Financialisation is a process that has affected many economies especially since the 1970s, which involves two major processes, First is the rise in scale of the financial sector, and second is the rise of financial techniques and financial influence across the whole economy, society and politics. Looming very large in this picture is the phenomenon of “rent-seeking”, where financial and financialised players seek to extract wealth from other parts of the economy, as opposed to engaging in genuine wealth creation. One account of this, describing the UK, gives a summary that would fit a number of other countries:
Although the UK has had a strong financial sector for centuries, it expanded significantly from the late 1970s. From 1979 to 1989, investment in financial services grew 320.3 per cent next to investment in manufacturing, which rose only 12.8 per cent. Until the 1970s, UK bank assets had been equal to roughly half the value of UK GDP for a century. Following changes, by the mid-2000s, they had risen to five times the value of GDP. In 1979/80, the equity value of the stock market (£30.8 billion) was roughly 40 per cent of government income (£76.6 billion). By 2012, it was worth £1.76 trillion, or three times government income (£592 billion; HMSO, 1980–2014). From 1997 to 2013, the UK’s debt rose from £34 billion in 1997 to £1.3 trillion, or 88 per cent of GDP in 2013. By the time of the financial crisis in 2007–8, the UK’s financial sector relative to its economy was bigger than any other G7 nation. In contrast, UK industry has suffered a faster decline than all its economic rivals in that same period. In 1970, UK manufacturing accounted for 30 per cent of GDP, 16.3 per cent of total world exports and had trade surpluses of 4–6 per cent annually. Furthermore, 35 per cent of UK employment was in this sector. By 2010, 13 per cent of GDP and 10 per cent of total employment was in manufacturing, and the UK was running a trade deficit in this sector of 2–4 per cent.
Some source references have been removed for clarity, and can be found in the original.
For a more on-the-ground look at financialisation in action, look at the example of Trainline in my Guardian article about the finance curse, (and many subsequent examples there) or at the beginning of the Finance Curse book.
Rent-seeking and the resource curse
Here’s an example of rent-seeking in action. As my last book Treasure Islands explained, Britain sits at the centre of a “Spiderweb” of British tax havens around the world, such as the Cayman Islands or Jersey, which attract financial activity, whether criminal or not, from around the world. They feed a large slice of the ensuing profits to the City of London. British lawyers, bankers, accountants, consultants and many others are able to sit back and accumulate easy profits tumbling in from this tax haven network, without necessarily having to try too hard. These easy profits can be compared to the easy profits that spring obligingly forth when an oilfield is tapped. Anyone familiar with the “Resource Curse” will know that rent-seeking generates multiple harms alongside the profits — harms which in may cases easily outweigh the benefits.