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A new word has emerged in the lexicon of the new economy – financialization- defined as the “growing scale and profitability of the finance sector at the expense of the rest of the economy and the shrinking regulation of its rules and returns.” The success or failure of the financial sector has had serious effect on the rest of the economy and most of its returns have gone to the wealthy driving inequality.

As the New Deal regulations were slowly dismantled, the financial sector growth accelerated along with risks and speculation. The employment and total sales of the finance industry grew from 10% of GDP in 1970 to 20% by 2010. The emphasis was no longer on making things – it was making money from money.

At the same time the manufacturing industry fell from 30% of GDP in 1950 to 10% in 2010. The finance industry swelled as the rest of the economy weakened. The disproportionate growth of finance diverted income from labor to capital. Wall Street profits rose from less than 10% in 1982 to 40% of all corporate profits by 2003.

Since the 1980s, the financial industry has pursued short term financial returns over long term goals such as technology and product development investments. The financial industry, consequently, has played a major role in the decline of manufacturing in the U.S. for a variety of reasons.

Wall Street followed their capitalist instincts and saw that there was more profit in making money from money rather than in engineered products. They wanted quick returns of financial instruments and software rather than investing in the brick and mortar of expensive factories. They were also supportive of products that could be sold at Wal-Mart and manufactured overseas.

In an article C:UsersOwnerDesktoparticle in Industry Week, Susan Berger a professor at MIT makes the assertion that, “Since the 1980s, financial market pressures have driven companies to hive off activities that sustained manufacturing.” She gives the example of The Timken Company that was forced to split into two companies by the board of directors. The Chairman argued that the company should stay together because that is how it has been able to offer high quality products with good service support. The board overruled him based on the potential of better short term profits.

This stripping down the company to their core competencies has been forced on most of the large publicly held corporations to some degree. But in stripping them down, many critical functions are lost. For instance, apprentice type training has been lost in many American corporations because it is long term training and doesn’t have a good enough ROI. Basic research, funding to bring innovation to scale, and diffusion of new technologies to suppliers, have also been dropped or reduced because they are seen by the shareholders as being peripheral to the core competencies.

The growth of financialization also begs another important question. If innovation is the key strategy that will keep America in the race and its position as global leader, how can it happen without financial support? I can see where basic research and R&D are nebulous terms for shareholders that are hard to forecast as a financial return. But if these functions are not properly funded, how will we be able to compete with the rest of the world like we did in the twentieth century?