Financialisation, the process of making money from money itself, has spiralled out of control. The financial sector’s share of U.S. corporate profits soared from 10% in 1980 to 40% by 2007. This trend is not due to better financial services, but rather a shift in focus from serving the real economy to serving itself. It has become a parasite on the real economy, distorting resource allocation and income distribution.
The root cause is a shift in management philosophy. Traditional management aimed to balance the interests of all stakeholders. But in the 1970s, a new theory took hold: the sole purpose of a firm is to maximise shareholder value. This theory, combined with deregulation and globalisation, led to financialisation.
The consequences are profound. The economy is dominated by short-term thinking, with firms prioritising share buybacks over investment in the real economy. Inequality has grown, with the top 1% of earners capturing 95% of the income gains since 2009.
Reversing financialisation requires a return to traditional management values. This means prioritising long-term growth and the interests of all stakeholders, not just shareholders. Despite resistance from the financial sector, a shift is already underway. Firms are recognising the need for a more balanced approach to management, one that serves the real economy rather than just itself.
Go to source article: http://www.forbes.com/sites/stevedenning/2014/06/03/why-financialization-has-run-amok/