2015/14 | LEM Working Paper Series | |
Financing the Capital Development of the Economy: A Keynes-Schumpeter-Minsky Synthesis |
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Mariana Mazzucato and L. Randall Wray |
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Keywords | ||
Banker as Ephor of Capitalism; Capital Development; Finance; Global Financial Crisis; Innovation; Minsky; Schumpeter
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JEL Classifications | ||
B5, B51, B52, G, G1, G2, H6, L5, N1, O1, O2, O3, O4, P1
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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.
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