could strengthen worker protections, such as unionization and collective bargaining. This would help to ensure that workers are able to negotiate for higher wages and better benefits, and would help to reduce economic inequality.

5. Addressing Political Power Imbalances:

To address the concentration of economic power in the hands of financial elites, it will be necessary to address political power imbalances. This could include campaign finance reform, which would reduce the influence of wealthy donors on the political process.

Conclusion:

In summary, the financialization of the economy has had a number of negative consequences for the average citizen, including the concentration of economic power, economic instability and crisis, a shift in priorities, and the decline of the middle class. To address these issues, it will be necessary to take a comprehensive approach that addresses the underlying economic, social, and political factors. By regulating the financial sector, investing in real assets, strengthening worker protections, and addressing political power imbalances, we can work towards a more just and equitable economy that benefits everyone, not just the financial elites.