Financialization of the US Economy
Media
Part of Financialization of the US Economy
- Title
- Financialization of the US Economy
- extracted text
-
Financialization of the US Economy
GERALD (JERRY) F. DAVIS and SUNTAE KIM
Abstract
“Financialization” describes the increasing centrality of finance and financial considerations to the workings of the economy. This essay reviews the evidence that
(i) creating shareholder value became a predominant concern for corporations since
1980, particularly in the United States, and (ii) the financial sector gained increasing prominence and power in the economy, with a number of consequences for the
operations of corporations and the organization of society. Opportunities for future
research are discussed including documenting the rise of securitization and its effect
on the finance industry; understanding the emergence of new noncorporate forms of
organization not tied to financial markets; finance and social movements; and finance
and culture.
INTRODUCTION
During the past 30 years financial markets became pervasive. The number of
countries with a domestic stock market doubled after 1985, and some new
markets, such as those in China, grew to be worth trillions of dollars (Weber,
Davis, & Lounsbury, 2009). Cross-border financial flows expanded from a
trickle to a flood, as country after country reduced barriers to outside investment. Moreover, the range of things traded on financial markets spread from
corporate stock and bonds to pools of home mortgages, auto loans, credit
card receivables, and business loans, to exotic asset-backed securities such as
Bowie Bonds and bonds backed by the insurance payoffs of the elderly and
terminally ill.
In the most financially advanced economies such as the United States,
financial transactions increasingly replaced the production of goods and
services at the center of the economy. By the turn of the millennium, 40%
of corporate profits were attributable to finance, and the richest compensation went to those running hedge funds, not those running corporations.
Meanwhile, employment in manufacturing continued to decline: during the
first decade of the new century, manufacturing lost one-third of its jobs, and
Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
© 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.
1
2
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
during the recession that capped the decade, more people were unemployed
than working in manufacturing.
The financial crisis of 2008 laid bare some of the contradictions of a financialized economy. Americans had come to treat their homes as a financial
asset, and with the ready availability of refinancing, millions refinanced
their homes to gain access to increased valuations, in part to make up for
stagnant household incomes. When the housing bubble burst, more than
one-quarter of mortgages eventually ended up “underwater” (that is, the
loans were worth more than the house itself), and millions of homeowners
were foreclosed. Venerable Wall Street firms, commercial banks, insurance
companies, and lenders across the country went bust. But because mortgages
had generally been “securitized” and sold to global investors, the damage
spread widely to include banks and pensioners around the world.
In this essay we review the evidence for financialization and its impacts
on the corporate economy and the broader society. Although there has been
substantial research on how corporations have been affected by the shift
to “shareholder capitalism,” there is great unexplored territory worthy of
further exploration. We suggest four broad lines of future inquiry that will
enrich social scientific understanding of financialization and its effects.
FOUNDATIONAL RESEARCH
FINANCIALIZATION DEFINED
“Financialization” describes the increasing centrality of finance and financial
considerations to the workings of the economy. At the firm level, signs of
financialization come from the dominance of an orientation of corporations
toward shareholder value. Practically speaking, this means being driven
by an overriding concern with a company’s share price, and with the
markets that determine it. This is often contrasted with an orientation
towards “stakeholders” such as employees and communities. Critics of
financialization argue that “shareholder primacy” has diminished a focus on
other stakeholders. At the level of the broader economy, financialization is
indicated by the increasing importance of the financial sector as a source of
profit and employment. For instance, it is widely reported that by 2000, 40%
of the profits of US corporations came from financial activities. Finance has
also become perhaps the most remunerative sector of the economy. Kaplan
and Rauh (2010) report that the top five hedge fund managers in 2004 earned
more than all of the CEOs in the S&P500 combined. Thus, financialization is
associated with increasing inequality.
Krippner (2005, 2011) provides the authoritative account of the financialization of the American economy. Beginning in the 1970s, corporations in
Financialization of the US Economy
3
the United States saw an increasing proportion of their profits coming from
financial activities rather than production. “Financial activities” include
income from interest payments, dividends and capital gains on investments.
Manufacturing led this trend, which subsequently spread to firms in other
nonfinancial sectors. Examples of this include the outsize profitability of
financing units at old-line industrial firms such as Ford, GM, and GE relative
to manufacturing. In many cases, industrial firms made more profits from
financing the lease or purchase of their products than they did from the
products themselves. Krippner also finds that an increasing proportion of
profits were generated in the financial sector relative to the nonfinancial
sector. The proportion of corporate profits in financial firms increased from
20% in 1980 to 30% in early 1990s. By the turn of the twenty-first century,
financial industry took up 40% of entire corporate profits in US economy.
ANTECEDENTS TO FINANCIALIZATION
There are at least four distinct views on how finance came to economic
dominance within the United States and more broadly. The first attributes
financialization to speculative mania. In the United States, both the stock
market and the housing market saw rapid surge in prices that encouraged
broad participation in these markets during the 1990s and 2000s, followed
by rapid collapses. Minsky (1986) and others have argued that such bubbles
are endogenous to financial markets.
The second points to factors in the corporate economy that led to the rise
of shareholder capitalism, first within the United States and subsequently
in other global economies. With the United States, the emergence of a corporate takeover market in the 1980s was caused by deteriorating macroeconomic conditions (inflating the value of corporate assets while depressing
stock prices), changes in state policy (relaxed anti-trust restriction under the
Reagan administration), and a series of financial innovations such as junk
bonds. This led first to the breakup of the conglomerates into leaner and
more focused firms. It also altered compensation practices to focus executive’s attention on stock price, as an increasing proportion of their pay came
in the form of stock options. Corporate ownership increasingly came into the
hands of institutional investors driven by a financial orientation, who implicitly or explicitly encouraged corporations to spin off unprofitable divisions,
lay off workers, or engage in financial engineering, all in the name of “creating shareholder value.”
Third, a world-systems view, flowing out of a Marxist tradition, points to
financialization as a transition point in the cycle of material expansion. This
view points to the stagnationist tendencies of mature capitalism: “Advanced
4
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
industrial capitalism tends toward stagnation because the productive capacity of large, oligopolistic firms far outstrips demand for their products, especially in the absence of mechanisms to redistribute wealth to the working
class (Krippner, 2011, p. 12).” In response, finance capital reasserts its power
by pushing firms towards a financial orientation. According to Arrighi (2010),
this transition to financialization is a more or less predictable phase among
economic hegemons, as similar transitions occurred among the Genoese, the
Dutch, and the British. China is the presumptive inheritor of the mantle of
global hegemon.
Finally, political sociologists (most prominently Krippner) see financialization in the United States as an unintended consequence of policy shifts to
avoid state crisis in the late 1960s and 1970s.
During this period, the US government increasingly faced a mismatch
between the demands of diverse social groups and decreasing available
revenues to meet those demands. This led to a social crisis, with increasing
tension between social groups making conflicting demands; a fiscal crisis
caused by the structural gap between governmental revenue and spending;
and a legitimation crisis as a result of a declining confidence in government
to deal with social problems. US policymakers responded to these crises
by avoiding tough choices and instead delegating choice to the market
mechanism, which “transformed the resource constraints of the 1970s into
new era of abundant capital” (Krippner, 2011, p. 22). This master decision
took the form of three specific shifts in economic policies: deregulation of
US financial markets, which yielded abundant credit; increasing interest
rates, which encouraged an influx of foreign capital; and changes in the
overall approach to monetary policy. These policies in turn enhanced
the profitability of the financial sector, which handles the flow of credit,
and encouraged speculative behavior among nonfinancial firms. Notably,
financialization was not an explicit aim, but an unintended consequence of
upstream policy shifts.
CONSEQUENCES OF FINANCIALIZATION
The increasing centrality of finance to the American economy has re-shaped
the operations of corporations, from how they are structured and connect
with labor to how the proceeds from their activities are distributed. The
biggest single effect of financialization has been the increased share of
corporate profits going to shareholders and, to some extent, executives at
the expense of labor. Dividends as a percentage of total profits in the United
States doubled from 22.8% in 1946–1979 to 46.3% in 1980–2008, indicating
a regime shift in how profits are allocated in favor of shareholders (Torres,
International Labour Organization, & International Institute for Labour
Financialization of the US Economy
5
Studies, 2009). Executive compensation is increasingly contingent on the
creation of shareholder value rather than fixed. In the early 1990s, executives
received 35% of their compensation via stock options, while by 2008 it
had increased to 77%, making it by far the largest component of executive
pay (Jarque, 2008). In contrast, labor’s share of the pie, and its security,
have declined. Among advanced economies, wage share for the five most
financialized countries declined by 3.5% over the period of 1989–2005,
while for the five least financialized countries, wage share dropped only
by 2% for the same period of time (Torres et al., 2009). Notably, countries
with the highest union densities saw the lowest increase in financialization
while countries with the lowest union densities saw the greatest increase in
financialization.
The leveraged buyout (LBO) provides a microcosm of how finance shapes
corporate governance. LBO is a widespread practice in corporate takeover,
in which the acquisition of a firm is financed through the combination of
equity and debt, and the debt is secured or repaid by the asset or future
cash flow of the target company. Private equity funds typically use this
practice because employing high leverage (having high debt to equity
ratio) inflates the return on equity. A general tendency involved in LBOs
is “quick flips”, meaning private equity funds acquire the target firm and
exit the firm within a year. Indeed, of all buyouts sponsored by private
equity, 42% exited within the first 5 years, and the holding period of LBO
is on a steep decline, from almost 80 months in late 1980s to less than 20
months in late 2000s (Strömberg, 2008). In this short period of ownership,
private equity funds are incentivized to engage in corporate restructuring
aimed at increasing future cash flow and divesting unprofitable asset of
the target firm, in order to repay the high level of debt involved in initial
buyout deal. Specifically, through renegotiating old labor contracts, private
equity investors reduce staff levels and employee wage. In a study of 5000
US firms acquired in private equity transactions between 1980 and 2005,
it was found that employment of acquired firms shrunk more rapidly
than the firms in control group by 7% during the first 2 years after LBO
(Davis, Haltiwanger, Jarmin, Lerner, & Miranda, 2011). Also, LBOs can have
negative effect on other employee benefits, because buyout deals do not bind
acquirers with existing agreements between firm and labor but allow them
to stop contributing to the old retirement plans for employees. In addition,
following LBOs by private equity firms, target firms tend to engage in more
acquisitions and divestment than the firms in control group (Davis, et al.,
2011). The ultimate harm of LBOs is that some of the target firms in buyouts
subsequently fail and go out of business, eliminating the entire employment.
It is reported that 6% of all LBOs eventually fail, which is higher than
6
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
average bankruptcy rates among all publicly-traded firms in the United
States (Strömberg, 2008).
At a broader level, the financialization of the corporate sector has had rippling effects on society. Job security has declined. Hacker (2006) reports that
in 1982, when the unemployment rate hit almost 10%, only 12% of workers
were “frequently concerned about being laid off,” while the number went up
to 35% in 2005, when the unemployment rate was 5%. Also, long-term unemployment (i.e., unemployment lasting more than 6 months) in 2005 was three
times as high as it was in the 1960s. Pensions have become riskier, as corporations shifted from “defined benefit” pensions (where employees receive a
fixed payment on retirement according to their years of service) to “defined
contribution” plans (in which retirement pay depends on the performance
of the market). Cobb (2012) documents that this shift was a direct result of
investor influence within large corporations. Finally, corporations increasingly seek to avoid providing traditional social welfare benefits. Briscoe
and Murphy (2012) finds that since the 1990s, retiree health benefits came to
be seen as financial liability to investors, which made corporate employers
become increasingly sophisticated in cutting medical and other retirement
benefits in forms that would be invisible to their current employees.
CUTTING EDGE RESEARCH
EFFECTS OF FINANCIALIZATION ON CORPORATE STRATEGIES AND STRUCTURES
Financialization has had profound implications for how corporations are run
in the United States, leading to the dominance of Wall Street over Main Street.
One indication of this influence is in changing statements about corporate
purpose. During the post-War era, corporate executives acknowledged obligations to a broad set of stakeholders. According to economist Carl Kaysen, “No longer the agent of proprietorship seeking to maximize return on
investment, management sees itself as responsible to stockholders, employees, customers, the general public, and, perhaps most important, the firm
itself as an institution.” Moreover, “Its responsibilities to the general public are widespread: leadership in local charitable enterprises, concern with
factory architecture and landscaping, provision of support for higher education, and even research in pure science, to name a few” (Kaysen, 1957,
pp. 313–314). By the late 1990s, however, only one corporate purpose was
acknowledged: the creation of shareholder value.
“We exist to create value for our share owners on a long-term basis by building
a business that enhances The Coca-Cola Company’s trademarks.”
—from Coca-Cola Company’s 1999 mission statement
Financialization of the US Economy
7
“Sara Lee Corporation’s mission is to build leadership brands in consumer
packaged goods markets around the world. Our primary purpose is to create
long-term stockholder value.”
—from Sara Lee Corporation’s 1999 mission statement
These statements were not pure puffery, as corporations systematically
restructured themselves in an effort to appeal to Wall Street. Increased
focus on shareholder value led to increases in layoff through investment
in technology, and also to deunionization of labor (Fligstein & Shin, 2007).
An international comparative study has also shown that in the regions
where shareholder rights are stronger, hostile takeovers occurred more
frequently (Schneper & Guillén, 2004). More broadly, corporate structures
became increasingly industrially focused, first through de-diversification
(Davis, Diekmann, & Tinsley, 1994) and subsequently through outsourcing.
Executives were frank about their rationales:
“Wall Street can wipe you out. They are the rule-setters. They do have their fads,
but to a large extent there is an evolution in how they judge companies, and
they have decided to give premiums to companies that harbor the most profits
for the least assets.”—John Bryan, CEO, explaining Sara Lee’s “deverticalization”
program in 1997
“We believe the market value of The Associates is neither fully nor consistently
reflected in Ford’s stock price. Because the market views Ford as an automotive
company, it has not fully recognized or rewarded us for our diversification in
nonautomotive financial services businesses.”—Alex Trotman, CEO, announcing
spinoff of financial subsidiary The Associates
By the 2000s, many shareholder-oriented corporations had abandoned production entirely, following the model of Nike, in which production and distribution are handled by contractors.
Yet executives were hardly helpless in the face of investor pressures, and
many became quite skilled in generating “Potemkin village” approaches to
strategy and structure. CEOs found a way to manage the pressure through
symbolic alignment with shareholder value. Westphal and Zajac (1998) found
that the announced adoption of CEO incentive plans generated positive
stock market returns and deterred more substantive corporate governance
reform even if the change was not actually implemented. Corporate executives also rediscovered new value in old practices. For example, the financial
market response to stock repurchase plans shifted from negative to positive
as agency logic of corporate governance (turn to financialization) became
dominant in the mid-1980s (Zajac & Westphal, 2004). Finally, executives
engaged in impression management with representatives of the powerful
financial sector. CEO’s ingratiation towards institutional fund managers
8
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
weakened the influence of institutional ownership on corporate governance
practice that may be negatively affect CEO power—such as board reform,
CEO compensation, and diversification (Westphal & Bednar, 2008).
FINANCIALIZATION BEYOND THE CORPORATION
It is not just corporate shares and bonds that are traded on financial markets.
Mortgages, business receivables, credit card debt, student loans, and even the
payoffs of life insurance contracts on the elderly and terminally ill have been
turned into “securities” (bonds). Thus, financialization reaches deep into the
everyday lives of households. The process of turning financial assets such as
loans into tradable securities is called securitization. The most familiar form
of asset-backed security is a mortgage bond, in which hundreds or thousands of mortgages are pooled together and divided into bonds backed by
the expected future payments of the mortgage buyer. Mortgage-backed securities were traditionally considered safer than individual mortgages because
their cash flows were rendered more predictable via the law of large numbers.
This same basic idea can be applied to almost any regular cash flow:
business loans, car loans, student loans, lawsuit payments, or insurance
payoffs. Thus, banks and other businesses found that they could resell
the loans they had made to access future cash flows now. Investors were
happy to have new assets in which to invest, and investment banks were
happy to take a fee for underwriting new securities. As the corporate sector
demonstrates, responses of social actors to being publicly traded may be
complex. The mortgage market showed that the dynamics behind securitization can have malign consequences on a grand scale, when speculators
replaced homeowners and banks passed off weak loans as strong. Although
much has been written about the financial crisis, the broader implications of
securitization for society have yet to be fully explored.
KEY ISSUES FOR FUTURE RESEARCH
Most research on financialization to date has focused on documenting its
occurrence and its influence on corporate structures and governance. Far less
attention has gone to showing other concomitants of financialization. We here
highlight four of these as domains for future research.
SECURITIZATION AND THE FINANCE INDUSTRY
One of the most profound changes made through financialization is the
replacement of traditional finance with market-based finance across a wide
landscape via securitization. Mortgage securitization is the best-known
Financialization of the US Economy
9
form. Mortgages had traditionally been a highly local business in which a
bank or thrift took in deposits in their community to make local mortgage
loans. Jimmy Stewart’s character explained how the traditional model of a
savings and loan worked in the famous bank run scene in the movie It’s a
wonderful life.
“No, but you … you’re thinking of this place all wrong. As if I had the money
back in a safe. The money’s not here. Your money’s in Joe’s house … right next
to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred
others. Why, you’re lending them the money to build, and then, they’re going
to pay it back to you as best they can. Now what are you going to do? Foreclose
on them?”
A contemporary update would be very different (Davis, 2009a):
“No, but you … you’re thinking of this place all wrong. As if I held your mortgage on my balance sheet. I sold your mortgage to Countrywide 10 minutes
after we closed the deal, and they sold it along with 3000 other mortgages
to Merrill Lynch, which divided it into bonds that were bought by a Cayman
Islands LLC, which bundled them together with other mortgage–backed bonds
into a collateralized debt obligation that Citigroup sold to a Norwegian pension
fund. Now what are you going to do? Stop making your payments and force
those Norwegian retirees to go back to work?”
Mortgage banking went from being one of the most localized and
vertically-integrated industries to one of the most global and disintegrated
through the magic of securitization. We have seen some of the consequences
of this new model, and countless tomes have been written on the financial
crisis. The basic model of securitization—take a financial asset (such as a
loan or other regular cash flow), bundle it with other financial assets, and
turn it into bonds to be sold on the market—has fundamentally transformed
the banking industry. In principle, almost anything on a bank’s balance
sheet, from credit card receivables to business loans, can be securitized,
which potentially profound effects. Quinn (2008) documented the rise of
the “viatical” industry, in which individuals sell the payoffs of their life
insurance contracts to investors. A moment’s thought reveals that this can
create incredibly malign incentives: investors’ returns are higher the quicker
the seller dies. Television personality Larry King had sold the payoffs of his
life insurance contracts to investors, but then sued to reverse the deal after
giving it some thought. His lawyer stated, “The insured never knows if the
guy barreling down the highway in a large truck coming in the opposite
direction holds the insurance policy on his life. We don’t know whether the
owner is a Wall Street hedge fund or a Mafia don.”
10
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
Securitization has reshaped the finance industry in ways that are only
beginning to be mapped out, turning sleepy Caribbean islands into global
centers of financial intrigue and undermining much of the traditional business of commercial banking. When loans are almost immediately turned into
bonds, the traditional distinction between commercial banking (taking in
deposits and making business loans) and investment banking (underwriting
securities issuance) is ephemeral. Traditional banks are simply the brand
facade for Wall Street, much as firms such as Nike are the front for goods
manufactured by anonymous contractors. Securitization also links “issuers”
and “investors” around the world through occult financial flows. “Through
my pension plan, I may own part of my neighbor’s home mortgage, auto
loan, credit card debt, and be a beneficiary of his life insurance. “Social
capital” had come to take on a more than metaphorical meaning” (Davis,
2009b, p. 36).
Key research questions on securitization include:
•
•
•
•
How does the alienability of debt change incentives and economic
relations? Some early evidence confirms that banks made lower-quality
mortgage loans when they knew that those loans would be securitized,
a problem economists refer to as moral hazard. Does this apply more
broadly, for instance, to business loans? With what effect?
How do people think differently when intimate things become securitized? Zelizer (1979) has explored issues such as the creation of the life
insurance industry, but the prevalence of such markets has grown vast,
as educational loans, insurance contracts, and credit card debt have been
securitized.
When does politics intervene in securitization? For instance, when is it
disallowed to sell life insurance payoffs? (In the United States, it is illegal
for veterans to re-sell their pensions, although it is nonetheless common.)
What are the political limits of securitization?
Who wields economic power in a world of securitization? If banks are
no longer indispensable sources of capital, what institutions or entities
(if any) have taken their place?
FINANCE-RESISTANT FORMS OF ORGANIZATION
Recent years have seen a proliferation of new forms of organization that are
not dependent on traditional market-based finance. To a large degree, the
shape of formal organizations follows from the format of its financing, that
is, where it gets its money and who owns the proceeds from its endeavors.
Schneiberg (2011) has extensively documented the variety of organizational
forms that arose in the United States as alternatives and competitors to the
Financialization of the US Economy
11
public corporation, avoiding reliance on markets for funding. Cooperatives
are owned by workers, producers, or consumers rather than investors, and
are still common as a way for farmers to jointly own processing equipment
and distribution channels (e.g., Land o’ Lakes, REI). Mutuals are owned by
those who use their products, and are widespread in insurance (e.g., State
Farm). Municipal companies such as water and power providers are owned
by cities or other political units. In each case they provide alternatives to
financially-oriented companies. Legal changes in recent years have allowed
experiments in legal forms such as the benefit corporation, which in several
states provides an organizational form that explicitly eschews a primary
emphasis on creating shareholder value. Flexible purpose corporations
and low-profit limited liability corporations (L3Cs) also provide a legal
format to compete with both traditional for-profit companies and nonprofit
organizations.
More recently, new forms of “crowdsourced” financing have become available. For instance, some entrepreneurs use Kickstarter as a device to raise
funds for their businesses without necessarily giving up an ownership stake,
and this form was legitimated by Federal legislation in 2012. New financing
channels may well promote new formats of organization.
Key research questions on finance-resistant forms of organization include:
•
•
•
•
When and where do founders avail themselves of new forms of organization? Are there particular demographic or cultural factors that encourage the new noncorporate forms?
What cultural and institutional factors shape the format of new organizations made possible by new law and finance?
In what industries are alternative forms more prevalent? Why?
Do new forms of organization not dependent on financial markets yield
distinctive social benefits?
FINANCE AND SOCIAL MOVEMENTS
The rise of finance and the financial crisis have been accompanied by the rise
of oppositional social movements around the world, both formalized and
informal. Across the globe, and beginning in the United States in September
2011, the Occupy movement created a new focus on inequality and the outsize influence of Wall Street. Rising inequality and its link to financialization
became a prominent issue in public discourse in the United States for the first
time in living memory. There have also been social movements within finance
itself, as constituencies that regard themselves as disenfranchised within traditional corporate governance sought increased influence. Thus, institutional
investors relied on the tactics of social movements to advocate for corporate
reforms (Davis & Thompson, 1994).
12
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
Key research questions on finance and social movements include:
•
•
•
What are the characteristic forms of opposition? How does the repertoire
of contention vary among different groups in response to financialization?
How can the power of finance be used by social movements? For
instance, how effective is the responsible investment movement in
changing corporate practice?
Corporations vary with forms of financing—is this also true of social
movements? Are both linked to varieties of capitalism?
FINANCE AND CULTURE
The effects of finance go deeper than simply changing how businesses work.
In the United States, finance has become a worldview, a way of life. Polanyi
(1944) defined the “commodity fiction” that accompanied industrialization:
land and labor came to be treated as commodities produced for sale on a market. Similarly, Davis (2009a) describes the “capital fiction” in which categories
of social life are regarded as forms of capital. Education and talent are considered as “human capital,” and friends, families, and communities become
“social capital,” each category of assets suitable for investment or divestment. When more than half of all households are invested in the stock market,
the investment metaphor transfers readily and is reinforced by the pervasive
availability of information on how the market is doing. An example of this
is perceptions of political interest. Nessler, Natalie and Davis (2012) found
that stockholders came to identify themselves as Republicans to a far greater
extent than did nonstockholders in the early 2000s, and this effect persisted
through the 2008 election even though the market had collapsed. It appeared
that “stockholder” was not just a simple pecuniary interest, but had become
a core aspect of their identity.
Key research questions on finance and culture include:
•
•
•
How does ownership affect identity and interests? How can this question be researched in ways that overcome endogeneity? For instance,
could one construct an experiment to see how financial interests influence individual cognitions and political perceptions?
How did the “capital” metaphor come to spread so widely? Do aspects of
this metaphor also diffuse—for instance, do people purposefully invest
and divest in their “social capital” in ways that follow investment nostrums?
How does the extreme compensation in financial industries shape educational choices and pathways to mobility?
Financialization of the US Economy
13
REFERENCES
Arrighi, G. (2010). The long twentieth century: Money, power, and the origins of our times.
London, England: Verso.
Briscoe, F., & Murphy, C. (2012). Sleight of hand? Practice opacity, third-party
responses, and the interorganizational diffusion of controversial practices. Administrative Science Quarterly, 57(4), 553–584. doi:10.1177/0001839212465077
Cobb, J. A. (2012). From the ’treaty of detroit’to the 401 (k): The development and evolution
of privatized retirement in the united states (Doctoral dissertation). Available from
The University of Michigan, Ann Arbor, MI.
Natalie-Nessler, N.C., & Davis, G. F. (2012). Stock Ownership, Political Beliefs, and
Party Identification from the “Ownership Society” to the Financial Meltdown.
Accounting, Economics, and Law, 2 (2) Article 6.
Davis, G. F. (2009a). Managed by the markets: How finance reshaped America. Oxford,
England: Oxford University Press.
Davis, G. F. (2009b). The rise and fall of finance and the end of the society of organizations. The Academy of Management Perspectives, 23(3), 27–44.
Davis, G. F., Diekmann, K. A., & Tinsley, C. H. (1994). The decline and fall of the
conglomerate firm in the 1980s: The deinstitutionalization of an organizational
form. American Sociological Review, 59(4), 547–570.
Davis, G. F., & Thompson, T. A. (1994). A social movement perspective on corporate
control. Administrative Science Quarterly, 39(1), 141–173.
Davis, S. J., Haltiwanger, J. C., Jarmin, R. S., Lerner, J., & Miranda, J. (2011). Private
equity and employment. Cambridge, MA: National Bureau of Economic Research.
Fligstein, N., & Shin, T. (2007). Shareholder value and the transformation of the
U.S. Economy, 1984–20001. Sociological Forum, 22(4), 399–424. doi:10.1111/j.15737861.2007.00044.x
Hacker, J. S. (2006). The great risk shift: The assault on american jobs, families, health care
and retirement and how you can fight back. New York, NY: Oxford University Press.
Jarque, A. (2008). CEO compensation: Trends, market changes, and regulation. Economic Quarterly—Federal Reserve Bank of Richmond, 94(3), 265–300.
Kaplan, S. N., & Rauh, J. (2010). Wall Street and Main Street: What contributes
to the rise in the highest incomes? Review of Financial Studies, 23(3), 1004–1050.
doi:10.1093/rfs/hhp006
Kaysen, C. (1957). The social significance of the modern corporation. American Economic Review: Papers and Proceedings, 47, 311–319.
Krippner, G. R. (2005). The financialization of the American economy. Socio-Economic
Review, 3(2), 173–208. doi:10.1093/SER/mwi008
Krippner, G. R. (2011). Capitalizing on crisis: The political origins of the rise of finance.
Cambridge, MA: Harvard University Press.
Minsky, H. P. (1986). Stabilizing an unstable economy. New Haven, CT: Yale University
Press.
Polanyi, K. (1944). The great transformation: Economic and political origins of our time.
New York, NY: Rinehart.
14
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
Quinn, S. (2008). The transformation of morals in markets: Death, benefits, and the
exchange of life insurance policies. American Journal of Sociology, 114(3), 738–780.
Schneiberg, M. (2011). Toward an organizationally diverse american capitalism?
Cooperative, mutual, and local, state-owned enterprise. Seatle University Law
Review, 34, 1409–1434.
Schneper, W. D., & Guillén, M. F. (2004). Stakeholder rights and corporate governance: A cross-national study of hostile takeovers. Administrative Science Quarterly,
49(2), 263–295.
Strömberg, P. (2008). The new demography of private equity. The global impact of
private equity report, pp. 3–26.
Torres, R., & International Labour Organization, & International Institute for Labour
Studies (2009). World of work report 2009: The global jobs crisis and beyond. Geneva,
Switzerland: International Institute for Labour Studies.
Weber, K., Davis, G. F., & Lounsbury, M. (2009). Policy as myth and ceremony? The
global spread of stock exchanges, 1980–2005. Academy of Management Journal, 52(6),
1319–1347. doi:10.5465/amj.2009.47085184
Westphal, J. D., & Bednar, M. K. (2008). The pacification of institutional investors.
Administrative Science Quarterly, 53(1), 29–72.
Westphal, J. D., & Zajac, E. J. (1998). The symbolic management of stockholders:
Corporate governance reforms and shareholder reactions. Administrative Science
Quarterly, 43(1), 127–153.
Zajac, E. J., & Westphal, J. D. (2004). The social construction of market value: Institutionalization and learning perspectives on stock market reactions. American Sociological Review, 69(3), 433–457.
Zelizer, V. A. R. (1979). Morals and markets: The development of life insurance in the United
States. New York, NY: Transaction Publishers.
FURTHER READING
Davis, G. F. (2009). Managed by the markets: How finance reshaped America. Oxford, England: Oxford University Press.
Krippner, G. R. (2011). Capitalizing on crisis: The political origins of the rise of finance.
Cambridge, MA: Harvard University Press.
GERALD (JERRY) F. DAVIS SHORT BIOGRAPHY
Gerald (Jerry) F. Davis is the Wilbur K. Pierpont Collegiate Professor of Management at the Ross School of Business and Professor of Sociology, The University of Michigan. Davis received his PhD from the Graduate School of
Business at Stanford University. Recent books include Social Movements and
Organization Theory (with Doug McAdam, W. Richard Scott, and Mayer
N. Zald; Cambridge University Press, 2005) and Organizations and Organizing: Rational, Natural, and Open System Perspectives (with W. Richard
Financialization of the US Economy
15
Scott; Pearson Prentice Hall, 2007). Davis has published widely in management, sociology, and finance. He is currently editor of Administrative Science
Quarterly and codirector of the Interdisciplinary Committee on Organization Studies (ICOS) at Michigan. Davis’s research is broadly concerned with
corporate governance and the effects of finance on society. His latest book
Managed By the Markets: How Finance Reshaped America (Oxford University Press, 2009) examines how finance replaced manufacturing at the center
of the American economy, and what the consequences have been for corporations, banking, states, and households in the twenty-first century. In 2010 he
was awarded the Academy of Management’s George R. Terry Book Award
for Outstanding Contribution to the Advancement of Management Knowledge.
SUNTAE KIM SHORT BIOGRAPHY
Suntae Kim is a PhD candidate in Management & Organizations at the University Michigan’s Ross School of Business. His research focuses on how
alternative forms of organizing emerge to increase organizational diversity
of modern economy, and the technological/cultural factors involved in this
process. In this context, he is also interested in the micro-level process of the
macro change, with a specific focus on noncognitive processes such as bodily and emotional feelings. His research on embodied cognition and creativity
was published in Psychological Science, and his preliminary study on the emergence of Certified B Corporations was presented in the 2012 annual meeting
of American Sociological Association. For his dissertation, Suntae is currently
conducting an ethnographic field research in metro Detroit area to see how
diverse social/economic experiments of alternative organizing are paving a
way to the revitalization of the region. Before pursuing a doctoral degree at
Michigan, he received his Bachelor and Master’s degree in Business Administration from Seoul National University in South Korea. He also participated
in the incubating process of a social enterprise, Orgdot, which won the finalist of Asian Social Venture Competition in 2009. When he does not ponder on
the future of organizations and society, he spends most of his time carefully
observing the developmental process of Eleanor, his one-year-old daughter.
RELATED ESSAYS
Global Economic Networks (Sociology), Nina Bandelj et al.
The Public Nature of Private Property (Sociology), Debbie Becher
Returns to Education in Different Labor Market Contexts (Sociology), Klaus
Schöemann and Rolf Becker
Emerging Trends: Asset Pricing (Economics), John Y. Campbell
16
EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES
Neoliberalism (Sociology), Miguel Angel Centeno and Joseph N. Cohen
Elites (Sociology), Johan S. G. Chu and Mark S. Mizruchi
Trust and Economic Organization (Sociology), Karen S. Cook and Bogdan
State
Stability and Change in Corporate Governance (Sociology), Gerald F. Davis
and Johan S. G. Chu
Institutions and the Economy (Sociology), Carl Gershenson and Frank
Dobbin
Global Income Inequality (Sociology), Glenn Firebaugh
Architecture of Markets (Sociology), Neil Fligstein and Ryan Calder
Labor Market Instability, Labor Market Entry and Early Career Development
(Sociology), Michael Gebel
Distributive Politics: Federal Outlays (Political Science), Sanford C. Gordon
and Woo Chang Kang
The Future of Employment, Wages, and Technological Change (Economics),
Michael J. Handel
Behavioral Economics (Sociology), Guy Hochman and Dan Ariely
Family Formation in Times of Labor Market Insecurities (Sociology), Johannes
Huinink
Can Public Policy Influence Private Innovation? (Economics), James Bessen
Search and Learning in Markets (Economics), Philipp Kircher
Transformation of the Employment Relationship (Sociology), Arne L. Kalleberg and Peter V. Marsden
Economics and Culture (Economics), Gérard Roland
Sociology of Entrepreneurship (Sociology), Martin Ruef
Impact of Limited Education on Employment Prospects in Advanced
Economies (Sociology), Heike Solga