Financialization, Productive Capital, and Inequality: A Comparative Analysis of Oren Cass and Gary Stevenson
Introduction
Financialization—the increasing dominance of financial actors, markets, motives, and institutions in the operation of the economy—has emerged as one of the defining structural transformations of advanced capitalism since the late twentieth century. While the expansion of finance has coincided with rising GDP, technological innovation, and global capital mobility, it has also paralleled rising inequality, stagnating median wages, declining labor share, and reduced productive investment relative to profits. The contemporary debate over financialization is therefore not merely descriptive but normative and structural: does financialization represent an efficient evolution of capitalism, or a pathological deviation from productive economic organization?
This question has gained renewed prominence through public intellectuals and economists such as Oren Cass of American Compass, and market practitioner-turned-inequality economist Gary Stevenson. While Cass critiques financialization primarily through the lens of national productive capacity and labor market health, Stevenson approaches the issue from a distributional and macro-demand perspective rooted in inequality dynamics. Both perspectives challenge the conventional neoclassical view that financial markets efficiently allocate capital and maximize welfare, yet they differ fundamentally in causal emphasis, theoretical framing, and policy implications.
This essay examines the economic phenomenon of financialization, evaluates Cass’s and Stevenson’s critiques within broader economic theory, and argues that their perspectives are complementary rather than mutually exclusive. Cass highlights the structural misallocation of capital away from productive investment, while Stevenson reveals the macroeconomic and distributional mechanisms through which financialization exacerbates inequality and stagnation.
I. Defining Financialization: Structural Transformation of Capitalism
Financialization refers to the increasing role of financial motives, markets, and institutions in shaping economic outcomes. Epstein (2005) defines it as “the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy.”
This transformation manifests empirically in several ways:
Growth of financial sector profits relative to nonfinancial sectors
Increased corporate focus on shareholder value maximization
Expansion of debt instruments and leverage
Increased household dependence on asset markets
Growth of speculative trading relative to productive investment
From a national accounting perspective, financial sector profits in advanced economies grew dramatically from approximately 10–15% of total corporate profits in the mid-20th century to over 30–40% by the early 21st century.
This shift reflects a broader structural transition from what Marx termed “productive capital accumulation” to what some scholars characterize as “fictitious capital accumulation”—wealth generation increasingly detached from material production.
II. Oren Cass: Financialization as Productive Disinvestment
Oren Cass’s critique of financialization emerges from a political economy perspective emphasizing productive capacity, labor markets, and national resilience.
Cass’s central thesis is that financialization distorts corporate incentives away from productive investment—such as physical capital formation, technological innovation, and workforce development—and toward financial engineering, including:
Stock buybacks
Dividend maximization
Leveraged recapitalizations
Short-term earnings management
This shift represents a fundamental change in corporate purpose.
A. Shareholder Primacy and Investment Decline
Cass’s argument aligns with empirical findings demonstrating declining net investment rates despite rising corporate profits. Since the 1980s, U.S. corporate profits increased significantly, yet net fixed investment as a share of GDP did not rise proportionally.
Instead, firms increasingly returned profits to shareholders.
Stock buybacks alone reached trillions of dollars in recent decades, effectively transferring corporate earnings to asset holders rather than reinvesting them in productive expansion.
From Cass’s perspective, this represents a structural malfunction in capital allocation.
B. Institutional Causes: Financial Market Incentives
Cass identifies institutional drivers of financialization:
Executive compensation tied to stock price performance
Institutional investor dominance
Deregulation of capital markets
Global capital mobility reducing national investment incentives
These mechanisms create incentives for firms to prioritize short-term shareholder returns over long-term productive investment.
C. Labor Market Effects
Cass argues that financialization weakens labor markets through reduced demand for labor-intensive productive investment. When firms prioritize financial returns rather than expansion, job creation slows, and wage growth stagnates.
This aligns with empirical evidence showing declining labor share of income across advanced economies since the 1970s.
From Cass’s perspective, financialization undermines the fundamental purpose of the economy: to support productive employment and national prosperity.
III. Gary Stevenson: Financialization as Inequality Amplification Mechanism
Gary Stevenson offers a distinct but complementary critique rooted in inequality dynamics and macroeconomic demand.
Stevenson’s core thesis is that financialization disproportionately benefits asset owners and systematically redistributes wealth upward, producing structural inequality that undermines economic stability.
His argument can be understood through three interrelated mechanisms.
A. Asset Price Inflation as Wealth Concentration
Financialization increases demand for financial assets, driving asset price inflation.
Because asset ownership is highly concentrated among wealthier households, asset price increases disproportionately benefit the wealthy.
This produces a self-reinforcing cycle:
Wealthy individuals accumulate financial assets
Asset prices rise due to financialization
Wealthy individuals become wealthier
They acquire more assets
Inequality increases further
This dynamic aligns with Piketty’s famous inequality identity:
r > g
Where:
r = return on capital
g = growth rate of economy
When returns on capital exceed economic growth, wealth concentrates.
Financialization amplifies this condition.
B. Inequality and Aggregate Demand Suppression
Stevenson emphasizes a macroeconomic mechanism often neglected in Cass’s analysis: inequality reduces aggregate demand.
Wealthy individuals have lower marginal propensity to consume than poorer individuals. When income concentrates among the wealthy, consumption demand weakens relative to productive capacity.
This produces:
Underinvestment
Slow growth
Economic stagnation
This insight originates in Keynesian theory, particularly Keynes’s paradox of thrift and effective demand framework.
In Stevenson’s model, financialization exacerbates inequality, which reduces demand, which reduces productive investment, creating stagnation.
Thus financialization does not merely reflect disinvestment—it causes it through demand suppression.
C. Financial Markets as Inequality Extraction Mechanisms
Stevenson’s perspective reflects the insider understanding of financial markets as redistribution systems.
He argues that financial markets increasingly extract economic value through:
Interest payments
Rent extraction
Asset appreciation
Speculative gains
These mechanisms transfer wealth from wage earners to asset holders.
This aligns with Marx’s distinction between productive profit and rent extraction.
Financialization shifts income from production to rent.
IV. Theoretical Foundations: Keynes, Marx, and Minsky
Cass’s and Stevenson’s arguments can be situated within broader economic theory.
Keynes: Financial Markets and Speculation
Keynes warned about financialization in The General Theory:
“When enterprise becomes the bubble on a whirlpool of speculation, the job is likely to be ill-done.”
Keynes distinguished productive investment from speculative investment and argued excessive financialization destabilizes capitalism.
Stevenson’s demand-side inequality argument reflects Keynesian macroeconomics.
Cass’s investment-allocation argument reflects Keynes’s distinction between productive and speculative capital.
Marx: Capital Accumulation and Financialization
Marx anticipated financialization through his concept of fictitious capital—financial claims disconnected from productive capital.
Financialization represents the expansion of fictitious capital relative to productive capital.
Stevenson’s inequality analysis reflects Marx’s capital accumulation dynamics.
Cass’s productive investment focus reflects Marx’s emphasis on capital formation.
Minsky: Financial Instability Hypothesis
Hyman Minsky argued financial systems evolve toward increasing instability as speculative finance replaces productive finance.
Financialization increases systemic fragility and reduces productive investment.
Both Cass and Stevenson implicitly operate within a Minskian framework.
V. Points of Convergence Between Cass and Stevenson
Despite different emphasis, Cass and Stevenson converge on several fundamental points.
1. Financialization distorts capital allocation
Both argue financial markets redirect resources away from productive investment.
Cass emphasizes corporate incentives.
Stevenson emphasizes macroeconomic inequality and demand suppression.
2. Financialization increases inequality
Cass focuses on wage stagnation and labor weakening.
Stevenson focuses on wealth concentration via asset inflation.
Both identify inequality as a central outcome.
3. Financialization undermines productive growth
Both reject the neoclassical assumption that financial markets automatically maximize productive efficiency.
Financialization may increase profits without increasing productive capacity.
VI. Points of Divergence: Supply-Side vs Demand-Side Explanations
The key difference lies in causal emphasis.
Cass provides a supply-side explanation:
Financial markets distort investment incentives → reduced productive investment → weaker labor markets.
Stevenson provides a demand-side explanation:
Financial markets increase inequality → reduce aggregate demand → reduce productive investment → stagnation.
These explanations operate at different levels of analysis.
Cass focuses on firm behavior.
Stevenson focuses on macroeconomic distribution and demand.
They describe different parts of the same system.
VII. Integrating Cass and Stevenson: A Unified Theory of Financialization
Financialization can be understood as a systemic transformation involving mutually reinforcing mechanisms.
Financial markets increase asset returns
Asset returns increase inequality
Inequality reduces aggregate demand
Reduced demand reduces productive investment opportunities
Firms increasingly turn to financial engineering rather than productive investment
Financial sector grows relative to productive sector
Cycle repeats
This creates a self-reinforcing equilibrium favoring financial capital over productive capital.
Both Cass and Stevenson describe different components of this system.
Cass focuses on step 5.
Stevenson focuses on steps 2–4.
Together they provide a comprehensive explanation.
VIII. Policy Implications
Cass’s framework suggests policies to redirect capital toward productive investment:
Industrial policy
Restrictions on stock buybacks
Incentives for domestic investment
Labor market strengthening
Stevenson’s framework suggests policies targeting inequality:
Progressive taxation on wealth
Asset taxation
Redistribution
Policies increasing labor income share
Both sets of policies aim to rebalance the economy toward productive growth.
Conclusion
Financialization represents a structural transformation in capitalist economies characterized by the growing dominance of financial markets over productive activity. The critiques offered by Oren Cass and Gary Stevenson illuminate complementary dimensions of this transformation.
Cass’s analysis reveals how financialization distorts corporate incentives and undermines productive investment and labor market vitality. Stevenson’s analysis demonstrates how financialization increases inequality, suppresses demand, and generates macroeconomic stagnation.
Together, their perspectives reveal financialization as a systemic shift in the structure of capitalism—from production-centered growth toward asset-centered wealth accumulation.
Financialization has not “ruined” the economy in the sense of halting growth entirely, but it has fundamentally altered the mechanisms through which growth occurs and who benefits from it.
The central economic challenge of the 21st century is not merely growth itself, but restoring the link between financial markets, productive investment, and broadly shared prosperity.
Financial markets must serve the real economy—not replace it.
Oren Cass’s Solutions: Reorienting Capitalism Toward Production
Oren Cass’s policy framework can be characterized as a form of institutional restructuring designed to realign economic incentives with productive investment and national economic resilience. His solutions rest on the premise that financialization is not an inevitable outcome of capitalism, but rather the result of specific institutional choices—legal, regulatory, and governance structures—that privilege financial returns over productive growth.
Cass’s solutions fall into three broad categories: reforming corporate governance, implementing industrial policy, and strengthening labor market institutions.
Corporate Governance Reform: Limiting Financial Engineering
A central pillar of Cass’s policy framework is reforming corporate governance structures that incentivize short-term financial returns rather than long-term productive investment. Since the 1980s, corporate governance in Anglo-American economies has been dominated by the doctrine of shareholder primacy—the principle that firms exist primarily to maximize shareholder value.
This doctrine, reinforced by executive compensation structures tied heavily to stock prices, has created powerful incentives for firms to engage in stock buybacks, dividend maximization, and financial engineering rather than investing in productive capacity.
Cass proposes regulatory and institutional reforms to counteract these incentives, including restrictions on stock buybacks, reforms to executive compensation structures, and governance models that prioritize long-term investment over short-term financial returns.
Stock buybacks are particularly central to Cass’s critique. He argues that buybacks represent a mechanism through which firms transfer profits to shareholders rather than reinvesting them in productive expansion. Restricting buybacks would force firms to allocate a greater proportion of profits toward investment, research and development, and workforce expansion.
Cass also advocates for redefining fiduciary responsibility, arguing that corporate leaders should consider broader stakeholder interests—including workers, communities, and national economic health—rather than focusing exclusively on shareholders.
This approach reflects a stakeholder capitalism model, similar to governance structures historically present in Germany and Japan, where firms prioritize long-term productive stability.
Industrial Policy: Directing Capital Toward Strategic Sectors
Cass’s second major policy proposal involves the use of industrial policy to direct investment toward productive sectors critical to national economic strength.
Industrial policy involves government intervention to promote specific industries, technologies, or sectors deemed essential for economic development or national security. Cass argues that unregulated financial markets often fail to allocate capital efficiently toward long-term productive investments because financial markets prioritize short-term returns.
As a result, sectors such as manufacturing, infrastructure, and advanced technological development may receive insufficient investment relative to their long-term economic importance.
Cass advocates policies including targeted subsidies, tax incentives for productive investment, domestic manufacturing promotion, and strategic protection of key industries.
This approach reflects historical precedents. Industrial policy played a central role in the economic development of countries such as South Korea, Japan, and postwar Germany, where coordinated investment strategies supported industrial expansion and technological advancement.
Cass argues that restoring productive capacity is essential not only for economic growth but for national resilience, technological leadership, and labor market stability.
Labor Market Strengthening: Increasing Worker Bargaining Power
Cass’s third major solution involves strengthening labor market institutions to increase worker bargaining power and ensure that productivity gains translate into wage growth.
Financialization, in Cass’s analysis, has weakened labor markets by reducing demand for labor-intensive productive investment and shifting corporate priorities toward financial returns.
Cass advocates policies such as wage subsidies, vocational training programs, and labor-supportive institutional reforms designed to strengthen employment stability and wage growth.
He emphasizes the importance of linking economic success to productive employment rather than financial wealth accumulation.
This reflects a broader philosophical commitment to what Cass calls “productive pluralism”—an economic system in which prosperity derives primarily from productive work rather than financial speculation.
Gary Stevenson’s Solutions: Redistribution and Structural Equality
Gary Stevenson’s policy proposals emerge from a fundamentally different diagnosis of financialization’s root cause. Stevenson argues that inequality itself is the primary driver of financialization, rather than merely a consequence.
According to Stevenson, wealth concentration produces structural imbalances in economic demand and capital allocation. When wealth becomes concentrated among asset owners, financial markets expand because wealthy individuals seek investment opportunities for excess capital.
Therefore, Stevenson argues, reversing financialization requires directly addressing wealth inequality.
His solutions focus primarily on wealth taxation, redistribution, and structural reforms to rebalance income and wealth distribution.
Wealth Taxation: Directly Targeting Asset Concentration
Stevenson’s central policy proposal is the implementation of wealth taxes targeting large concentrations of financial assets.
Unlike income taxes, which target earnings flows, wealth taxes target accumulated asset stocks, including stocks, bonds, real estate, and other financial holdings.
Stevenson argues that wealth taxation is necessary because financialization disproportionately increases wealth through asset appreciation rather than labor income.
Traditional income taxation cannot effectively address this dynamic, as much wealth accumulation occurs through unrealized capital gains.
Wealth taxation directly targets the mechanism through which financialization concentrates wealth.
Stevenson argues that wealth taxes would reduce inequality, slow asset price inflation, and reduce the structural dominance of financial markets.
Redistribution and Demand Restoration
Stevenson also emphasizes redistribution as a mechanism for restoring aggregate demand.
Inequality reduces consumption demand because wealthy individuals consume a smaller proportion of their income than lower-income individuals.
Redistributing wealth toward lower-income households increases aggregate demand, which stimulates productive investment.
This reflects Keynesian macroeconomic theory, in which economic growth depends on effective demand.
Stevenson argues that redistribution is not merely a matter of fairness but an economic necessity for restoring sustainable growth.
Housing and Asset Market Reform
Stevenson also advocates reforms targeting housing and asset markets, which he views as key mechanisms of inequality accumulation.
Housing represents one of the primary channels through which wealth inequality expands. Rising housing prices disproportionately benefit existing property owners while excluding younger and lower-income households.
Stevenson supports policies aimed at stabilizing housing costs, increasing housing supply, and reducing speculative investment in housing markets.
These policies would reduce asset-based wealth concentration and improve economic mobility.
Comparative Analysis: Institutional Reform vs Redistribution
Cass’s and Stevenson’s solutions reflect fundamentally different theoretical perspectives.
Cass focuses on institutional reform to redirect capital toward productive investment. His solutions operate primarily at the level of firms and national economic structure.
Stevenson focuses on redistribution to counteract inequality and restore economic balance. His solutions operate primarily at the level of wealth distribution and macroeconomic demand.
Cass assumes financialization is primarily driven by institutional distortions in corporate governance and capital markets.
Stevenson assumes financialization is driven primarily by wealth concentration and inequality dynamics.
These perspectives are not mutually exclusive but emphasize different causal mechanisms.
Cass seeks to change how capital is allocated.
Stevenson seeks to change who owns capital.
Limitations and Challenges
Both approaches face significant practical and theoretical challenges.
Cass’s industrial policy proposals require effective government intervention, which historically has produced mixed results. Poorly designed industrial policy risks inefficiency, political favoritism, and misallocation of resources.
Stevenson’s wealth taxation proposals face challenges related to political feasibility, capital mobility, and implementation complexity. Wealth taxes require accurate asset valuation and international coordination to prevent capital flight.
However, both approaches address genuine structural problems created by financialization.
Toward an Integrated Solution
An effective solution to financialization may require integrating elements of both Cass’s and Stevenson’s frameworks.
Redistribution alone cannot guarantee productive investment if corporate incentives remain distorted.
Institutional reform alone cannot restore economic balance if wealth concentration continues to suppress demand.
A comprehensive approach would involve:
Corporate governance reform
Industrial policy supporting productive investment
Progressive wealth taxation
Strengthening labor market institutions
Policies increasing income equality
Such an approach would address both capital allocation and wealth distribution.
Conclusion
Oren Cass and Gary Stevenson offer distinct but complementary solutions to the challenges posed by financialization. Cass emphasizes institutional reforms designed to restore productive investment and strengthen labor markets. Stevenson emphasizes redistribution and wealth taxation designed to counteract inequality and restore economic demand.
Their proposals reflect deeper theoretical differences concerning the root causes of financialization—whether it arises primarily from institutional distortions or from wealth concentration dynamics.
Ultimately, financialization represents a systemic transformation requiring systemic solutions. Restoring economic balance requires both redirecting capital toward productive uses and ensuring that economic gains are broadly shared.
Financial markets must once again serve productive economic activity rather than dominate it.