Relationship Between Finance And The Real Economy

INTRODUCTION FINANCIALIZATION There is no consensus on how best to define financialization. Although the concept emerged within the Marxist tradition, there are conflicting views about the relationship between finance and the real economy. Baran and Sweezy (1966) explain that advanced capitalist states face a surplus absorption problem that inevitably leads to stagnation. To prevent the latter, unproductive consumption rises and the remaining surplus enters the sphere of circulation, particularly, financial activities. This is a stark contrast to Orthodox Marxists (cite), who explain the rise of finance as a consequence of the falling rate of profit in the sphere of production. The essential contention is that poor profitability in†¦show more content†¦Epstein (2001) defines financialization as follows: the importance of financial markets, financial motives, financial institutions and financial elites in the operation of the economy and its governing institutions, both at the national and international l evel. Since financialization was policy induced, a re-regulation of the financial sector was necessary to curb its excesses and increase employment and income (Crotty 2008, 2009; Crotty and Epstein 2008, 2009). Arrighi (1994) understood financialization as the last stage of the USA’s hegemonic power. As advanced capitalist states de-industrialize and lose their productive edge, the sphere of finance expands. After the collapse of Fordism, the Regulation School contends that financial markets became the new regime of regulation (Boyer 2000). Unlike Fordism, finance posed problems for employment, income and growth. Related to this tradition is the new corporate governance view, which argues that the main thrust of financialization is the preoccupation with shareholder value (Stockhammer 2006, Froud et al 2002, Williams 2000, Lazonick and O’ Sullivan 2000). This preoccupation leads to short termism through share buybacks that crowds out long-term real investments. Lapavitsas (2013) contends that the processes of finance should be analysed in their own right, rather than being treated as a surface phenomena sitting on top of real economic