Income Dynamics, Economic Rents and the Financialization of the ...

More documents

Recommendations

Info

(e.g. Weeden 2002). As presented below, rents may also be produced as a function of unintended demand, institutional or even ideological shifts. Because market actors rely on the state to create or endorse the ground rules for market exchange, the state is often an important audience and actor in rent creation and destruction political processes (Fligstein 2000). In an application of rent theory Morgan (Morgan and Tang 2007; Morgan and McKerrow 2004) develops an empirical strategy focusing on industry rents, highlighting industries’ shifting capacities to extract rents from a national market. This approach is broadly consistent with the well established economic result that both wages and profits tend to rise in industries where one (monopoly) or few (oligopoly) firms dominate production (Scherer and Ross 1990). Sorenson’s rent model directs scholar’s attention to additional institutional bases of market avoidance and rent creation such as state licensing (e.g. Weeden 2002) or the political manipulation of demand or regulatory structures (Fligstein 2000). We will show that both processes – industry concentration and changes in regulatory structure – are important for the shift of national income into the finance sector. Typically, sociological rent theory takes aggregate demand as exogenous to the process of rent creation. As we will see in the financialization story aggregate demand was not exogenous. The rise of institutional investors sharply increased demand for financial services and so are clearly part of the historically contingent growth of finance sector rents and political power. Compared to previous applications of rent theory we provide a more detailed institutional analysis of changes in market power and regulatory structure. Rent shifts have typically been inferred from shifts in income distributions across industries or occupations. While we follow this practice we believe that inferences are strengthened by documenting the actual shifts in actors’ constraints and behaviors as well. This also allows for a closer examination of the timing of 14
income dynamics, which should follow the institutional shifts we argue are producing them. Be- cause we disaggregate the finance sector into detailed industries we can also observe which actors during which historical moments realized the increased income associated with financialization. The rising share of national income in the finance sector, if it was created by increased market power linked to deregulation, industry concentration, and financial innovation, likely came at the expense of other actors in the economy. In a neoclassical economic model one might be tempted to claim that financialization, because it might increase the efficient allocation of capital, might have also increased economic activity overall, thereby raising all actors’ income. However, Stockhammer (2004) and Orhangazi (2008) show that the actual case was that financialization reduced non-financial firm’s capital investment in new productive assets and saw an increasing share of their cash flow diverted to the finance sector as increased profits. Fligstein and Shin (2007) show that, when non-financial firms pursue shareholder value strategies (which are closely linked to financialization in the discussion that follows), they did not actually produce increased profitability. 3. The Institutional Roots of Financialization Market institutions provide both the state sanctioned and culturally recognized rules of the game and the cognitive maps through which actors, including corporations and regulators, understand how the market works and their role within it, thereby shaping market strategies and the devel- opment of markets themselves (Fligstein 2000). In this section we provide a historical analysis of the institutional shifts in and around financial markets since 1980s. We start from the end of Post-War economic boom in the 1970s, which was perceived at the time not only as a crisis for 15
Page 1 and 2: Income Dynamics, Economic Rents and
Page 3 and 4: “I think everybody a few years ag
Page 5 and 6: economic sociology and political ec
Page 7 and 8: tion but since the two trends are l
Page 9 and 10: their profits as taxable income. Th
Page 11 and 12: While we have established that the
Page 13: ployees, a lower capital share of i
Page 17 and 18: serve Bank, led by Paul Voker, foug
Page 19 and 20: anks profitability, the second and
Page 21 and 22: Together these shifts in the instit
Page 23 and 24: nancial engagement of non-financial
Page 25 and 26: count suggests a certain happenstan
Page 27 and 28: The other finance sector industries
Page 29 and 30: from the society overall. The emplo
Page 31 and 32: as dramatic. In the Security indust
Page 33 and 34: egulatory relaxation and a general
Page 35 and 36: occurred if finance sector actors h
Page 37 and 38: of total national profits in the fi
Page 39 and 40: swaps. Clearly, the market and poli
Page 41 and 42: Our analysis points to the federal
Page 43 and 44: ents from other actors in the econo
Page 45 and 46: Krippner, Greta. 2005. “The Finan
Page 47 and 48: Stockhammer, Engelbert. 2004. “Fi
Page 49 and 50: %GDP 10 15 20 25 30 35 Figure 1. Fi
Page 51 and 52: Ratio 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1
Page 53 and 54: %Profits 0 5 10 15 20 Figure 5. Fin
Page 55 and 56: Ratio 1.0 1.5 2.0 2.5 3.0 Figure 7.
Page 57 and 58: Table 1. Summary of Institutional A
Page 59 and 60: Appendix A. Industry classification
Page 61 and 62: Appendix B. Sector and industry shi

Income Dynamics, Economic Rents and the Financialization of the ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?