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

maskovic-Devey and McKinley 1981). The rise of institutional investors, both private (e.g.
pension funds) and public (e.g. countries running budget surpluses such as Japan in the 1980s
and China more recently) provided a steady source of investment capital to promoted continued
financialization (Orhangazi 2008).
At the same time the rise of the finance conception of the firm as a bundle of tradable as-
sets, replaced managerial commitments to investment and innovation in specific markets (Fligs-
tein 2001, Davis 2009). This produced a fundamental change in managerial behavior so that
finance oriented managers came to control major corporations and short-term planning to in-
crease stock price became the primary managerial focus. This shift to a shareholder value con-
ception of the firm was reinforced by the linking of top management pay to stock options rather
than long term market share, sales, or production based profit. Financialization, and particularly
the rise in long term real interest rates, also encouraged managers to invest in financial instru-
ments rather than in production.
The financialization of the economy both allowed and encouraged financial speculation.
While blaming the recent financial crisis simply on speculation (e.g. Schiller 2008) misses the
facilitating institutional organization of the economy, the post 1980 period is remarkable for a
series of financial bubbles driven by speculative herding behavior among investors including the
early 1980s international debt crisis, the real estate bubble and savings and loan crisis of the mid-
1980s, the stock market run-up and collapse of the late 1980s, the dot-com bubble of the late
1990s, the hedge fund expansion in the late 1990s, and the real estate and stock market bubbles
of the 2000s.
Similarly, financialization has encouraged corporate leaders to switch their investment
strategies from long to short term and from physical to financial investments. The increased fi-
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