Economic Evolution and Financial Innovations: From a Creative Process to Creative Destruction

By Faruk Ülgen

English

In the economic literature, it is often assumed that open and liberalized financial markets allow for a better allocation of financial resources for the effective financing of productive activities. Thus, numerous works do not distinguish between financial innovations and Schumpeterian entrepreneurial innovations and then conclude that changes observed in the financial markets since the 1980s have contributed to the promotion of economic growth. However, Schumpeter does not give an accurate and specific analysis of financial innovations, different from that of entrepreneurial innovations, though one can find in his works numerous statements advancing the role of the banking and financial system in economic development. This paper proposes a study to fill this analytical gap. It shows, however, that the nature of financial innovations differs radically from the orientation of the Schumpeterian innovations. Recurrent imbalances for several decades seem to support the thesis that financial innovations transform the process of creative evolution in capitalism, studied by Schumpeter, in a phenomenon of creative destruction. Financial instabilities thus require a renewal of regulatory schemes to direct financial innovations toward an evolutionary path which does not provoke economic crisis, with destruction of growth and of productive entrepreneurial activities.
JEL Codes: B25, E44, G28, O16, O31

Keywords

  • economic evolution
  • financial innovations
  • destructive creation
  • regulation
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