The historic rise of financial profits in the U.S. economy

Abstract

The ratio of financial to nonfinancial profits in the U.S. economy has risen greatly during the last four decades, a period often called the financialization of capitalism, but the reasons for the increase are not well understood. This article tackles the issue by developing a model that incorporates the relationships between financial and nonfinancial capitalists that are characteristic of the period of financialization. It is shown that the ratio of financial to nonfinancial profits depends positively on the net interest margin and the noninterest income of banks, but negatively on the general rate of profit, the noninterest expenses of banks, and the ratio of the capital stock to interest-earning assets. Empirical estimation for the United States strongly supports the model and reveals that financial profits have varied mainly with respect to the net interest margin, although non-interest income has also been important.

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