Non-equilibrium evolutionary dynamics

In neoclassical models,Footnote ⁴ changes are due to external (technological, demographic) shocks and even in endogenous growth theories, market dynamics are assumed to result in a stationary equilibrium without any room for uncertainty and even less for endogenous instability. Contrary to those approaches, Schumpeter (Reference Schumpeter1934: 63, Reference Schumpeter1947: 31) maintains that capitalism constantly evolves through entrepreneurial innovations (new combinations, goods, methods of production, organisation, opening of new markets, conquest of new sources of supply, etc.) and that ‘The whole capitalist process, like any other process that is evolutionary, consists in nothing else but exploiting such opportunities as they enter the businessman's horizon and there is no point in trying to single out the one under discussion in order to construe it as an external factor’ (Schumpeter, Reference Schumpeter1947: 109). Therefore, ‘in dealing with capitalism we are dealing with an evolutionary process’ (ibid.: 82).Footnote ⁵

Such a process is not linear, instead it means turmoil: ‘in this turmoil competition works in a manner completely different from the way it would work in a stationary process’ (Schumpeter, Reference Schumpeter1947: 32). The economic system does not move along ‘continually and smoothly’ (Schumpeter, Reference Schumpeter1934: 216) and is not similar to ‘the gradual organic growth of a tree’ (ibid.) but evolves ‘jerkily’ (ibid.: 223). From this perspective, Metcalfe (Reference Metcalfe, Hanusch and Pyka2007: 951–952) states, ‘Thus it is the innovative nature of capitalism that prevents the emergence of a full complement of future markets that gives the price mechanism a constitutional weakness. As economists know too well, only in a stationary state could we expect this difficulty to be resolved by tradition and habit if not by rational calculation, and “stationary” is not an adjective to apply to capitalism at any stage of history’.

Schumpeterian capitalism is not a perfect competitive adjustment process but a cutthroat competition (Schumpeter, Reference Schumpeter1947: 80) and the core of economic analysis should be ‘the way by which economic changes take place and economic phenomena to which they give rise’ (Schumpeter, Reference Schumpeter1934: 62). Such a dynamic process revolutionises endogenously the economic structure, incessantly destroying the old structures and creating new ones. Therefore, the relevant economic problem is how capitalism creates and destroys existing structures (Schumpeter, Reference Schumpeter1947: 84). That is the Creative Destruction process through close links between innovation, competition and uncertaintyFootnote ⁶ that results in economic efficiency-enhancing innovations. Thus, the destruction is viewed as a positive creative process (the capitalist engine is an engine of production for the masses (Schumpeter, Reference Schumpeter1947: 67)).

This process is related to some specific institutional patterns. Schumpeter (Reference Schumpeter1939: 144–145, Reference Schumpeter1947: 157–162) explicitly adopts an institutional framework and stresses that capitalist evolution means not only changes of existing economic structures but also and more fundamentally changes of society's institutional structures. Those changes are social and historical processes (Schumpeter, Reference Schumpeter, Becker, Knudsen, Becker, Eßlinger, Hedtke and Knudsen1932: 114, Reference Schumpeter1934: 58). Actually, comparing commercial and socialist societies, Schumpeter (Reference Schumpeter1947: 167) defines commercial society by specific institutional patterns such as private property in means of production and regulation of the productive process by private contract. He (Schumpeter, Reference Schumpeter1947: 167, Reference Schumpeter, Clemence and Swedberg1951: 48/189) then adds that capitalist society is distinguished by an additional phenomenon: the financing of enterprises by bank credit. Therefore, money enters the picture in its very profound form as ‘a tool of rational cost-profit calculations, of which the towering monument is double-entry bookkeeping’ (Schumpeter, Reference Schumpeter1947: 123). This towering monument is the social way of recording and checking in economic relations among independent decision units. It is a part of what one may call the monetary institution in a capitalist economy in which the continuous flow of financing economic operations is based on credit relations. Credit operations affect the working of the capitalist engine ‘so much so as to become an essential part of it without which the rest cannot be understood at all’ (Schumpeter, Reference Schumpeter1961: 318). More important, it is through money that ‘capitalism became analytically conscious of itself’ (ibid.).

Capitalism as a monetary economy and the transversality of money

Without euphemism and remaining loyal to Schumpeter's work, one can assert that capitalism is a monetary economy. Schumpeter (Reference Schumpeter1939) introduces money at the very core of his analytical structure and stresses that in a capitalist economy individuals need to be financed in order to become innovators/entrepreneurs. The debt-financing relation between banks and entrepreneurs is the fundamental economic relation as an individual ‘can only become an entrepreneur by previously becoming a debtor’ (Schumpeter, Reference Schumpeter1934: 102). Economic development relies on the financing process of entrepreneurial innovations: ‘By credit, entrepreneurs are given access to the social stream of goods before they have acquired the normal claim to it. (. . .) It is only thus that economic development could arise from the mere circular flow in perfect equilibrium. And this function constitutes the keystone of the modern credit structure’ (ibid.: 107).

Schumpeter (Reference Schumpeter1970: 69/75) is aware of the various (internal and external) ways to finance economic activities. But he (Schumpeter Reference Schumpeter1934, Reference Schumpeter, Clemence and Swedberg1951) asserts that in strict logic, the financing of innovations cannot rest on loanable funds (savings) that stem from previous development (i.e. successful previous innovations). Hence, an essential aspect of capitalist evolution is the financing of economic development by ad hoc bank credit. Obviously, the Schumpeterian approach concurs with the Keynesian tradition that seeks to offer a theoretical alternative to the (neo/new)classical real approach through the analysis of the very nature of a monetary economy (Bertocco, Reference Bertocco2007). As Minsky (Reference Minsky1988: 6) states, “The visions of Schumpeter and Keynes are alike in that the subject of their work is a capitalist economy with complex financial structures. In terms of the vision of a monetary production economy Schumpeter clearly has precedence over Keynes’. One can identify here a vanguard version of Post-Keynesian endogenous money theories, where the means of payment created by bank credit give innovators access to productive means and assets.

While Schumpeter seems to give banks a secondary ‘accompaniment’ role in economic development, the realisation of entrepreneurial projects is crucially determined by banks’ willingness to grant credit. Then the definition of capital lies not in existing means of production but in the ‘money market’ which is related to the development beyond the existing wealth basis. Entrepreneurship financing has logical priority in economic process (Schumpeter, Reference Schumpeter1939: 114) as the fate of new combinations is decided in money markets. Money markets and especially the banking system are the headquarters of the capitalist system where plans for further development are debated and decided: ‘The main function of the money or capital market is trading in credit for the purpose of financing development’ (Schumpeter, Reference Schumpeter1934: 126–127) such that ‘development is in principle impossible without credit’ (ibid.: 106). In a credit-money economy, ‘The decision to invest precedes, as a rule, and the act of investing precedes very often, the decision to save’ (Schumpeter, Reference Schumpeter1947: 395, Reference Schumpeter1939: 109–112). Financial markets can then be seen as a set of rules and practices which organise the permanent use of loanable funds in the financing process through the transformation of short-term credit into more permanent debt forms: ‘In a first place, shares or bonds are created and their amounts are credited to the enterprise, which means that banking resources still finance the enterprise. Then these shares and bonds are disposed of and gradually are paid for (. . .) by the subscribers out of existing supplies of purchasing power or reserves or savings.’ (Schumpeter, Reference Schumpeter1934: 111).

In such a capitalist economy, the responsibility of monetary creation and circulation is ascribed to the banking system. However, money is not a good or service, privately reproducible. Actually Schumpeter remarks (Reference Schumpeter1970: 268, 272, 277) that money is a social institution and represents a social accounting system independent of the world of goods. The monetary system is a set of social rules that allow private economic units to undertake decentralised activities thanks to debt relations supported by the banking system. Such debts circulate as money through the entire economy under the general constraint of repayment at the end of financing contracts. Money and related funding processes and products are supplied by banks and also remarketed by financial institutions. In this schema money is transversal and takes everything into its oscillations since all economic transactions rely on monetary relations.Footnote ⁷ Monetary and financial problems do structurally matter to all other sectors through the changes of strategies of the credit-money providers (banks) and of financial intermediaries. Hence, changes on money/financial markets affect the whole economy irrespective of decision units which are or are not involved in debt relations. The worldwide effects of the 2007–08 crisis and the difficulties to restore confidence in money markets and to support a new accumulation regime can be understood in the light of this approach that reveals the importance of bank behaviour on economic evolution.

The crucial role of banks in capitalist evolution

Recent (neoclassical) growth modelsFootnote ⁸ show a renewal of interest in the Schumpeterian vision of endogenous change and assert that the financial system can promote economic growth by encouraging a switch in savings from unproductive liquid assets to productive illiquid ones. Financial intermediaries are assumed to offer appropriate instruments of risk diversification and then to permit risk adverse savers to hold bank deposits rather than liquid unproductive assets in a way that would be favourable to capital accumulation. However, this approach analyses the financing problem as a matter of efficient circulation of loanable funds between innovators and savings. Schumpeter (Reference Schumpeter1934, Reference Schumpeter1939) criticises such a narrow vision of banking as a mere financial intermediationFootnote ⁹ and remarks that the intermediation is only one of the two roles played by banks in a capitalist economy. The specific-crucial role of banks lies in the financing of productive activities through the credit-money creation in order to fund entrepreneurial expectations (Keynesian animal spirits). In this very specific function the Schumpeterian banker is, in the name of society ‘the ephor of the exchange economy’ (Schumpeter, Reference Schumpeter1934: 74/140–141).

A very important point to be emphasised in this framework is that banks – contrary to other intermediaries – can issue large amounts of debt in the form of deposits which circulate in the whole economy as general means of payment, i.e. money. This function constitutes the keystone of the modern credit structure (Schumpeter, Reference Schumpeter1934: 107). As stated above, the working of a monetary economy is linked to bank credit and to the underlying social/extra-market rules governing the creation (grant of bank credit), circulation (economy-wide use) and the extinction (reimbursement) of debts. Banks are indeed active agents and if they do not grant credit (credit rationing) to finance investment expenditures, they may obstruct entrepreneurial innovations. Therefore, the following statement of Schumpeter (Reference Schumpeter1939: 116) comes into the picture with acuteness as regards the current turmoil of capitalism: ‘(. . .) The banker must not only know what the transaction is which he is asked to finance and how it is likely to turn out, but he must also know the customer, his business (. . .), and get (. . .) a clear picture of his situation. But if banks (. . .) finance innovation, all this becomes immeasurably more important’. Therefore, banks are at the core of economic evolution and then should have ‘moral and intellectual qualities’ to perform their function which is essentially a ‘critical, checking, admonitory one’ (ibid.: 118). Raines and Leathers (Reference Raines and Leathers2012: 6) and Leathers and Raines (Reference Leathers and Raines2013: 512) put forth this crucial aspect of the Schumpeterian analysis of banks in economic evolution. Hudson (Reference Hudson2010) notices that this role had been emphasised by several authors and policy makers in the past as ‘From St Simon's followers in France to Marx and other reformers prior to World War I, nearly all financial observers expected banking to become the economy's industrial planning agency, alongside government’.

So in the evolution of financial markets and aims, banking dynamics change such that the ‘symbiotic relationship between the entrepreneur and the banker’ (Hanusch & Pyka, Reference Hanusch and Pyka2007a) is interrupted: ‘Schumpeter's banker is a robber baron of J. P. Morgan's time . . . [who] is not our own day's master of the corporate raid and the leveraged buyout, for Schumpeter's banker financed the creative part of creative destruction’ (Minsky, Reference Minsky1988: 11). ‘Our own day’s’ banks indeed follow innovative strategies that mainly rely on financial restructuring and affect the evolution of the productive sphere without accompanying it in its possible creative path. Therefore, the relevant question becomes: Does financial market development consist in its function of financing economic development or does it follow another logic consisting in making money without improving or reinforcing productive structures? The answer to this question will determine whether one can consider financial liberalisation and innovations as sources of Schumpeterian creative destruction.

Financial innovations and the instability of financialised capitalism

Even though Schumpeterian analytical grounds are more frequently used by most modern economists (Hanusch and Pyka, Reference Hanusch and Pyka2007b), little attention has been paid to the ways through which financial innovations might affect the functioning of the ‘economic engine’. To deal with this issue, it is worth reassessing Schumpeter's results regarding the evolution of modern banking activities.

Burlamaqui and Kregel (Reference Burlamaqui and Kregel2005) distinguish two types of banking: house banking, based on confidential and accompanied relationship, and transactional banking, based on financial arbitrage related to particular characteristics of financial assets. The second type of financial system which has been prevailing since the 1980s in major economies raises financial competition and innovations. This involves banks in strategies directed towards new opportunities able to make rapid returns on arbitrages irrespective of real sector's evolution. From this perspective, one can talk about a great transformation of the financial system à la Polanyi so much the banking activities turned away from the financing of productive activities to focus more upon speculative operations with high short-term returns.

In recent decades, generalised liberalisation/deregulation let spectacular financial innovations take place with an unprecedented expansion of new means and methods of funding markets. Various financial derivatives (hedge instruments) increased the immediate liquidity of banks to cover positions against risk of unexpected fluctuations in interest and exchange rates as well as in asset prices. Also, the negotiability of debt instruments issued by non-banks is enhanced thanks to banks which implicitly assumed risks on the issuers’ debt offering without increasing their required capital. Highly flexible and low-cost financial products through off-balance-sheet banking increased the attractiveness of financial positions for institutional investors as well as for individuals (especially for low-income households). Those innovations allowed investors and traders to transfer risks into specific and complex products (structured investment vehicles, SIVs) and positions which encouraged the development of shadow banking. Those activities – not included in bank assets and liabilities under conventional procedures – increase bank risks beyond the regulatory boundaries.

Those operations – resting on securitisation processes – amplify different ways of transforming illiquid non-commercial commitments into liquid assets (Minsky, Reference Minsky2008). Expansion of lenders’ markets into less creditworthy borrowers begins with financial innovations such as ‘interest-only’ and ‘option adjustable rate’ mortgages with low payments at the outset, but rising monthly payments later. In these markets banks initiate new products by creating financial papers that structure credits previously granted. These products are also used as sound investment vehiclesFootnote ¹⁰ and then serve to create other securitisation conduits that are also connected to short-term asset-backed commercial paper. Such innovations generate therefore strong interdependence among various products, processes and market players.

Confident expectations – stemming from continuously rising profits – increase the willingness to assume less sound liability structures and lead banks to finance acquisitions of additional capital goods and real estate assets. In such a context sharp speculative expectations-based rises in the value of existing capital lead to an increase in the willingness to finance new acquisitions by issuing new liabilities (increasing the borrower's risk) and to stronger willingness of lenders to accept low-yield assets in relation to the lenders’ risk. This financial development began in the 1980s when the Leveraged Buyout (LBOs) movement led to growth in highly leveraged firms and fed Ponzi financing (Minsky, Reference Minsky1992a). Also the securitisation enabled banks to continue to initiate mortgages even though their funding ability was sorely compromised (Minsky, Reference Minsky1982). Most economic activities become financialised and enterprises ‘are being turned from means of production into vehicles to extract interest, generate banking fees and register stick market gains for the banking and financial sector’ (Hudson, Reference Hudson2010). Numerous works (Hudson, Reference Hudson2010; Leathers and Raines, Reference Leathers and Raines2013; Lounsbury and Tavakoly, Reference Lounsbury and Tavakoly2013; Ülgen, Reference Ülgen2011) show the speculative bubble fuelling character of financial innovations. Those innovations do not only let the securitisation become independent of the evolution of the real economy and popular classes’ income but also allow some specific sectors to become the main source of profitable banking activities, thereby strengthening the short-term tendency of market expectations. The FIRE (finance-insurance-real estate) sector plays therefore the leading role in the accumulation process. Supported by a favourable tax code, this makes asset-price inflation the quickest mode of wealth creation (Hudson, Reference Hudson2010). In the same process, financial markets become more globalised through the opening up of domestic markets and worldwide financial deregulation policies and generate highly sensitive strong interconnectedness among different markets and nations.

Greenspan (Reference Greenspan2005) nonetheless emphasises that financial innovations increase the efficiency and the soundness of the system: ‘The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions, which was so evident during the credit cycle of 2001–02 and which seems to have persisted. Derivatives have permitted the unbundling of financial risks’. He (Greenspan, Reference Greenspan2000) maintains that recent innovations visibly accelerate Schumpeter's creative destruction process: ‘Today our capital stock is undergoing an increasing pace of renewal through investment of cash flow from older-technology capital equipment and facilities into cutting-edge, more efficient vintages. This process of capital reallocation across the economy has been assisted by a significant unbundling of risks in capital markets made possible by the development of innovative financial products (. . .)’.

This is an unfortunate misinterpretation of Schumpeter. Schumpeter never gave banks’ innovations a positive role or never developed the financial aspects of capitalism through money market innovations as he did for entrepreneurial innovations. Certainly he (Schumpeter, Reference Schumpeter1939: 277–282/348) gives various examples of financial innovation to emphasise the role of finance in capitalist dynamics and asserts that the most important innovations of the 19th and 20th centuries would have been impossible without joint-stock companies, limited liability and joint stock deposit banks. However, he maintains that innovative activities of banks turn easily into speculative behaviour provoking reckless finance when they go beyond their essential role (i.e. financing entrepreneurial innovations; Schumpeter, Reference Schumpeter1934: 106). The speculative wild excesses – through reckless borrowing and lending in mortgage financing (Schumpeter, Reference Schumpeter, Clemence and Swedberg1951: 219) or through bubble speculations resting on new industrial opportunities (Schumpeter, Reference Schumpeter1939: 277–79) – result in manias as banks withdraw from their regular activities (Schumpeter, Reference Schumpeter1939: 348).

One can find here the speculative excess of the ‘secondary wave’ of Schumpeterian business cycles (Leathers & Raines, Reference Leathers and Raines2004). Schumpeter (Reference Schumpeter1939: 148) calls macroeconomic oscillations the secondary wave of cycles, subsequent to the primary wave of entrepreneurial innovations: ‘In the atmosphere of the secondary prosperity there will also develop reckless, fraudulent or otherwise unsuccessful enterprise, which cannot stand the test administered by recession. The speculative position is likely to contain many untenable elements which the slightest impairment of the values of collateral will bring down. A considerable part of current and investment operations will show loss as soon as prices fall (. . .). Part of the debt structure will crumble’.

In order to apprehend the secondary wave more explicitly in monetary terms, one should notice some specific dynamics of financial markets. The main purpose of the changes in financial markets is to facilitate regulatory and/or speculative arbitrages by shifting off balance-sheet investments, allowing them to hold less capital and provision against losses. In this sense, financial innovations do not entirely provide more efficient diversification of risk but shift risks to speculative investors who are looking for greater short-term returns on their capital instead of financing long-term productive investments. Contrary to the (neo/new)classical hypothesis that regulation-free finance is the best tool to select and boost efficient investments, the ‘great transformation’ of capitalism into a financialised system leads to Schumpeterian reckless finance. Schumpeter (Reference Schumpeter1939: 260; note 1) defines the reckless finance in the frame of endogenous money approach as the ‘issue of notes or the creation of deposits without regard to redeemability. More accurate is it to stress the criterion of granting loans without regard to the borrowers’ ability to repay.’ This definition seems to be well suited for the understanding of the consequences of the financialisation phenomenon. It remains however a bit general and can be analytically developed through the work of Minsky. Two crucial aspects might be emphasised in this respect.

The first is that the consequences of banks’ activities concern every economic agent and there is no competitive mechanism that would ensure a systematically efficient banking (Hellmann et al., Reference Hellmann, Murdock and Stiglitz2000). As stated above, the transversality of money and related financial relations mean that, unlike the consequences of entrepreneurial innovations, increasing risk and fragilities on banking and financial markets affect directly all economic sectors as they can stop the financing of real activities or direct them towards more speculative horizons. Consequently, it does not seem to be suitable to study financial innovations as Schumpeterian entrepreneurial innovations although the analogy is tempting.

The second is that as Leathers and Rains (Reference Leathers and Raines2004: 671) wisely remark, in Schumpeter's analysis there is no room for financial innovations in ‘positive’ economic evolution for two reasons. First, the central role of banks is not to induce monetary/financial innovations but to finance/accompany entrepreneurial innovations, i.e. the productive dynamics of economic development. When banks take the initiative of innovation, they evolve towards reckless finance (Schumpeter, Reference Schumpeter1939: 642, Reference Schumpeter, Clemence and Swedberg1951: 214) and regular banking business may be made ancillary to innovative aims (1939: 348). Second, in a monetary economy, banks – as creators of ex nihilo credit-money – do not need to innovate in order to finance productive activities; their ability to lend is never limited by a given amount of funds (‘there is never any such thing as a definite quantity of bank accommodation available’; Schumpeter (Reference Schumpeter1939: 606, Reference Schumpeter1934: 112–115)). Financial innovations aim at improving financial profitability, whatever the consequences on economic development. They are not designed to make banks more able to finance productive activities.

Such an intuition can be extrapolated to the analysis of modern finance since financial innovations of the late 20th century are not related to the creation of new productive value but to the desire of increasing the speed and the scope of short-sighted speculative returns that become independent of productive relations. Two speculative pressures, expectations-induced and competition-coerced, emerge therefore in liberalised markets. Those pressures contribute to the increase of high-risk speculative transactions which augment financial vulnerabilities (Arestis, Reference Arestis, Bellofiore and Ferri2001). Innovations allow markets to imagine various techniques and products that spur agents to take a positive stand on the future of the economy while the commitments move away from the real state of macroeconomic imbalances. As Schumpeter (Reference Schumpeter1939: 885) states, ‘The path that leads from the financial sector to real investment is tortuous and unsafe’. Financial innovations make this path much more unsafe.

This results in a new accumulation regime resting on the profitability of a debt burden. It is not full employment optimism but a spending-ease optimism that leads individuals and institutions to further borrowing/lending. A kind of attractive bubble that rests on financial innovations emerges (Leathers & Raines, Reference Leathers and Raines2013: 516) and speculative gains increase over time, enlarging the prevailing optimism. After the end of the euphoria of ‘dotcom markets’ in the second half of the 1990s, a new speculative source was found thanks to the mortgage bubble, especially in the USA. Such strategies often provoke instability when expectations backfire on mark-to-market values, borrowers’ default increases, real assets and related financial supports cannot be sold without suffering losses while investors try to sell out positions and assets. Illiquidity enters the picture as the herald of future general insolvency in markets. Such a reversal on financial markets may provoke macroeconomic disequilibria fuelled by defensive retreat of creditors from debt-financed activities. While new products/processes, closely related to each other, allow agents to match risks and cover them by highly sophisticated and diversified instruments at microeconomic level, at macroeconomic level a sort of bank run can be triggered and provoke a race to withdraw among lenders when some institutions are expected to default on payments. So the ability to fulfil obligations is incessantly under the threat of lack of confidence which can transform temporary liquidity problems into a system-wide insolvency crisis (money is transversal).Footnote ¹¹

To deal with this endogenous issue of capitalist finance, Minsky (Reference Minsky1992a) puts the emphasis upon the capital development of the economy as the prime problem that economic theory needs to address and calls it the Schumpeterian problem. Schumpeter indeed argues that money is a social institution/social tie which should rest on some stronger regulatory principles. In other words, the institutional/social embeddedness of the financial sphere does matter for consistent systemic viability.

Rational regulation against financial destruction

A regulatory framework provides the economy with a specific institutional structure and incentives that shape banks’ conduct. On the one hand, when faced with tight regulation banks try to escape constraints through new strategies (the regulatory dialectic of Kane (Reference Kane1988)). On the other hand when regulatory constraints are relaxed, banks have to compete with other financial intermediaries and innovate in pursuit of competitive advantage. Since the 1980s regulatory barriers among financial intermediaries have been reduced, and expanded liberalisation policies have let new financial practices and players enter the market and freely innovate in products and processes without considering the underlying systemic fragilities. Thus, financial markets evolution in past decades and the subsequent 2007 crisis have been built on financial deregulation policies that implemented the efficient free markets doctrine which asserts that markets – left to their own devices (laissez faire/deregulation) – can work and produce an optimal equilibrium without requiring external/public regulation (Leathers & Raines, Reference Leathers and Raines2013; Ülgen, Reference Ülgen2011). It is assumed that free markets internal adjustment mechanisms could minimise the possibility of financial crises and the need for government bailouts: ‘Over and over again, ideology trumped governance. Our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite. The mantra became government regulation is wrong, the market is infallible’ (Committee on Oversight and Government Reform, 2008: 2).

In this vein, more decentralised and private control practices ruled instead of public supervision rules. The loose regulation of institutions and markets allowed banks to manage their risks and the quality of their engagements through their own internal models and through credit-rating agencies – also used as strategic advisors. Contrary to the Schumpeterian principle that the banker ‘should be an independent agent’ in order to be able to check and to judge (Schumpeter, Reference Schumpeter1939: 116), this transformation has broken off the necessary separation between finance and industries and the necessary independence of banks as social evaluator of entrepreneurs’ plans. This new regulatory environment ignored the crucial gap between the quantitative/individualistic speculative efficiency of the innovated ‘new’ finance and the qualitative/long-term efficiency of the monetary/financial system required for economic development.

So in his analysis of the 1929 Great Depression Schumpeter points to the inability of capitalism to police and to protect itself and maintains that the system's sustainability remains related to regulatory devices. He (Schumpeter, Reference Schumpeter1939: 1027) states that the recovery after the 1929/33 crisis has been substantially facilitated by the Banking Act of 1933 which introduced important reforms to provide consistent institutional conditions. In the same vein, the Committee on Oversight and Government Reform (2008: 2) declares that the 2007–08 turmoil ‘could have been prevented if federal regulators had paid more attention and intervened with responsible regulations’.Footnote ¹² It is obvious that most policy-makers and scholars who were defending financial deregulation in the past are in a ‘shocked disbelief’ today; and aware of the consequences of financialisation on systemic stability they opt for more macro-prudential approach (Bernanke, Reference Bernanke2013; Greenspan and the Hearings before the Committee on Oversight and Government Reform, 2008). DeLong (Reference DeLong2011), an eminent Keynesian, ‘confesses’, ‘It may even be the case that we ought to return to the much more tightly regulated financial system of the first post-World War II generation. That system served the industrial core well, at least as far as we can tell from the macroeconomic aggregates. We know for certain that our more recent system has not’. Also, World Bank (2012: 2–3) declares, ‘The state tends to play a major role in the modern financial sector, as promoter, owner, regulator, and overseer’.

However, those changes seem to go very slowly and those who do advocate change in the regulatory regime do not base themselves on any robust analysis of the structural weaknesses of financialised capitalism, rather the standard studies often rest on some ‘unconventional’ monetary-easing policies and on macro-prudential tools to accompany self-regulation mechanisms.Footnote ¹³ More than five years after the beginning of the 2007–08 crisis, there has not been enough and sufficiently tough reforms to prevent a future systemic crisis.

When financial innovations enter into a process of destructive creation, alternative policies must be designed and implemented. From this perspective, two major oppositions between Schumpeterian lessons and post-crisis market-friendly policies must be noticed:

1. (1) The first is that in times of crisis central banks and governments intervene in order to reduce the immediate effects of the turmoil on major institutions without aiming at deeply reforming the system (Greenspan in Reference Greenspan2000s, Bernanke in 2008, to quote but a few). The subsequent cost of such policies is now the rise of unemployment and deterioration of living conditions of lower classes while markets continue their path through ‘business as usual’. So, as Leathers and Raines (Reference Leathers and Raines2013) and Raines and Leathers (Reference Raines and Leathers2012) note it, Schumpeter (Reference Schumpeter1934: 112, 255, Reference Schumpeter1939: 410, 437, Reference Schumpeter, Clemence and Swedberg1951: 116, 176, 253–255) advocates for discriminatory/selective policies to be implemented by an ‘intelligent government’ in order to move out speculative excesses and rescue firms and banks that merit it. The relief must aim at treating the systemic disease, not to hush up the weaknesses of an ill-working finance.

2. (2) The second is that contrary to dominant market ideology, promoted by policy makers and scholars (e.g. Greenspan, Reference Greenspan2005), Schumpeter (Reference Schumpeter1934: 115, 254, Reference Schumpeter1939: 261, 987, 1027, Reference Schumpeter1947: 89–91, Reference Schumpeter, Clemence and Swedberg1951: 116) advocates for active public regulation to prevent reckless finance. This means that a rational regulation, able to shape markets behaviour, assigns to banking/financial system its appropriate role in economic development and keeps speculative-innovative ardours under control. From this point of view, a very Schumpeterian financial innovation would lie in new regulatory forms (e.g. the 1933–35 regulatory reforms in the USA; Schumpeter, Reference Schumpeter1939: 987–1027), not in financial liberalisation. Opposed to the liberal wisdom, Schumpeter (Reference Schumpeter, Clemence and Swedberg1951: 185) remarks the role of public intervention in the banking/financial system to sustain economic activities especially in case of crisis, as it was the case of the Reconstruction Finance Corporation Act of 1932 which played a major role in handling the Great Depression in the USA by ‘keeping capitalism alive in the oxygen tent’.

In this vein, the Schumpeterian approach, developed in some Minskyian directions, can be used as a suitable way of establishing relevant principles to reform the institutional organisation of financial markets in order to design ‘robust finance’ able to serve economic development (Minsky, Reference Minsky1986: 328).Footnote ¹⁴ From this point of view, when capitalist economy turns out to be a money manager capitalism (Whalen, Reference Whalen2001) and the accumulation regime mainly rests on debt-funded speculative excesses, it is time to ‘tame the finance monster’, i.e. to definancialise the capitalist accumulation process. Re-regulation cannot therefore lie in some improved control devices of actors’ behaviour in a liberal environment. It must be founded on alternative principles to cut financial markets’ ardour down and push them to adopt less speculative strategies. That means, at least, the prevention of speculative positions through new regulatory rules, for instance by separating the financial intermediation and the traditional – productive system financing – bank activities. ‘Finance to finance’ and ‘finance to produce’ must be distinguished. Studying national reactions across different countries, Lounsbury and Tavakoly (Reference Lounsbury and Tavakoly2013: 9) also notice that in the aftermath of the 2007–08 crisis, one of the angles of attack to fight the crisis’ consequences was the global interconnections among markets and economies such that some nationalistic logic gained strength ‘to challenge the neoliberal logic’. They then argue that the relationships between the neoliberal and nationalistic logics shape the orientation of regulatory systems and frame the future of capitalist finance.

Certainly, structural reforms are much more difficult to implement than it seems. In a liberal-oriented and globalised environment different sectors and countries with different characteristics do not experience the same effects. Furthermore, international negotiations through G8–G20 platform do not rely on an alternative structural framework. However, without voluntarist and toughly oriented regulatory policies there could be no sustainable solution. In this sense, there is no gain without pain but the gain here is the systemic stability, not the micro efficiency of markets.

Studying complex dynamic economic systems to point out close relationships between institutions and development, Ostrom and Basurto (Reference Ostrom and Basurto2011) insist on rule evolution to enable actors to develop regular procedures of revising their behaviour and relevant institutions in order to improve collective as well as individual results of their actions. But in the case of financialised capitalism, capital development does not seem to be a learning-by-doing process which would allow individuals to adopt efficient and wiser behaviour under previous turmoil. Mirowski (Reference Mirowski2010: 428) then maintains, ‘Once the crisis grows acute, markets cannot heal themselves on their own; some outside social authority or external entity must push the reset button’.

The complexity of financial innovations as well as the financing of entrepreneurial innovations are likely to lead to unstable/explosive business cycles that call for rational systemic regulation: ‘A modern central bank which attempts to control aggregate demand and is the lender of last resort is the ephor of the ephor of the financial structure’ (Minsky, Reference Minsky1988: 10). To contain the endogenous instability of liberalised/financialised capitalism a central authority is needed. From this perspective, establishment of consistent macro-regulatory institutions is the prerequisite to frame a ‘good financial society” (Minsky & Whalen, Reference Minsky and Whalen1996–97) able to ensure more shared prosperity.