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This paper seeks to assess the nature of financial innovations as regards the economic stability throughout an institutional framework within the Schumpeterian tradition. While in the Schumpeterian evolutionary process entrepreneurial innovations are assumed to lead the entire economy towards economic development, financial innovations do not obviously generate the same positive outcome for economic evolution. To point to the ambiguous nature of financial innovations the paper suggests a monetary interpretation of Schumpeterian capitalist dynamics and sheds light on the role of the institutional environment to ensure viable economic development. It then argues that in highly liberalized environment, unconstrained financial dynamics may lead to system-wide crises and make public regulatory schemes necessary for the sake of systemic stability.

Abstract: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.