Financialization and going off the rails with Norfolk Southern

Financialization is an awful word.

It sounds clumsy in the mouth and refers to a process that has been underway for over 40 years but is nearly unknown to most of us. Before we get to Norfolk Southern, the railroad company, what is financialization?

Basically, financialization is a nested set of changes in business concepts and operations that center around the notion that money is the only purpose of business. Money is the only object in capitalism.

Capitalism has always been about money, finance. It both measures success and failure and is an asset (or liability if you have to borrow to keep your business afloat). However, capitalism has also been about products, services, plant and equipment, customers, employees, and others like the communities in which a business exists. Starting in the 1980s, neoclassical economists (that’s the professors teaching economics in college), free-market politicians, CEOs and other top managers, and Wall St. embraced the idea that the only purpose of a business is to increase shareholder value.

Milton Friedman wrote a long piece setting up the argument for this idea in the New York Times in 1970, “A Friedman doctrine‐- The Social Responsibility Of Business Is to Increase Its Profits1 Most of the article is devoted to attacking the idea that business has “social responsibility” even invoking the idea that such behavior is “socialism”. Finally, in the last paragraph, he re-states the shareholder-value doctrine:

“there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud.”

Let’s only pause for a moment on that last phrase, “…engages in open and free competition with deception fraud”. With the highly concentrated, monopolized, state of our economy, businesses, particularly the gigantic corporations that dominate almost every sector of the economy, by definition are not engaging in open and free competition.

To return to financialization, the shareholder-value doctrine came to dominate corporate boardrooms in the 1980s. Business schools taught it to crops of managers. Wall St. emphasized it through its focus on quarterly earnings reports and their impact on stock prices. Then, in 1982 the Securities Exchange Commission (SEC) put jet fuel on this change in management philosophy. Rule 10b-18 legalized stock buybacks. This allowed companies to purchase their own shares in the marketplace. By definition, this drives up the price of each share. Before this rule, the SEC considered such transactions as stock price manipulation. In parallel, senior managers in large corporations began to receive compensation in the form of stock options. This guaranteed them opportunities to buy company shares at a price lower than the market if certain, always financial, objectives were met. This is part of the change in management compensation that has led to a shift in the ratio between top management compensation compared to average worker earnings.
In the 1950s CEOs earned 20 to 30 times the average worker. Today they earn more than 350 times as much. These changes in compensation set up an environment of perverse incentives for senior managers. Given the enormous personal gains at hand, they are driven to follow policies that maximize immediate, quarter-by-quarter, financial results. Products, services, customers, and employees, are just pawns in this game.

Back to Norfolk Southern.

Two derailments, one with a catastrophic spill and burning of hazardous chemicals, have attracted much attention in the past month.

SPRINGFIELD, OH – MARCH 5: Aerial view of a Norfolk Southern Train Derailment leaving 20 cars jumping the tracks on the previous day In Springfield, Ohio. March 5, 2023. Credit: mpi34/MediaPunch /IPX


This photo taken with a drone shows portions of a Norfolk and Southern freight train that derailed Friday night in East Palestine, Ohio are still on fire at mid-day Saturday, Feb. 4, 2023. (AP Photo/Gene J. Puskar)

Here is where we return to financialization. Robert Reich pointed out:

“Last year, the Norfolk Southern Railway enjoyed record revenue and operating income — $3.2 billion in the fourth quarter alone, a remarkable 13 percent year-over-year increase.

How did the railroad accomplish this? By cutting nearly 10,000 jobs — reducing its workforce by a third while running fewer, longer trains. Some trains now stretch longer than 2 miles. It made these changes despite warnings that they worsened safety risks.

The corporation also refused to provide its remaining workers with sick leave. And it failed to invest in improved safety equipment. (As I noted last week, the railroad mounted a major lobbying blitz against stronger safety regulations.)

And what did Norfolk Southern do with all the money it saved from cutting its workforce, running longer trains, refusing sick leave, and scrimping on safety?

Over the past two decades, it has boosted shareholder payouts by 4,500 percent (along the way enriching Warren Buffett and other investors).

Specifically, it has spent billions on stock buybacks — hitting a record $4.7 billion in buybacks and dividends last year.”2

Financialization is bigger than just this example

 “Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic systems at both the macro and micro levels.

Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector, (2) transfer income from the real sector to the financial sector, and (3) increase income inequality and contribute to wage stagnation. Additionally, there are reasons to believe that financialization may put the economy at risk of debt deflation and prolonged recession.

Financialization operates through three different conduits: changes in the structure and operation of financial markets, changes in the behavior of nonfinancial corporations, and changes in economic policy.”[bold emphasis added]3

The Norfolk Southern case represents the outcomes from changes in corporate behavior (shareholder value primacy) and changes in economic policy (Rule 10b-18 amongst others).

The topic of change in the financial markets is too large to follow here.

Hopefully this little exploration of financialization and Norfolk Southern will sensitize you to some of the changes making capitalism more predatory and unequal.


“As President at NORFOLK SOUTHERN CORP, Alan H. Shaw made $3,777,801 in total compensation. Of this total $616,667 was received as a salary, $1,179,500 was received as a bonus, $255,584 was received in stock options, $1,448,348 was awarded as stock and $277,702 came from other types of compensation. This information is according to proxy statements filed for the 2021 fiscal year.”4


  3. from summary of Thomas Palley, “Financialization: What It Is and Why It Matters,” Working Paper Levy Economics Institute at Bard College. No. 25 (December 2007).