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Positive aspects of financialization (#22)

22.  Financialization of the economy

The combination of globalization with its expansion of markets and earnings and new communication technologies has brought the financial sector to great prominence in business.  The term “financialization” describes the shift in the capitalist economy from production to finance.  The revenue and profits of the financial sector have become an increasingly large segment of the world-wide economy.  Its institutions, instruments and motives are having a significant influence on the operations and understanding of business.  While the recent financial crisis has brought about a wave of criticisms of the negative effects of financialization, the financial sector has also: given millions of people easier access to credit for consumption and production; sought to spread risk through derivative instruments; created ways to leverage capital to make it more productive; and more. The financial sector has also produced social or ethical funds allowing investors to apply their values in supporting or avoiding certain industries or certain companies. These funds represent an important and fast-growing development that is set to grow further after some promising results during the financial crisis. Caritas in Veritate points out that ethical investment should be the norm: “Efforts are needed—and it is essential to say this—not only to create ‘ethical’ sectors or segments of the economy or the world of finance, but to ensure that the whole economy—the whole of finance—is ethical, not merely by virtue of an external label, but by its respect for requirements intrinsic to its very nature”.

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Commentary:  This point addresses the positive aspects of financialization; the next point looks at the downside.  So this commentary will be focused accordingly.

The increasing importance of the financial sector of the economy is certainly driven by globalization.  Being able to move money around quickly and safely and to hedge currencies or share risks through derivatives provides more opportunities for businesses to expand in predictive environments.  Without these financial products, goods and services would be more expensive and less available, so we can say that these aspects of financialization are serving the common good.  

We can also observe the rise of microfinance as a component of financialization.  Providing small loans to men and women in developing countries enables them to start small businesses, enhancing both their income and dignity and providing more stability for their families.

Finally, socially responsible or ethical mutual funds are also enabled by financialization.  Investors can now choose funds that refuse to invest in companies providing contraceptives or abortafacients or other morally objectionable products.