Replacing Financialization with Innovation

October 10 2008 / by TonyManfredi
Category: Economics   Year: General   Rating: 1

Financialization is a relatively new term used to discuss the emergence of a new form of capitalism in which financial leverage and exotic instruments tends to override capital (equity) and in which financial markets dominate over the traditional industrial economy.

With the global economy in apparent free fall one can not help but wonder if the dominance of the financial sector as a sum of our total economy is coming to a tumultuous end. In response to decades of deterioration in the industrial sector, advanced countries such as Britain and the United States responded by shifting more of their economic activity to financial services, placing a bet that this would give their countries an edge in the economy of the next century. Along the way process of financialization allowed the markets of the world to balloon. More and more profits were made selling a wide variety of derivatives, equities, and collateralized debt obligations. Bankers were busy dreaming up every conceivable way to market their imaginary products. Imagination, instead of developing the new light bulb, instead focused on developing new ways to make risky financial bets. Our investment houses, lacking any real regulation, became financial laboratories, with mad scientists at the helm. They would take money from main street investors in one hand, and then pace bets against them with another. Credit swaps (derivatives), a way of balancing (supposedly) risk, became a $500 trillion dollar industry. More than the GDP of the world many times over. Wikipedia has a great explanation of financialization, so I won’t go into to hefty a description, but every reader should check it out. Throughout this process the financial markets became dominant industries in the first world. Some countries, such as Iceland, bought into the financialization concept full force. They are now paying the price of this lack of economic diversification, and are on the verge of national bankruptcy. As we built this imaginary financial system, the real world of innovation and development was simply not keeping pace. The old rules of developing an economy, through utilization, collaboration, and trade of physical resources (brilliant minds, coal, cheese, livestock, wool coats, movie scripts, drug-coated stents, and funny hats) and creating jobs and training people seemed to be unimportant. Instead we sold and resold imaginary things, way easier than having to re-tool a rust belt. Now we are paying the price for this economic decision made several decades ago. It is easy to think all of this happened in just a matter of days, but in reality it can be traced to economic development decisions made long ago. It should be obvious to everyone now that financialization is not the way to build an economy. Like feeding steak to a person with heart disease we preached consumption and free use of credit, going from one bubble to the next. How can we change gears in the face of this? We need to fundamentally rethink the very foundations of our economy, and in turn our priorities. We are as we speak bailing out this failed concept of financialization, and in the process enriching some people that should not be enriched. Why not reward someone for actually creating something, for getting an education in a critical area, or work with regions to develop technological specialties? Why not develop efficiencies in our systems through technological innovation and utilization, in areas such as healthcare, energy , education, and transportation? Speaking from experience I live in an area that has benefited somewhat from just those things, almost a technological Mini-New Deal. Through collaboration of the public and private sector upstate New York has become a major force in Nanotechnology. A recent announcement from Abu Dhabi to back the construction of a $3.2 billion chip fab has positioned the area to be the capital of the world in nanoscale innovation. This on the backs of billions already invested in the area. A true partnership between government, the private sector, and the international community has blossomed. More importantly our restaurants are full, our banks are sound, and our housing market has not collapsed. Plumbers, waiters, and shoe salesman are all doing well. Thats the kind of trickle down economics I want to see. This once sleepy area has become the arena of players from throughout the world, bringing both minds and capital to fuel innovation. Innovation it seems has no borders, and spurs not just prosperity but cooperation. Insteading of becoming a banking center, we worked picked nanotechnology instead. The choice of innovation over financialization should be easy. The nanotechnology initiative like that in upstate New York are already leading to countless innovations in everything from microchips to alternative energy. By working on the fundamental problems the world faces over the next 20 years or more, society gets a dividend much more valuable than any financial derivative could provide. Smart money from the Middle East seeks these types of investments out like a bird dog. One can be sure that the author is no economist, but I have seen first hand the benefits a concerted regional investment in technology can provide. My city is a boom town where education and science are the top priority. We over-regulate collaboration and innovation when we should open these doors wide open, and regulate the financial markets instead.

Live long and prosper.

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