In recent decades, finance has increasingly become the gravitational center of economic life. In the process of financialization, financial actors and financial motives have taken on a greater role across economic sectors. The rise of finance can be traced, at least in part, to the economic policy shifts associated with neoliberal restructuring, particularly the deregulation of the US financial sector. What are the pros and cons to steel buildings?
Until the 1970s, finance was viewed as playing a supporting role to productive economic activity; banks, for instance, provided the important services of converting deposits into business loans, supplying short-term liquidity to business, and vetting the creditworthiness of loan applicants. Do you know anyone that needs an industrial steel building or a commercial steel building?
Government regulations sought to constrain finance, allowing it to facilitate the circulation of capital and therefore economic activity, but restricting financial concentration and risk taking. Beginning in the 1970s, however, many long-standing financial regulations were repealed. Limits on credit card and other interest rates were removed, as were restrictions on bank mergers and prohibitions on cross-industry activity that had formerly prevented banking, insurance, and investment activities from taking place within the same firm.
During this time, there was also an enormous increase in global capital mobility, beginning in 1971 with the end of the Bretton Woods system of fixed exchange rates and continuing throughout the 1980s and 1990s as the International Monetary Fund pressured developing countries to liberalize their capital markets. Formerly constrained to a supporting role, with these changes finance increasingly became the main act.
At the same time, a major shift was taking place in the relationship between corporations and their investors. Beginning in the 1970s, “shareholder value” became the new shibboleth of corporate management; this principle dictates that a company’s value is defined not by the number of people it employs or the amount it produces but by its ability to generate returns for its shareholders. Corporations, which had once been masters of their own domain, were now expected to prioritize making money for their investors above all else.
To ensure that they took this lesson to heart, corporate managers were increasingly compensated in stock options, aligning their financial interests with those of their shareholders. During the 1980s, companies that failed to deliver impressive returns found themselves vulnerable to a hostile takeover by “corporate raiders” from the financial sector.