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Financialization And Inequality

By Matthew Yglesias  

"Financialization And Inequality"

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The growing “financialization” of the American economy is often discussed as a driver of inequality, but Frank Rich’s line about how “finance long ago supplanted visionary entrepreneurial careers like Jobs’s as the most desired calling among America’s top-tier university students” makes me wonder if the causation doesn’t in some ways run in the other direction.

After all, suppose you want to get rich. You’re going to need to think of something that can get you a very high sales number. That means either you need to sell something relatively cheap to a large number of people, or else you need to sell something very expensive to a small number of people. Clearly, both business models have always existed and always will exist. But it’s generally difficult to think of entrepreneurs who became super-wealthy selling luxury goods. McDonald’s CEO James Skinner made over $17 million in 2009 and I’m guessing Ferran Adria didn’t do as well. That’s because as you get richer, your purchases of stuff don’t rise proportionately with riches. But rich people also don’t just “save” money in the way that middle class people do on a larger scale. They purchase large quantities of financial services. So to the extent that you anticipate income to be increasingly concentrated at the top, it makes more sense to go into selling financial services than into selling non-finance items. The people who get rich with non-financial enterprises (Bill Gates, the Walton family) are all selling to mass markets. Lots of people make a living selling luxury goods to the top 1 percent, but nobody becomes a billionaire that way. Unless they’re selling financial services.

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