The economy – a shaky house of cards

Why is the world economy so susceptible to crises? One reason is the financialisation of the economy, that is, part of the world economy is now dominated by the logic of the financial world, says postdoctoral researcher Ville-Pekka Sorsa from the Department of Political and Economic Studies.

BIGTALK is a new interview series, where big questions are asked from the scientists of Helsinki University. On the first episode Ville Halonen talks about money and poverty with postdoctoral researcher Ville-Pekka Sorsa. Watch the video at Helsinki University's YouTube Channel » »

 

“Over the last few decades, the amount of money in capital markets has grown considerably, but much of the income produced by these markets is now based on market expansion instead of tangible production,” says Ville-Pekka Sorsa.

“If you compare the world economy to a house of cards, financialisation has built an enormous house, but has removed the glue that binds it together. The potential gains have become formidable – but so have the risks.”

Traditional socio-political areas, such as pension systems, are also being financialised. Pensions used to be paid either directly from the state budget or by those in employment. Nowadays, even our pensions have become pawns in the financial market.

“People all across the globe are increasingly being forced to invest their pension savings in the financial market – and to carry the risk alone. Although the Finnish pension system does not yet require any investment decisions, people in Sweden already have to decide where five per cent of the pension should be invested.”

Gambling instead of construction

If, for example, a pension fund is invested in green technology, this money doesn’t establish a company or build wind turbines. It is instead invested in suitable shares and bonds. In the worst-case scenario, this leads to a dramatic rise in the value of shares in wind power and an economic bubble whose risks are materialised as a financial crisis and its accompanying unemployment.

Why, then, do financial industry giants not build factories? Because they are only professional gamblers.

“Do we want to maintain an economy in which a small group of financial professionals steer the development of society, increase economic risks, and widen the wealth gap?” Sorsa asks.

“Under the current system, the rich get richer and the poor get poorer. If you have a lot of money, it’s easy to make more, and vice versa. But it’s quite possible to build a fairer house of cards,” Sorsa believes.

“It’s a question of political will. Initially, we could reassess the need to financialise absolutely everything. We could also encourage concrete investments instead of speculation, and recalibrate taxation to balance out the global income divide.

“Of course, the card makers – the financial sector – have a lot invested in the current house of cards, so making changes won’t be easy.”

BIGTALK is a new interview series, where big questions are asked from the scientists of Helsinki University. On the first episode Ville Halonen talks about money and poverty with postdoctoral researcher Ville-Pekka Sorsa. Watch the video at Helsinki University's YouTube Channel » »

Department of Political and Economic Studies » »

Research Database TUHAT: Ville-Pekka Sorsa » »

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Text: Tapio Ollikainen
Photo: Tiina Aarniala ja Tapio Ollikainen
Translation: AAC Global
30.3.2012
University of Helsinki, digital communications


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