Financialization and the Transformation of the Global Economy

Financialization has transformed the global economy in profound ways. But how did this process begin? In this paper, I argue that financialization occurred when states stumbled upon its advantages. Through a detailed analysis of the American and British governments’ actions, I will show how they introduced and encouraged financialization. Furthermore, I will explore the impact of financialization on both the American and British economies and examine its effects on the lives of everyday citizens. 

Financialization first emerged in the 1960s as a response to multiple crises faced by the American government, as described by Greta R. Krippner (Krippner, 2011). Both the United States (US) and the United Kingdom (UK) were grappling with social crises. In the US, this was caused by the government’s failure to raise taxes to help fund increased social spending as well as continuing the Vietnam War (Mofatt, 2020), combined with the 1973-1974 oil embargo by members of the Organization of Petroleum Exporting Countries that led to soaring energy prices which in turn exacerbated inflation (Amadeo, 2022). In the UK, union protests against Heath’s Industrial Relations Act (Morgan, 2017) and blackouts resulting from miners’ strikes over pay disputes in the 1970s (Cheng-Morris, 2022) led to decreased economic growth, lower standards of living, and inflation. As people started to turn to social security due to declining standards of living and economic growth, government revenue decreased, making it increasingly difficult for the government to provide public and social services (Social Security Administration, 2000). This led to a crisis of legitimacy as people lost faith in the government’s ability to provide for them and their families (Newburn, 2020). In response, the American government passed the Depository Institutions Deregulation and Monetary Control Act of 1980 (Allen / Wilhelm, 1988), influenced by political lobbying during the 1970s that argued deregulation would encourage economic growth and provide a more stable source of revenue for the government (Ranalli / D’Angelo / King, 2018). A similar situation occurred in the UK under Prime Minister Margaret Thatcher, who introduced rapid deregulation culminating in the “Big Bang” on October 27th, 1986 (Plender, 2013)  - a sudden deregulation of financial markets that allowed London to become a financial capital of Europe and one of the financial capitals of the world (D’Souza, 2022). In conclusion, financialization first emerged as a response to social, economic, and legitimacy crises faced by the American and British governments. Through deregulation and other measures, these governments sought to encourage economic growth and restore public faith in their ability to provide for their citizens. In the next section, we will explore the impact of these measures on the American and British economies. 

Financialization has significantly impacted both the American and British economies. In the United States, the finance industry’s influence in the economy has only grown such as how in just 2001, 40% of total profits in the US economy was due to financial sector profits (Krippner, 2011). While this domination has led to increased prosperity and wealth, it has also made the US more susceptible to economic bubbles and crashes. For instance, the dotcom bubble crash of 1999-2002 resulted in a recession, a series of bankruptcies, decreased capital spending, and increased household borrowing (CFI Team, 2023). This was not an isolated incident as several economic crises followed, including the US housing bubble of 2007 that culminated in the Global financial crisis of 2008. Similarly, in the UK, the finance industry’s contribution to total economic activity grew from 6% in the 1990s to a peak of 9.1% in 2009 (Hutton, 2022). The industry has been steadily increasing in total economic activity, only contracting during financial crises over the past three decades. In conclusion, financialization has had a profound impact on the economies of both the United States and the United Kingdom. The growth and dominance of the finance industry have brought prosperity and wealth but have also made these economies more vulnerable to economic bubbles and crashes. 

The effects of financialization on the lives of everyday citizens are most evident in advanced economies such as the US and UK. In the UK, for example, the availability of financial services is vast. The ability to finance nearly everything, from technology and clothing to cars and food, demonstrates how financialization permeates daily life (Lai, 2018). The prevalence of “digital banks'' such as Monzo, Revolut, and Starling Bank is also unique to the UK (Nicolle, 2021). Additionally, the widespread adoption of stock and asset buying apps like Etoro and Robin Hood has increased the financial sector’s customer base and investors while also increasing people’s stake in the industry, encouraging further deregulation (Eaton / Green / Roseman / Wu, 2022). This culminated in events such as the GameStop stock increase caused by average citizens buying up GameStop stock options through stock asset buying apps, democratizing the stock market and resulting in a short squeeze event that pushed GameStop’s stock price higher (Yarovaya, 2021). In conclusion, financialization has had a profound impact on the daily lives of citizens in advanced economies such as the US and UK. The widespread availability of financial services and the adoption of new technologies such as digital banks and stock buying apps have made it easier for individuals to participate in the financial sector. This increased participation however, has also led to events such as the GameStop stock increase.

In conclusion, financialization emerged as a solution to the social and economic challenges faced by the American and British governments during the 1960s and 1970s. Through measures such as deregulation, these governments aimed to stimulate economic growth and provide a more reliable source of revenue. The effects of financialization on the American and British economies have been far-reaching and transformative. Its impact on the daily lives of citizens living in advanced economies varies but is most notable in the United Kingdom and United States. 

Bibliography, References, & Further Readings: 

Krippner, G.R. (2012) Capitalizing on crisis: The political origins of the rise of Finance. Cambridge: Harvard University Press. 

Moffatt, M. (2020) The U.S. economy of the1960s and 1970s, ThoughtCo. ThoughtCo. Available at: https://www.thoughtco.com/us-economy-in-the-1960s-and-1970s-1148142 (Accessed: April 17, 2023). 

Amadeo, K. (2022) OPEC Oil Embargo , The Balance. The Balance. Available at: https://www.thebalancemoney.com/opec-oil-embargo-causes-and-effects-of-the-crisis-3305806  (Accessed: April 17, 2023). 

Morgan, K.O. (2017) Britain in the seventies – our unfinest hour?, Revue Française de Civilisation Britannique. French Journal of British Studies. CRECIB. Available at: https://journals.openedition.org/rfcb/1662#notes (Accessed: April 17, 2023). 

Cheng-Morris, J. (2022) In pictures: How the UK handled the 1970s blackouts, Yahoo! News. Yahoo! Available at: https://uk.news.yahoo.com/how-uk-handled-1970s-blackouts-110419967.html (Accessed: April 17, 2023). 

SSA Team (2000) Social Security History, Social Security Administration. Available at: https://www.ssa.gov/history/ratios.html (Accessed: April 17, 2023). 

Newburn, T. (2021) “The causes and consequences of urban riot and unrest,” Annual Review of Criminology, 4(1), pp. 53–73. Available at: https://doi.org/10.1146/annurev-criminol-061020-124931.  

Allen, P.R. and Wilhelm, W.J. (1988) “The impact of the 1980 depository institutions deregulation and monetary control act on market value and risk: Evidence from the Capital Markets,” Journal of Money, Credit and Banking, 20(3), p. 364. Available at: https://doi.org/10.2307/1992262.  

Ranalli, B., D'Angelo, J. and King, D. (2018) The 1970s sunshine reforms and the transformation of Congressional lobbying, Congressional Research. The Congressional Research Institute . Available at: https://congressionalresearch.org/Ranalli2018SunshineReformsAndTransformationOfLobbying.pdf (Accessed: April 16, 2023). 

Plender, J. (2013) Markets insight: Bank deregulation part of Thatcher legacy, Financial Times. Financial Times. Available at: https://www.ft.com/content/7f8aaf08-a122-11e2-bae1-00144feabdc0 (Accessed: April 17, 2023). 

D'Souza, D. (2022) How London became the world's Financial Hub, Investopedia. Investopedia. Available at: https://www.investopedia.com/how-london-became-the-world-s-financial-hub-4589324  (Accessed: April 17, 2023). 

CFI Team (2023) Dotcom bubble, Corporate Finance Institute. Corporate Finance Institute . Available at: https://corporatefinanceinstitute.com/resources/capital-markets/dotcom-bubble/  (Accessed: April 17, 2023). 

Hutton, G. (2022) By Georgina Hutton Financial Services: Contribution to the UK economy, Research Briefings Parliament UK. House of Commons Library . Available at: https://researchbriefings.files.parliament.uk/documents/SN06193/SN06193.pdf (Accessed: April 17, 2023). 

Kaiser, A. et al. (2018) “Chapter 32: Financialisation of everyday life,” in G.L. Clark (ed.) The New Oxford Handbook of Economic Geography. Oxford: Oxford University Press (Oxford Handbooks), pp. 611–627. 

Nicolle, E. (2021) The state of the Fintech Union: Monzo, Starling Bank and Revolut, Financial News. Financial News. Available at: https://www.fnlondon.com/articles/the-state-of-the-fintech-union-monzo-starling-bank-and-revolut-20210810 (Accessed: April 17, 2023). 

Eaton, G.W. et al. (2022) “Retail trader sophistication and stock market quality: Evidence from brokerage outages,” Journal of Financial Economics, 146(2), pp. 502–528. Available at: Retail Trader Sophistication and Stock Market Quality: Evidence from Brokerage Outages by Gregory W. Eaton, T. Clifton Green, Brian Roseman, Yanbin Wu :: SSRN    

Yarovaya, L. (2021) GameStop: Wallstreetbets Trader Army is back for a second share rally – here's how to make sense of it, The Conversation. University of Southampton. Available at: https://theconversation.com/gamestop-wallstreetbets-trader-army-is-back-for-a-second-share-rally-heres-how-to-make-sense-of-it-156083 (Accessed: April 17, 2023).