Author: Dan Gray
Compiled by: Deep Tide TechFlow
Deep Tide's Guide: This article traces the historical roots of 'financialization' to explain why the current economy increasingly resembles a casino. From meme stocks to cryptocurrencies, from sports betting to the 'lottery ticket' mentality in venture capital, author Dan Gray argues that when capital no longer flows into productive activities but circulates idly in financial engineering, the true health of the economy is being masked. The article concludes with a call to return to 're-industrialization,' betting on hard tech companies that solve real problems.
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"Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."
--John Maynard Keynes, The General Theory of Employment, Interest and Money (1936)
Meme stocks, cryptocurrencies, leveraged bets, prediction markets, VCs white-knuckling their way through a $2 billion seed round.
Savings rates hit historic lows, debt hits historic highs.
Capital has never been so restless. Creating wealth has become a game of chance, placing big bets on long odds, hoping to hit the jackpot.
Gambling has seeped into every corner of the economy, from institutions to individuals, top to bottom. It shapes the behavior of the younger generation and influences the direction of technology investment.
Welcome to casino culture.
Caption: "Double or Nothing" - Apple Pay design concept from Shane Levine
The Roots of Financialization
To understand casino culture, one must first understand how we got here. The core concept is 'financialization,' which refers to capitalism's gradual detachment from productive activities in the economy.
In practice, it means economic returns shift from producers to capital holders. This is the opposite of industrialization. During industrialization, investment in manufacturing and infrastructure increased, and economic returns flowed from capital owners to the production side.
These two forces alternate cyclically with major technological revolutions, a central theme in Carlota Perez's book *Technological Revolutions and Financial Capital*. In the early stages of a market boom (the 'installation period'), massive capital inflows meet demand, layered with pure speculation. At some point, the market corrects (the bubble bursts), followed by a new production phase (the 'deployment period') where the new technology spreads throughout the economy, driving widespread prosperity.
In a healthy economy, this full cycle takes about 40 to 60 years, generally driving human progress. But the West has experienced roughly 50 years of uninterrupted financial services expansion and industrial stagnation.
Caption: Technological Revolutions and Financial Capital Cycles, source Carlota Perez
From a policy perspective, financialization was driven by the deregulation of financial markets (e.g., the Nixon Shock, GLBA Act, and NSMIA Act in the US), coupled with money printing under the name of 'quantitative easing.' The result is that companies are incentivized to pursue success through financial engineering. Shareholders focus on metrics representing financial market performance rather than actual economic production.
Think of the recent era of low interest rates—it could have spurred unprecedented growth in manufacturing and infrastructure. Instead, financialization bred a generation of 'asset-light' companies, efficiently converting abundant capital into inflated valuations and shareholder returns. Capital pooled and circled, not flowing into productive activities.
Historically, financialization began with 16th to 18th-century mercantilism and bullionism. International trade was often settled in precious metals, and politics ultimately favored the accumulation of the total amount of precious metal as a mark of success, rather than a more vibrant, productive trading economy. This shift, and the associated 'zero-sum' thinking, is the underlying logic of many of today's economic dilemmas.
"We always find the main thing is to get money... It would be too ridiculous to go about seriously to prove that wealth does not consist in money, or in gold and silver; but in what money purchases, and is valuable only for purchasing."
--Adam Smith, The Wealth of Nations (1776)
Profits Do Not Bring Prosperity
The preference for accumulation is reflected in public companies using market capitalization as the ultimate indicator of success. For example, an increasing number of companies choose to distribute profits through dividends or stock buybacks (repurchasing shares to reduce supply, boosting earnings per share and stock price), rather than investing capital in R&D or capital expenditures—productive activities. Simply put, instead of creating more value, companies manipulate metrics and ratios to make their market cap look good.
This behavior makes some sense, as it creates value for shareholders. But the risk is that it creates overvalued, 'hollow' companies that ultimately erode the economy's overall productivity.
"For U.S. manufacturers, the ratio of dividend payments to capital equipment investment rose from around 20 percent in the late 1970s and early 1980s to 40 to 50 percent in the early 1990s, and to over 60 percent in the 2000s. In other words, market pressures forced firms to use higher dividends (or stock buybacks) to maintain stock prices, rather than reinvesting funds in capital."
--‘The Greater Stagnation,’ Luke A. Stewart and Robert D. Atkinson (2013)
We Once Had Robots
Throughout the 2010s, iRobot outsourced production, shedding fixed assets (factories) and inventory risk, lowering the capital denominator on its balance sheet, and boosting Return on Net Assets (RONA) and Return on Equity (ROE). Simultaneously, cutting R&D spending increased free cash flow, which was used for stock buybacks rather than product innovation. Earnings per share (EPS) were artificially inflated, creating a positive feedback loop: rising stock price → rising executive compensation → continued buybacks.
In this process, iRobot repositioned itself as a 'smart home' tech company to command more attractive valuation multiples (P/E, P/B, etc.), rather than being a less sexy 'appliance' company. It hired many software developers while selling off its defense security business line and US manufacturing base. In subsequent years, maintaining competitiveness relied increasingly on sales and marketing expenses rather than sustaining technological barriers.
This is the story of a cutting-edge robotics company funded by DARPA and incubated at MIT. It once dismantled IEDs in Afghanistan and participated in search and rescue after 9/11, only to end up as a distributor of overseas-manufactured robotic vacuum cleaners. The outcome was predictable—when the company lost control of its own products, its monopoly was eroded by more innovative competitors.
iRobot is just a microcosm of the systemic issues of financialization. Much of the economic growth of the past few decades looks good on paper, but the reality is long-term stagnation and weak growth. The achievements in financial reports are exaggerated (see Goodhart's Law), without a corresponding contribution to the actual prosperity and opportunities for ordinary people.
Debt Leads to the Center
"When a person has too much student loan debt, or housing is too unaffordable, they are in a state of negative capital for a long time, or it is difficult to start accumulating capital through property; and if a person has no stake in the capitalist system, they are likely to turn against it."
--Peter Thiel, email to Mark Zuckerberg (2020)
From an individual perspective, financialization limits opportunities to participate in wealth creation because the economic upside is concentrated in the hands of capital owners. If companies are pressured to cut R&D, capital expenditures, and domestic employees to optimize financial metrics, they become top-heavy. When this trend spreads throughout the economy, wages are suppressed, and inequality increases.
Caption: Since 1978, CEO pay has surged 1460%. In 2021, CEO pay was 399 times that of the average worker.
Source:Economic Policy Institute
In an industrial economy, money is merely a unit of liquidity value that makes the system run more efficiently. It is a tool; you can use it to do important things, but it is not important in itself. Money has value because it allows you to have a good house, a good car, and a comfortable life. Your core economic role is to produce and consume goods and services, driving the 'invisible hand' Adam Smith described to create prosperity, from which you also benefit.
"The relationship between money and real wealth (i.e., actual goods and services) is like the relationship between words and the physical world. Words are not the physical world itself, and money is not wealth; it is merely an accounting of available economic energy."
--Alan Watts, Writer and Philosopher (1968)
In a financialized economy, the unequal distribution of opportunity is subsidized by financial products. You take out a loan for a house you can't really afford, lease a car in installments, and charge vacations to your credit card. Trading stocks or buying cryptocurrencies makes everything seem okay—maybe you can turn things around through speculation and escape a permanent underclass status. Your core economic role becomes indebtedness to the center, and the entire system is designed to keep you there.
"Banks are using increasingly sophisticated models to predict which customers will borrow more after a credit limit increase. For many, this means an automatic increase they never requested and may not understand at all. These decisions are shaping household debt across the nation in ways most borrowers cannot see."
--Dr. Agnes Kovacs, Senior Lecturer in Economics, King's Business School
The Gambling Gene
"Buying a lottery ticket is the only time in our lives we can hold a concrete dream in our hands—to obtain those good things you already have and take for granted."
--Morgan Housel, The Psychology of Money (2020)
During periods of economic stress, financialization has evolved mechanisms to exploit human cognitive biases. We tend to overestimate the small probability of extreme returns, a phenomenon economists Daniel Kahneman and Amos Tversky called prospect theory:
"People underestimate the weight of outcomes that are merely 'possible,' while over-weighting certain outcomes. This tendency is called the certainty effect, leading people to be risk-averse when facing certain gains and risk-seeking when facing certain losses."
For example, if you are chasing wealth, you are more likely to borrow money to buy a lottery ticket because we cognitively naturally assign a higher weight to that extreme (and unlikely) return and underestimate that small (and certain) cost. Conversely, an already wealthy person prioritizes avoiding losses, so they are less likely to buy a lottery ticket they can easily afford.
The result of fifteen years of deepening financialization is a behavioral shift from saving heavily towards debt and gambling. US sports betting revenue soared from $400 million in 2018 to $13.8 billion in 2024, while credit card debt increased from $870 billion to $1.14 trillion over the same period.
This behavior masks a lot of the economy's ailments—goods purchased with debt still show up statistically as consumption, gambling shows up as service consumption.
As this mentality spreads through the economy, the speed of 'gamblification' accelerates. Whether it's sports betting, meme stocks, altcoins, gamified brokerage platforms, frantically opening game loot boxes and Pokémon card packs, social media is full of people rolling the dice, chasing wealth by chance.
Perhaps more concerning is the scale of the audience these contents attract—another layer of abstraction, where viewers live vicariously through performers. This content is pulling a new generation of young people into an environment where gambling is completely normalized and even celebrated.
"Although loot box-related activities can predict participation in monetary gambling (opening free boxes, paid opening, and selling loot) and perceived normative pressure (selling loot), other activities have a greater impact. More specifically, all tested monetary gambling indicators could be significantly predicted by watching gambling livestreams—or videos containing gambling behavior."
--Eva Grosemans et al., ‘More Than Loot Boxes: The Role of Video Game Livestreaming and Gambling-like Elements in the Game-Gambling Connection Among Adolescents’
Of course, the house always wins. Whether it's harvesting order flow data, charging fees, or the negative expected value of gambling itself, existing capital holders always outperform individuals who must meet liquidity needs within a shorter, more unpredictable time frame.
Finance Devours Innovation
Since 2011, Silicon Valley's theme has been 'software eats the world.' A more accurate statement might be 'finance eats the world.' Despite their rebellious and independent reputation, venture capital unfortunately exhibits all the ills of financialization, with the same preference for accumulation.
In the era of low interest rates, software provided VCs with a tool to convert venture capital into inflated asset values and management fee income. Companies with negative gross margins were scaled up with huge losses, then justified subsequent funding rounds through multiple markups. Capital chasing capital created an inflationary cycle, where the 'best' deals became those most likely to attract more investment. Similar to stock buybacks, this created overvalued, fragile market leaders.
This round of financial engineering died with the end of the low-interest-rate environment in 2022, and the subsequent correction washed away a lot of 'paper' accumulation. The market is still digesting the hangover, with the impact of the liquidity collapse reflected in weaker fundraising performance for subsequent funds (mainly concentrated in marginal markets and 'outsider' managers).
But the problem hasn't gone away. Fund managers are also not immune to prospect theory. The 'buying lottery tickets' metaphor corresponds very accurately to current investment behavior: when leading institutions occupy the center through accumulation, the common reaction of others is to significantly premium any project that might generate extreme returns. The 'Power Law' now shapes entry logic more than exit explanation—investors are all rushing to the endgame.
Worse are the investments that exploit the behavioral patterns solidified by long-term financialization. You can gamble with your bills, bet against insiders on prediction markets, or try your luck in poorly regulated crypto casinos. Thus, the desperation of late-stage financialization has brought us into 'financialization squared'—investors looking for scalable business models that print paper gains by exploiting the economic stagnation caused by financialization.
Caption:Augustus Doricko, Founder of Rainmaker, a true industrialist
Ultimately, investors are responsible for their choices. You can continue sliding along the tail inertia of financialization, investing in products that support it, all the way to the end. Or, you can be part of the correction, supporting companies that bring long-term prosperity through industrialization.
The Obstacle is the Way
Despite unfavorable incentives (slower growth, lower valuation multiples) and insufficient scale of activity, areas like industrial manufacturing are steadily rising.
Whether this marks a return of the industrialization cycle or merely reflects a growing awareness that the status quo is unsustainable is unclear. But one thing is certain: as more capital concentrates in fewer investors' hands, flowing to even fewer companies, it means more and more investors and builders feel they have no stake in the current system.
Something will break first.
"But this time, it's different. In the current ICT revolution, we seem stuck in the installation period, or what I call the 'turning point'—an intermediate period of recession and uncertainty, rebellion and populism, exposing the pain the initial 'creative destruction' process inflicted on society. It is precisely when the system is in danger, questioned and attacked, that politicians finally understand they must establish a win-win game between business and society."
--Carlota Perez, ‘Why is the Installation Period of ICT So Long?’
As Perez describes, turning points are usually driven by government action. Although the current US administration is advancing industrial policy, the trend of deregulation continues. Therefore, this might be the first time in history that an industrial economy grows quietly in parallel next to the financial economy, both competing for capital and talent.
Make no mistake, industrialization is the harder path. Fund managers face LP skepticism and less attractive short-term gains. But in the long run, these 'hard tech' and 'deep tech' companies have enduring moats and compound value, capable of outperforming hotter sectors. More importantly, they have a direct and positive impact on prosperity by solving real problems.
'Re-industrialization' is a common cry among technologists who recognize the future has been failed.
It is the new uranium enrichment plants in the nuclear renaissance, the marine robotics startups solving critical food supply chain issues, the specialized AI labs focusing on the blue ocean of drug discovery in the AlphaFold era.
None of these projects benefit from financialization. They don't easily fit into the metrics and ratios that enable money printing in private markets. But they will make the economy truly productive again.
The Era of the Industrialists
"The relationship between the creation of money and credit and the creation of wealth (real goods and services) is often confused, but it is the biggest driver of the economic cycle."
--Ray Dalio, Founder of Bridgewater Associates
Financialization has become an inert default in the post-prosperity stability period—an extraction mechanism and a driver of stagnation. Ultimately, it is self-serving, zero-sum, and increasingly prone to collapse under systemic shocks, washing away both accumulated gains and hopes of turning things around.
The hope is that capital is ready to re-embrace 'hard problems.' The characteristic of this phase of the cycle is the great industrialists, especially those pioneering at the frontier. The key is that they are idealists with a vision that transcends the shallow incentives of finance. They will prioritize lasting competitive strength over fragile capital barriers, long-term legacy over short-term status. Finance will serve their needs, not the other way around.
Meanwhile, the return of Adam Smith's 'invisible hand' will show mercy to those still whitewashing metrics for investor-preferred, inflated projects.
(Thanks to Yifat Aran, Alex LaBossiere, Laurel Kilgour, and Aaron Slodov for feedback on the early draft.)
