EconPapers    
Economics at your fingertips  
 

Financing the Capital Development of the Economy: A Keynes-Schumpeter-Minsky Synthesis

Mariana Mazzucato () and L. Randall Wray

Economics Working Paper Archive from Levy Economics Institute

Abstract: This paper discusses the role that finance plays in promoting the capital development of the economy, with particular emphasis on the current situation of the United States and the United Kingdom. We define both "finance" and "capital development" very broadly. We begin with the observation that the financial system evolved over the postwar period, from one in which closely regulated and chartered commercial banks were dominant to one in which financial markets dominate the system. Over this period, the financial system grew rapidly relative to the nonfinancial sector, rising from about 10 percent of value added and a 10 percent share of corporate profits to 20 percent of value added and 40 percent of corporate profits in the United States. To a large degree, this was because finance, instead of financing the capital development of the economy, was financing itself. At the same time, the capital development of the economy suffered perceptibly. If we apply a broad definition--to include technological advances, rising labor productivity, public and private infrastructure, innovations, and the advance of human knowledge--the rate of growth of capacity has slowed. The past quarter century witnessed the greatest explosion of financial innovation the world had ever seen. Financial fragility grew until the economy collapsed into the global financial crisis. At the same time, we saw that much (or even most) of the financial innovation was directed outside the sphere of production--to complex financial instruments related to securitized mortgages, to commodities futures, and to a range of other financial derivatives. Unlike J. A. Schumpeter, Hyman Minsky did not see the banker merely as the ephor of capitalism, but as its key source of instability. Furthermore, due to "financialisation of the real economy," the picture is not simply one of runaway finance and an investment-starved real economy, but one where the real economy itself has retreated from funding investment opportunities and is instead either hoarding cash or using corporate profits for speculative investments such as share buybacks. As we will argue, financialization is rooted in predation; in Matt Taibbi's famous phrase, Wall Street behaves like a giant, blood-sucking "vampire squid." In this paper we will investigate financial reforms as well as other government policy that is necessary to promote the capital development of the economy, paying particular attention to increasing funding of the innovation process. For that reason, we will look not only to Minsky's ideas on the financial system, but also to Schumpeter's views on financing innovation.

Keywords: Banker as Ephor of Capitalism; Capital Development; Finance; Global Financial Crisis; Innovation; Minsky; Schumpeter (search for similar items in EconPapers)
JEL-codes: B5 B51 B52 G G1 G2 H6 L5 N1 O1 O2 O3 O4 P1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-his, nep-hme, nep-hpe and nep-pke
Date: 2015-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://www.levyinstitute.org/pubs/wp_837.pdf (application/pdf)

Related works:
Working Paper: Financing the Capital Development of the Economy: A Keynes-Schumpeter-Minsky Synthesis (2015) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:lev:wrkpap:wp_837

Access Statistics for this paper

More papers in Economics Working Paper Archive from Levy Economics Institute
Bibliographic data for series maintained by Elizabeth Dunn ().

 
Page updated 2019-10-05
Handle: RePEc:lev:wrkpap:wp_837