An Essay on Financialization Utku Ören Kadir Has University Abstract The aim of this paper is to define the concept of financialization through a discussion of different definitions presented so far in the class readings. The paper attempts to bring in and discuss the diverse definitions of the concept by different authors, and also by considering empirical evidence from various sources. This paper tries to establish its own rationale about financialization. What is Financialization? Financialization is considered to be one of the main forces, besides neoliberalism and globalization, which has transformed the economic reality of our times (Epstein, 2005, p. 3). There are several definitions of the concept some of which are going to be discussed in this paper. Works on financialization portray a thoroughly complex phenomenon which has many dimensions. This can be seen in the sheer amount of diverse views approaching the concept from different angles. Krippner (2004), as cited in Epstein (2005), captures this diversity and points out some of these dimensions by summarizing the various uses of the term: […] some writers use the term ‘financialization’ to mean the ascendancy of ‘shareholder value’ as a mode of corporate governance; some use it to refer to the growing dominance of capital market financial systems over bank-based financial systems; some follow Hilferding’s lead and use the term ‘financialization’ to refer to the increasing political and economic power of a particular class grouping: the rentier class; for some financialization represents the explosion of financial trading with a myriad of new financial instruments […]. (p. 3)  Many authors including Epstein (2005), Krippner (2005 and 2011), Orhangazi (2008), Palley (2007), and Stockhammer (2010) refer to the growing importance of finance in the world economy. Krippner (2005), as cited in Orhangazi (2008), defines financialization as `a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production`. Krippner (2011) further refines her definition as `the growing importance of financial activities as a source of profits in the economy` (p. 27). Krippner’s definition is remarkable as she simply points out the ongoing transformation of the ways that the economy generates profits, which will also be considered as the foundation for discussion in the scope of this paper. According to Epstein (2005) financialization means `the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies`. Constructing a broader definition of the concept, Epstein (2005) aims to understand the implications of financialization in a framework that accommodates other prominent forces of our times; namely, globalization and neoliberalism. Krippner (2011) shows the profits from finance taking 30 percent of total profits in the U.S. in the 1980s compared to only 10 percent of the total in the 1950s, and this ratio reached an incredible 40 percent of total profits in 2001 (p. 28). Palley (2007) points out that the financial profits as a share of GDP has more than doubled since 1973, whereas the same ratio for nonfinancial profits only grew about 30 percent (p. 36). Orhangazi (2008) puts emphasis on financial corporations’ profits as a percent of nonfinancial corporations’ profit, as it rose above historical levels after the 1980s and reached its peak around 75 percent in the early 2000s. Commercial banks’ net income as a percent of total assets also steadily increased, after collapsing in the late 1980s, reaching almost the double of historical rates (Orhangazi, 2008, p. 14). Evidence from different sources affirm the growing importance of financial activities as a basis of profit generation in the economy. Orhangazi (2008) refers to `an increase in the size and significance of financial markets, transactions, and institutions` and further narrows his definition to `the changes in the relationship between the nonfinancial corporate sector and financial markets` (pp. 5-6). According to Orhangazi (2008), NFC engagement in financial activities results in greater income from financial assets instead of real investments, and also in an increase of financial market pressure which is realized as the growth of funds transferred from NFCs to financial markets in the form of interest payments, dividend payments and stock buybacks. Orhangazi (2008) discusses the growing power of finance over nonfinancial corporations’ decision making based on the shareholder value creation, which results in a shift of capital employment from productive real investment to nonproductive financial investment. Orhangazi (2008) meticulously examines the increase in the financial activities of NFCs in the U.S. as he presents solid empirical evidence on the change of the composition of NFC balance sheets and shows the increase of NFC incomes from and transfers of resources to financial markets. As NFCs’ involvement in financial activities increase, their balance sheet composition also changes favoring a growth of the share of financial assets. Over the course of fifty years, the ratio of NFCs’ financial assets to tangible assets more than quintupled and their share in total assets more than doubled (Orhangazi, 2008, p. 18). In addition to those figures, Orhangazi (2008) investigated the portion of miscellaneous financial assets in total financial assets and finds, not so surprisingly, after a steep upwards spike in the mid 1970s the ratio rises steadily and flats out around 70 percent. According to Orhangazi (2008), as financial investments increase NFC income generated from and transfers of resources to those assets also grew. Interest and dividend incomes of NFCs as a share of NFC gross value added hovers higher than the historical rates after the mid 1970s, as well as the interest and dividend payments NFCs as a proportion of NFC gross value added experienced growth after the 1980s (Orhangazi, 2008, pp. 19-21). Orhangazi’s (2008) clear depiction of increased NFC involvement in financial activities resulting in growing involvement in financial activities, combined with the empirical evidence supporting higher financial profits in the economy gives an indication of a motivation for more of NFC capital to move away from productive real investment and towards nonproductive financial investment. Palley (2007) acknowledges the increasing role of financialization and stresses the power of financialization to affect the economic system both in macro and micro levels. He defines the concept as `a process whereby financial markets, financial institutions and financial elites gain greater influence over economic policy and economic outcomes` (p. 1). Palley (2007) is relevant to this discussion as he points out the impact of financialization in enlarging income inequality through the stagnation of wages. According to Palley (2007), the policy configuration by the combination of globalization, small government, labor market flexibility and abandonment of full employment forms a so called `neoliberal box`, which creates a challenge on both private and public sector workers and puts downward pressure on wages. Palley (2007) clearly demonstrates the detachment of wage growth in the U.S. from productivity growth since the 1960s. A graphical representation of an index comparison of productivity and hourly compensation of `production and non-supervisory` workers in the U.S. shows a 150 points increase in productivity whereas only an increase of 50 points in hourly compensation (Palley, 2007, p. 28). The compensation of financial sector employees as a percent of total compensation, on the other hand, grew from three percent in the early 1960s to almost eight percent in 2006 (Orhangazi, 2008, p. 16) which is a clear confirmation of growing income inequality. Stockhammer (2010) concentrates his description on `the changes in the role of the financial sector`. Part of his work emphasizes the increasing indebtedness of households as one of the aspects of financialization. Stockhammer combines unsustainable consumption levels and credit access effect with stagnant wages and decreasing saving rates in explaining the rise in household debt. Stockhammer’s approach is useful in our discussion to show the extent of financialization beyond financial markets and nonfinancial corporations. Palley (2007) clearly depicts an incredibly rapid increase in U.S. household debt (as a ratio of GDP) from forty five percent in 1973 to ninety four percent in 2005. Stockhammer (2010) confirms that `financialization has come with a dramatic increase in debt levels across different sectors` (p. 3), and his analysis shows a further increase of two percent over Palley (2007) to a whopping household debt of 96 percent of GDP in 2009. After discussing the diverse views evaluating the various dimensions of this complex phenomenon and presenting supportive empirical evidence one must accept that there are indeed other discussions of financialization and issues related with it, of which some are different than the ones presented in this paper, and one must consider those as well, in order to establish a better understanding of the concept. It is clear that financialization is evident and it manifests itself as the growing importance of finance as source of profits, amplification of the share, profitability and power of financial markets and institutions, increasing involvement of NFCs in financial activities, growing income inequality as a result of stagnant wages and a rising household debt through the ease of obtaining credit.  REFERENCES Epstein, G. (2005). Financialization and the World Economy. Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Krippner, G. R. (2004). What is Financialization?, mimeo, Department of Sociology, UCLA. Krippner, G. R. (2005). The financialization of the American economy, Socio-Economic Review, 3 (2), 173–208. Krippner, G. R. (2011). Capitalizing on Crisis: The Political Origins of the Rise of Finance. Cambrigde, MA and London, UK, USA: Harvard University Press Orhangazi, Ö. (2008). Financialization and the US Economy. Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Palley, T. I. (2007). Financialization: What it is and why it matters. PERI Working Paper 153 Stockhammer, E. (2010). Financialization and the Global Economy. PERI Working Paper 240 AN ESSAY ON FINANCIALIZATION 6