Executive Briefings

The 'Financialization' of Business Is Taken to Task

Free-market capitalism says that the only purpose of business is to create shareholder value and that the unfettered market can regulate itself. In the last 30 years, that definition changed to, "the only purpose of business is to create shareholder value measured by short-term results and with little or no regulation."

This is no longer the capitalism described by Adam Smith; it is financialization -- defined as the "growing scale and profitability of the finance sector at the expense of the rest of the economy and the shrinking regulation of its rules and returns."

In recent years, as New Deal regulations were slowly dismantled, financial sector growth accelerated along with high risk-taking and speculation. The employment and total sales of the finance industry grew from 10 percent of GDP in 1970 to 20 percent by 2010. The focus of the economy was no longer on making things; it was on making money from paper. The finance industry swelled as the rest of the economy weakened.

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This is no longer the capitalism described by Adam Smith; it is financialization -- defined as the "growing scale and profitability of the finance sector at the expense of the rest of the economy and the shrinking regulation of its rules and returns."

In recent years, as New Deal regulations were slowly dismantled, financial sector growth accelerated along with high risk-taking and speculation. The employment and total sales of the finance industry grew from 10 percent of GDP in 1970 to 20 percent by 2010. The focus of the economy was no longer on making things; it was on making money from paper. The finance industry swelled as the rest of the economy weakened.

Read Full Article