AKDERE C. (2018) (with Pelin Benli) The Nature of Financial Innovation A Post-Schumpeterian Analysis (ACADEMIC PAPER) (original) (raw)

Schumpeterian economic development and financial innovations: a conflicting evolution

Although in the Schumpeterian process of entrepreneurial innovations money and financial markets are assumed to affect economic development, Schumpeter does not explicitly study financial evolution and its effects on real dynamics. In order to fill this gap, this article suggests a Minsky-inspired interpretation of Schumpeterian institutional dynamics in monetary terms. It then develops a specific Schumpeterian analysis of the evolution of financial institutions and regulatory mechanisms in the wake of the 2007–08 crisis and points to major consequences of financial innovations on economic stability. It appears that unlike the creative destruction process of entrepreneurial innovations, in a liberalised/deregulated environment financial innovations move banks from their crucial role of financing long-term economic evolution and lead to reckless finance. Thus, financial market dynamics put economies on a destructive path. Such an evolution calls for active and tight rational regulation in order to shape capitalist finance towards more stable and welfare-enhancing strategies.

IS THE FINANCIAL INNOVATION DESTRUCTION CREATIVE? A SCHUMPETERIAN REAPPRAISAL

This essay examines the consequences of financial innovations for economic stability through a monetary reappraisal of the Schumpeterian approach and states that changes occurring in financial markets may adversely affect financing conditions of firms and impede economic development. In the economic literature, it is usually asserted that liberalized financial markets lead to innovations that allow banks to provide better risk management, information acquisition, and monitoring services. Therefore financial liberalisation would support the Schumpeterian vision of creative destruction process. However, recent financial crises cast doubt on the creative nature of financial innovations on weakly regulated markets. When speculative bank behaviour gains ground, it leads to the financialisation of economies. Financial markets dominate over the productive activities and provoke disastrous consequences at the macroeconomic level. Unlike the Schumpeterian entrepreneurial innovations, the evolution of financial markets leads to reckless finance that generates destabilizing dynamics. Then the Schumpeterian creative destruction process turns out to be a destructive creation and the systemic sustainability of market economies calls for more consistent regulatory frameworks.

Schumpeter, the Banking System, and Innovation: Small versus Big Business

Joseph Schumpeter's writings on entrepreneurship and innovation have had a profound impact on economic theory and economic thought. Schumpeter initially saw the small entrepreneur as the source of innovation and economic growth within an economic system but later saw large corporations as the source of much innovation. Because large corporations, and in modern times many governments and universities as well, play such a large role in funding research and development and new innovations, much of the bank financing of innovation is done by smaller banks for small entrepreneurs and their ideas. Venture capitalists and self-financing are the other two major forms of small entrepreneur/small business financing. Meanwhile, the financial markets (stocks and bond markets) only indirectly play a role in funding the innovation of large corporations via changes in these firms' stock prices. Changes in stock prices reflect an estimate of the large firms' research and development efforts and their prospects for profitable, future innovation. Much corporate research and development is financed internally within the organization as an expense of doing business. Meanwhile, government and university funding through tax dollars and non-profit sources indirectly subsidize corporate innovation because governmental entities and universities take on risks that the private sector will often not tolerate. Yet, large corporations are often the beneficiaries of such governmental and university financing of research and development efforts. In today's times, Schumpeter would be impressed with the success of large firms regarding innovation but probably would be disappointed about the marginalization of the small entrepreneurial firm and the banking system and their diminished roles in innovation. This paper summarizes Schumpeter's views on how the banking system and financial markets could play a role in innovation and explains how a modern day monopoly capital system (Baran and Sweezy 1966) and its financial system have transformed entrepreneurship and innovation away from small business and innovation by the small entrepreneur.

Schumpeterian innovations and financial instability: An institutional framework

In the wake of recurrent financial crises of the liberal era, this paper presents an institutional framework within the Schumpeterian tradition to apprehend the nature of financial innovation and shed light on their consequences for the economic stability. In the Schumpeterian development process, innovation-led changes on money markets affect financing conditions of economic activities. A specific interpretation of Schumpeterian capitalist dynamics in monetary terms leads to state that in highly liberalized environment, financial innovations may lead to reckless finance that provokes system-wide crises. Such an evolutionary process should call for public regulation of financial dynamics.

Schumpeter's view on entrepreneur and credit versus contemporary mega - banks problem

Considering Schumpeter's basic proposition about innovations as the strength of the capitalist dynamics, this paper focus on the main goal which is the answering the question: What was the Schumpeter's view on entrepreneur and credit versus modern mega-banks? The basic problems with the modern banks are mainly related with the level of concentration in the banking sector, the bonuses of the management (which are the derivative of bank's motivational systems) but most of all are related with phenomenon that the banking sector is pursuing goals, that are harmful to the long-term economic profitability. According to the Schumpeter banks should stimulate innovations implemented by etrepreneurs in the economy. Unfortunately the bankers nowadays seemed to have other priorities than those implied by their function in the economic system. According to Schumpeter credit contributes to the development, because development results from the activities of entrepreneurs. Other types of credit are not important from the point of view of "life process of the economic organism".

Entrepreneurship, Economic Evolution, and the End of Capitalism: Reconsidering Schumpeter's Thesis

Quarterly Journal of Austrian Economics, 2009

This paper seeks to explore and to critically evaluate, from an economic standpoint, Joseph Schumpeter’s theory of the decline of capitalism, as put forward in his Capitalism, Socialism, and Democracy. It begins by exploring and criticizing Schumpeter’s entrepreneurial theory, and then explains how this flawed theory led to Schumpeter’s conclusion vis-à-vis capitalist evolution into socialism. It then introduces into the theory of capitalist evolution an uncertainty-bearing entrepreneur, and re-examines the theory on this basis, both in general and, in the appendix, for the specific case of artificial increases in the supply of bank credit. The conclusion reached is that Schumpeter’s argument cannot hope to explain the decline of capitalism into socialism. However, while not valid for a truly capitalist system, Schumpeter’s theory is nevertheless applicable to an interventionist economy.

J. A. Schumpeter, a Theorist of Innovation and a Historian of Economic Science

6th LIMEN Conference Proceedings (part of LIMEN conference collection)

The paper commemorates the 70th anniversary of the death of Joseph Alois Schumpeter, the world-renowned economist of Czech-Austrian origin and creator of innovation theory. It analyses Schumpeter’s work from the perspective of two aspects, complementing each other in his work: historical economic analysis and entrepreneurial innovation theory. The introduction reveals the genesis of his relation to enterprise, innovation, and the historical economics concept. The historical approach to economics appears in his scientific works at the time of his work at the European universities in Chernivtsi, Graz and Bonn, as well as in his later work at Harvard University. The paper also studies the rise of his innovation theory, first appearing during his work in Graz, Styria, and its gradual reflection in his professional work. The paper shows how these approaches merge in his economic teaching, which is very specific and includes both purely economic and technological and social aspects.

SCHUMPETER’S VIEW ON INNOVATION AND ENTREPRENEURSHIP

We are living in a complex and dynamic world in which innovation and entrepreneurship are occupying a decisive role for economic development. According to Joseph Alois Schumpeter "carrying out innovations is the only function which is fundamental in history". He also accented that It is entrepreneurship that "replaces today's Pareto optimum with tomorrow's different new thing". Schumpeter's words that entrepreneurship is innovation have never seemed so appropriate as the nowadays, when modern capitalism is experiencing a serious crisis and lost his strength during last subprime and euro-debt crises. The purpose of this paper is the analysis of the Schumpeter's innovation concept in a context of "first" and "second" Entrepreneurship theory.

Schumpeterrs View on Entrepreneur and Credit Versus Contemporary Mega-Banks Problem

SSRN Electronic Journal

Considering Schumpeter's basic proposition about innovations as the strength of the capitalist dynamics, this paper focus on the main goal which is the answering the question: What was the Schumpeter's view on entrepreneur and credit versus modern mega-banks? The basic problems with the modern banks are mainly related with the level of concentration in the banking sector, the bonuses of the management (which are the derivative of bank's motivational systems) but most of all are related with phenomenon that the banking sector is pursuing goals, that are harmful to the long-term economic profitability. According to the Schumpeter banks should stimulate innovations implemented by etrepreneurs in the economy. Unfortunately the bankers nowadays seemed to have other priorities than those implied by their function in the economic system. According to Schumpeter credit contributes to the development, because development results from the activities of entrepreneurs. Other types of credit are not important from the point of view of "life process of the economic organism".

Innovation changes and the traditional financial sector

Humanities & Social Sciences Reviews, 2022

Purpose of the study: The main objectives of this work are to analyze the innovation process in general and financial Innovation in particular, during which potential effects will appear on the financial structures of economic units and considering the recent financial events of the crisis of the subprime discuss whether financial Innovation is a source of growth or, on the contrary, is a source of financial instability. Methodology: The financial crisis has cast a shadow over recent financial innovations, particularly those that call for risk elimination. This research used secondary methods for innovation changes and traditional financial sectors. The secondary research method will collect data through google, websites, books, and other sources. Main findings: The main goal of financial technologies offered by entities in this sector is to improve the efficiency and availability of financial services, both from the customer and the perspective and a financial institution. The digi...