By FERNANDO NOGUEIRA DA COSTA*
A more well-founded criticism would require considering not only negative aspects, but also potential benefits of the so-called “financialization.”
The literature critically denouncing “financialization” — the process by which markets, institutions and financial motivations would become predominant in the economy — questions the effects of the growth of what it classifies as the financial “sector” (and not an economic-financial system emerging from interactions between all economic agents) on production, income distribution and inequality. Some mistakes or simplifications are frequent in critical approaches to financialization and deserve, in turn, to be criticized.
A common mistake is to assume that financialization refers simply to the increase in the size of the financial sector (sic) relative to the real economy, that is, the productive sector for the whistleblowers. The critique, demonstrating a medieval (pre-Prosperity Theology) moralistic or religious bias, treats any growth in financial activities as inherently negative.
Now, since the capitalist system emerged, from the foundations of banks to finance trade – House of San Giorgio, founded in 1406 in the city of Genoa, Italy, an important commercial center at the beginning of the Renaissance, is considered the first financial institution in this Western history – there was the interpenetration of financial capital in other economic activities, including non-financial companies, families, governments and the “abroad”.
The growth of financial markets and the use of financial instruments are not, in themselves, problematic. They produce good economic results by enabling greater liquidity, diversification and protection (e.g. via hedge exchange rate) of risks, in addition to financing for financial leverage of productive investments. The addition of third-party resources to own resources results in greater economies of scale. The new operating profit, exceeding financial expenses, provides greater equity profitability on equity.
However, staunch critics believe that financialization favors the accumulation of financial capital at the expense of real production. This view underestimates the crucial role of the financial system in intermediating resources between savers and investors. By mobilizing savings invested in financial investments (sources of funding) towards credit for productive enterprises, the financial system is fundamental for economic growth.
Financialization, analyzed in its positive dimension, allows for a safer allocation of capital, with risk assessment when financing innovations and the development of new technologies. It is necessary to differentiate between the negotiation of existing assets (stock of private equity) and the creation of new assets, which generate jobs and income flows. Both occur in a cyclical manner.
When the unfounded market value falls below the cost of producing new assets, growth stalls in depression because of this opportunity cost. When the market value of existing assets once again exceeds the cost of producing new assets, the economy resumes growth. Voluntary actions by all agents result in this economic cycle.
Many critical analyses of financialization treat the phenomenon as something autonomous, ignoring its relationship with the process of economic globalization. In reality, financialization is deeply intertwined with globalization, as the latter has increased cross-border capital flows and facilitated the shareholding of foreigners, notably institutional investors such as workers' pension funds or family investment funds.
Disregarding this global relationship results in a limited view of the causes and effects of financialization in the contemporary economy. Part of it is a response to the need for risk management in a globalized environment where companies and governments face pressure to protect themselves against exchange rate fluctuations, credit crises and volatility in international markets.
A difficult monetary problem to overcome is the double exchange rate asymmetry: an appreciated national currency (which makes imports cheaper) compared to another depreciated national currency (which is favorable to exports), such as that of China. This prevents imported inflation in Brazil, but the transnational industries established here are unable to generate productivity increases capable of overcoming the price advantages conferred by high exchange rate differentials between the countries' currencies.
Another common misconception is that all non-financial companies adopt financialization in a homogeneous manner, supposedly prioritizing the maximization of shareholder value over productive investments. This dynamic varies widely between productive sectors and types of companies, for example, closed family companies or public companies.
Multinational companies use advanced financial strategies such as hedge exchange rate or cash flow management without compromising productive investments. Therefore, reducing corporate financialization to the simple prioritization of dividends or share buybacks ignores the needs of complex interactions between financial strategies and productive decisions in the globalized economy, such as where it is advantageous to produce machinery and equipment and where to import them.
It is common for critics to attribute financialization to an increase in socioeconomic inequality. Poverty (lack of income flow) is surmountable, but inequality in terms of accumulation of wealth stocks is not.
This inequality is the result of multiple factors, for example, educational inequality, technological changes, life stages with time for compound interest to accumulate, inheritances, etc. Financialization contributes to the concentration of wealth among capital holders, but it is the result of the incentive to work, in a capitalist society, being the accumulation of financial reserves for retirement and the payment of caregivers for dementia suffered in old age.
Furthermore, financialization allows access to credit for families to purchase homes and vehicles and/or start small businesses. It offers opportunities for social mobility and human development.
Many critical approaches focus only on banks and companies, neglecting the fact that financialization involves households and consumers as active participants, especially through consumer credit, real estate financing and personal investments. The achievement of financial citizenship has increased households' access to credit, money management with financial products and payment systems, increasing social well-being.
Critics often simplify the concept of financialization, associating it exclusively with speculation and the creation of asset bubbles. While these phenomena do occur, financialization also includes the creation of risk management mechanisms, such as derivatives, to stabilize capital flows.
Focusing only on the speculative aspect ignores the positive advances in financial innovation to improve the risk management capabilities of companies and governments. The purely negative view of financialization obscures the rationale.
Critics of financialization treat the financial system as a monolithic entity. However, it is composed of a variety of institutions (commercial banks, investment banks, pension funds, insurance companies, fintechs etc.), each operating in different ways and with different incentives. This diversity is ignored by treating everything as if it were a single phenomenon.
Furthermore, financial behavior varies according to the regulatory and cultural frameworks of different countries. Countries with more regulated financial systems, such as Germany or Japan, have a different relationship between the financial sector and the real economy compared to more liberalized economies, such as the capital market economy of the United States.
Criticism of financialization is perplexed by the potentially destabilizing or cyclical effects of an economic-financial system, especially regarding speculation disconnected from fundamentals, credit default crises and increased inequality with financial enrichment.
There are several recurring mistakes when simplifying the complexity of the phenomenon, such as confusing financialization with the simple expansion of the financial system, underestimating the positive role of financial intermediation, and ignoring the diversity of behaviors among companies, families, governments, financial institutions and the globalized economy.
A more well-founded critique would require considering not only the negative aspects, but also the potential benefits of the so-called “financialization”, especially when adequately regulated and supervised by the Central Bank. In a capitalist economy, it is not possible to find a continuous balance between financial innovation and economic stability, mitigating systemic risks by restricting the positive role of financial instruments in the economy. Financial life is cyclical and difficult. It is necessary to know how to deal with it…
*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP). [https://amzn.to/4dvKtBb].
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