Financialization, Crisis, and the Development of Capitalism in the USA

1. IntroductionCentral to the historical development of capitalism is crisis: a moment of change from one way of organizing the economy to another, from one accepted political order to another, and from one set of dominant ideas to another. Understanding these transitional moments helps us understand how and why our contemporary world-economy takes the form that it does. If we can understand how economic, political, and ideological power is constructed over time, then perhaps we can employ such knowledge to alter power structures in a way that is much more democratic. In a capitalist world-system, a way of organizing the world-economy descends into crisis, and from the ruins of the old emerges the new, further entrenching capital's economic, political, and ideological domination of the subordinate classes of the world-system.Capitalism is distinct from other historical systems because it deconstructs and reconstructs the form that it takes over historical time and across geographical space, but is unified by the logic of the endless accumulation of capital (Arrighi 1994, 4-10; Arrighi and Silver 2001, 259; Deluze and Guattari 2009, 303; Marx 1990, 253; Mill and Bentham 1987, 309; Polanyi 2001, 134-35; Schumpeter 1976, 83; Smith 1991, 374; Wallerstein 1983, 14; Weber 2002, 17). Underlying the theoretical conceptualization of capitalism are cycles of deconstruction and construction woven together by a secular trend. The driver of the world-economy is then the rate of profit. Rate of profit is a measure of how much capital is accumulated in a certain place over a given period of time, and it is the rate of profit that indicates whether we view a point in time as one of prosperity or of economic contraction. If endless capital accumulation is the goal in a capitalist world-system, then a lack of ability to accumulate capital will raise concern at a system-level. The relative decreases in the rate of profit are the structural mechanism underlying crises.In this article, we use empirical evidence to describe the relationship between the rate of profit and crisis employing theory that has not yet been subject to quantitative evaluation in the wake of the 2008 crisis. Using theory and empirical evidence, we argue that the mechanism through which a decline in the rate of profit translates into economic crisis is financialization. A decline in the rate of profit compels firms to hold more cash assets when the production process no longer provides the best opportunities to maximize profit. Ultimately, a shift occurs from accumulating surplus via the production process to accumulating surplus via the financial sector.Firms may try to invest in more efficient technology, a more efficient labor process and/or lower labor costs. There are several ways firms reduce labor costs: reducing the amount of wages and benefits paid to citizen labor, employing non-citizen labor, relocating production, or outsourcing (Froebel, Heinricks, and Kreye 1982). These techniques only lower costs so far. Squeezing labor reaches its limits because there is a floor on production costs, but no floor on the relative decline in the rate of profit. In these moments, finance is a preferable alternative to the production process because there are no fixed costs associated with entry. As productive capital shifts into the financial sector, there is a financial expansion within the world-economy, where seemingly, the surplus value of both the period of productive expansion and the period of financial expansion is finally reaped. However, these bubbles eventually burst, and the underlying crisis remains unresolved.2. Literature ReviewBuilding on Adam Smith's theory of the origin of value and David Ricardo's theory of profit, Marx identifies an under-theorized link between commodity, production, markets, and finance, developing the first modern theory of financial- ization (Marx 1990, 251; Ricardo 1996, 17, 88, 183; Smith 1991, 25-26). …