Finance capitalism

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A 400-year evolution of modern financial capitalism
MG 056-De Beurs van Hendrick de Keyser.jpg
Courtyard of the Amsterdam Stock Exchange (or Beurs van Hendrick de Keyser in Dutch), a powerhouse of Dutch capitalism in the 1600s. The birth of the world's first formally listed public company (the Dutch East India Company) and first formal stock exchange (the Amsterdam Stock Exchange), in the 17th-century Dutch Republic, helped usher in a new era of finance capitalism. [1] [2] [3] [4] [5]
NYSE127.jpg
The trading floor of the New York Stock Exchange (NYSE), a foremost symbol of American finance capitalism, in the early 21st century.

Finance capitalism or financial capitalism is the subordination of processes of production to the accumulation of money profits in a financial system. [6]

Production is a process of combining various material inputs and immaterial inputs in order to make something for consumption. It is the act of creating an output, a good or service which has value and contributes to the utility of individuals.

Money Object or record accepted as payment

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment. Any item or verifiable record that fulfils these functions can be considered as money.

A 'financial system' is a system that allows the exchange of funds between lenders, investors, and borrowers. Financial systems operate at national and global levels. They consist of complex, closely related services, markets, and institutions intended to provide an efficient and regular linkage between investors and depositors.

Contents

Financial capitalism is thus a form of capitalism where the intermediation of saving to investment becomes a dominant function in the economy, with wider implications for the political process and social evolution. [7] Since the late 20th century, in a process sometimes called financialization, it has become the predominant force in the global economy, [8] whether in neoliberal or other form. [9]

Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets. In a capitalist market economy, decision-making and investment are determined by every owner of wealth, property or production ability in financial and capital markets, whereas prices and the distribution of goods and services are mainly determined by competition in goods and services markets.

Financialization Term used in financial capital

Financialization is a term sometimes used to describe the development of financial capitalism during the period from 1980 until 2010, in which debt-to-equity ratios increased and financial services accounted for an increasing share of national income relative to other sectors.

Neoliberalism political philosophy that supports economic liberalization

Neoliberalism or neo-liberalism is the 20th-century resurgence of 19th-century ideas associated with laissez-faire economic liberalism and free market capitalism. While it is most often associated with such ideas, the defining features of neoliberalism in both thought and practice has been the subject of substantial scholarly discourse. These ideas include economic liberalization policies such as privatization, austerity, deregulation, free trade and reductions in government spending in order to increase the role of the private sector in the economy and society. These market-based ideas and the policies they inspired constitute a paradigm shift away from the post-war Keynesian consensus which lasted from 1945 to 1980.

Characteristics

Finance capitalism is characterized by a predominance of the pursuit of profit from the purchase and sale of, or investment in, currencies and financial products such as bonds, stocks, futures and other derivatives. It also includes the lending of money at interest; and is seen by Marxist analysts (from whom the term finance capitalism originally derived) as being exploitative by supplying income to non-laborers. [10] Academic defenders of the economic concept of capitalism, such as Eugen von Böhm-Bawerk, see such profits as part of the roundabout process by which it grows and hedges against inevitable risks. [11]

To invest is to allocate money in the expectation of some benefit in the future.

A currency, in the most specific use of the word, refers to money in any form when in use or circulation as a medium of exchange, especially circulating banknotes and coins. A more general definition is that a currency is a system of money in common use, especially for people in a nation. Under this definition, US dollars (US$), pounds sterling (£), Australian dollars (A$), European euros (€), Russian rubles (₽) and Indian Rupees (₹) are examples of currency. These various currencies are recognized as stores of value and are traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are defined by governments, and each type has limited boundaries of acceptance.

Bond (finance) instrument of indebtedness

In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds.

In financial capitalism, financial intermediaries become large concerns, ranging from banks to investment firms. Where deposit banks attract savings and lend out money, while investment banks obtain funds on the interbank market to re-lend for investment purposes, investment firms, by comparison, act on behalf of other concerns, by selling their equities or securities to investors, for investment purposes. [12]

Social implications

The meaning of the term financial capitalism goes beyond the importance of financial intermediation in the modern capitalist economy. It also encompasses the significant influence of the wealth holders on the political process and the aims of economic policy. [13]

Thomas Palley has argued that the 21st century predominance of finance capital has led to a preference for speculation—Casino Capitalism—over investment for entrepreneurial growth in the global economy. [14]

Thomas Palley is an American economist who has served as the chief economist for the US–China Economic and Security Review Commission. He is currently Schwartz Economic Growth Fellow at the New America Foundation.

Historical developments

Rudolf Hilferding is credited with first bringing the term finance capitalism into prominence, with his (1910) study of the links between German trusts, banks, and monopolies before World War I—a study subsumed by Lenin into his wartime analysis of the imperialist relations of the great world powers. [15] Lenin concluded of the banks at that time that they were “the chief nerve centres of the whole capitalist system of national economy”: [16] for the Comintern, the phrase "dictatorship of finance capitalism" [17] became a regular one.

In such a traditional Marxist perspective, finance capitalism is seen as a dialectical outgrowth of industrial capitalism, and part of the process by which the whole capitalist phase of history comes to an end. In a fashion similar to the views of Thorstein Veblen, finance capitalism is contrasted with industrial capitalism, where profit is made from the manufacture of goods.

Fernand Braudel would later point to two earlier periods when finance capitalism had emerged in human history—with the Genoese in the 16th century and the Dutch in the 17th and 18th centuries—although at those points it was from commercial capitalism that it developed. [18] Giovanni Arrighi extended Braudel's analysis to suggest that a predominance of finance capitalism is a recurring, long-term phenomenon, whenever a previous phase of commercial/industrial capitalist expansion reaches a plateau. [19]

Whereas by mid-century the industrial corporation had displaced the banking system as the prime economic symbol of success, [20] the late twentieth-century growth of derivatives and of a novel banking model [21] ushered in a new (and historically fourth) period of finance capitalism. [22]

Fredric Jameson has seen the globalised abstractions of this current phase of financial capitalism as underpinning the cultural manifestations of postmodernism. [23]

See also

Related Research Articles

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A market economy is an economic system in which the decisions regarding investment, production and distribution are guided by the price signals created by the forces of supply and demand. The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of capital and the factors of production.

A mixed economy is variously defined as an economic system blending elements of market economies with elements of planned economies, free markets with state interventionism, or private enterprise with public enterprise. There is no single definition of a mixed economy, but rather two major definitions. The first of these definitions refers to a mixture of markets with state interventionism, referring to capitalist market economies with strong regulatory oversight, interventionist policies and governmental provision of public services. The second definition is apolitical in nature and strictly refers to an economy containing a mixture of private enterprise with public enterprise.

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Economic system system of production and exchange

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In Marxian economics, economic reproduction refers to recurrent processes. Michel Aglietta views economic reproduction as the process whereby the initial conditions necessary for economic activity to occur are constantly re-created. Marx viewed reproduction as the process by which society re-created itself, both materially and socially.

The history of capitalism has diverse and much debated roots, but fully-fledged capitalism is generally thought to have emerged in north-west Europe, especially in the Low Countries and Britain, in the sixteenth to seventeenth centuries. Over the following centuries, capital has accumulated by a variety of different methods, in a variety of scales, and associated with a great deal of variation in the concentration of economic power and wealth, and capitalism has gradually become the dominant economic system throughout the world. Much of the history of the past five hundred years is, therefore, concerned with the development of capitalism in its various forms.

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References

  1. Neal, Larry: The Rise of Financial Capitalism: International Capital Markets in the Age of Reason (Studies in Monetary and Financial History). (Cambridge University Press, 1993, ISBN   9780521457385)
  2. Goetzmann, William N.; Rouwenhorst, K. Geert: The Origins of Value: The Financial Innovations that Created Modern Capital Markets. (Oxford University Press, 2005, ISBN   978-0195175714))
  3. Rothbard, Murray: Making Economic Sense, 2nd edition. (Ludwig von Mises Institute, 2006, ISBN   9781610165907), p. 426. In own words of the Austrian School economist Ludwig von Mises, "A stock market is crucial to the existence of capitalism and private property. For it means that there is a functioning market in the exchange of private titles to the means of production. There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist."
  4. Dore, Ronald: Stock Market Capitalism, Welfare Capitalism: Japan and Germany versus the Anglo-Saxons. (Oxford University Press, 2000, pp. 280, ISBN   978-0199240616)
  5. Preda, Alex: Framing Finance: The Boundaries of Markets and Modern Capitalism. (University of Chicago Press, 2009, pp. 328, ISBN   978-0-226-67932-7)
  6. "Capitalism" by John Scott and Gordon Marshall in A Dictionary of Sociology Oxford University Press 2005. Oxford Reference Online. Oxford University Press
  7. Simon Johnson, "The Quiet Coup", May 2009, The Atlantic.
  8. R. Munck, Globalization and Labour (2011) p. 77–8
  9. Charles R. Morris, The Trillion Dollar Meltdown (2008) p. 156
  10. "The Contradiction of Capitalism in the Search for Democracy", Latin American Perspectives, Vol. 24, No. 3, Ecuador, Part 1: Politics and Rural Issues (May, 1997), pp. 116–122
  11. F. Boldizzoni, Means and Ends: The Idea of Capital in the West 1500–1970, Palgrave Macmillan 2008, pp. 128–32
  12. J. Bradford De Long & Carlos D. Ramirez, "Understanding America’s Hesitant Steps Toward Financial Capitalism", 1996, UC Berkeley Archived 2012-03-13 at the Wayback Machine .
  13. Dimitri B. Papadimitriou & L. Randall Wray, "Minsky's Analysis of Financial Capitalism, 1999
  14. Thomas Palley, From Financial Crisis to Stagnation (2012) p. 218
  15. Frederic Jameson, 'Culture and Finance Capital', in The Jameson Reader (2005) p. 257
  16. Quoted in E. H. Carr, The Bolshevik Revolution 2 (1971) p. 137
  17. Quoted in F. A Voight, Unto Caesar (1938) p. 22
  18. C. J. Calhoun/G. Derluguian, Business as Usual (2011) p. 57
  19. Jameson, p. 259-60
  20. A. Sampson, Anatomy of Britain Today (1969) p. 475
  21. P.Auger, Chasing Alpha (2009) p. 122 and p. 108
  22. Jameson, p. 256-7
  23. Jameson, p. 268-273

Further reading