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The finance/innovation nexus in Schumpeterian analysis: theory and application to the case of U.S. trustified capitalism

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Abstract

Joseph Schumpeter built his theory of economic development around the interaction between the entrepreneur and the banker, representations of the underlying finance/innovation nexus. The neo-Schumpeterian revival has marginalized this theoretical element, in favor of an interpretation focused primarily on technological aspects of innovation. Recent attempts by innovation scholars to re-integrate the missing financial elements have been hindered by this theoretical gap. The purpose of this paper is to contribute to the recovery of the finance/innovation nexus in the context of Schumpeter’s theory by proposing an original institutional interpretation of the relationship between finance and the entrepreneurial function. The new approach identifies the economic role of innovation as dependent on the contextual form taken by the related funding process. Application of these concepts to the U.S. trustified capitalism experience allows for an alternative interpretation linking corporate internalization of innovation and financial repression. A Schumpeterian trilemma involving monetary capitalism, financial autonomy of the corporate sector and financial stability is revealed. The proposed framework provides a flexible theoretical background for the development of our understanding of the current capitalist regime, open to further integration with other schools of economic thought.

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Notes

  1. «The formation of capital, the interest of capital, the entrepreneurial profit, and the crises – these are phenomena, towards which the pure economy currently fails» (Schumpeter [1908]2010:452). Schumpeter uses the term «pure economy» to describe the «static economics» of his time.

  2. A third constraint is provided by potential government intervention in case of excessive inflation, also inspired by empirical experience of the time.

  3. This is an example of the evolving nature of non-market institutions over time, as described by Ferri and Minsky (1992).

  4. In the following paragraph, the main references are Lazonick (1993, 2003, 2010a). These have been chosen among many alternatives for two reasons: they provide a complete overview of theoretical development from its earlier iterations to maturity and they have been repeatedly used by Lazonick himself as references to his theory of the innovative firm.

  5. Many of these savers were corporate treasurers. Commercial paper substituted for liquid assets such as deposits and Treasuries. This did not reflect a diminished liquidity preference; the movement was liable to reverse quickly in case of perceived liquidity issue, as indeed happened in 1970.

  6. A perspective shared by Volcker on the eve of assuming the role of Chairman of the Board of Governors of the Federal Reserve (Volcker 1978).

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Acknowledgements

The author wishes to thank those participating in the 16th International Schumpeter Society Conference in Montreal, especially Cristiano Antonelli and Harry Bloch. The usual caveats apply.

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  1. BI – Norwegian Business School, Nydalsveien 37, 0484, Oslo, Norway

    Beniamino Callegari

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Callegari, B. The finance/innovation nexus in Schumpeterian analysis: theory and application to the case of U.S. trustified capitalism. J Evol Econ 28, 1175–1198 (2018). https://doi.org/10.1007/s00191-018-0601-5

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