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Finance and Development: is Schumpeter’s Analysis still relevant?

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  • Bertocco Giancarlo

    ()
    (Department of Economics, University of Insubria, Italy)

Abstract

In recent years numerous studies have been published highlighting the role of financial structures in the development process of contemporary economies.1 These works represent a break with a widely-held theoretical view holding that income, wealth and economic growth are independent of the monetary and financial variables, and which thus considers money and the financial structure as neutral variables.2 In these recent studies there is always a reference to the pioneering work of Schumpeter; in many cases it is just a superficial mention, in other ones and in particular in the writings of Rajan and Zingales (2003a, 2003b, 2003c), important elements of Schumpeter’s theoretical framework are used. Hence, these works afford us an interesting opportunity to re-evaluate the importance of Schumpeter’s contribution.3 The thesis put forward in this paper is that while they do indeed highlight important elements of Schumpeter’s theory, Rajan and Zingales do not take the implications thereof into account and, furthermore, they neglect certain fundamental aspects of the Schumpeterian analysis that are closely connected with the parts that they consider. This renders their work incomplete, and prevents their analysis from achieving the coherence of Schumpeter’s theory. This paper is divided into two parts. In the first part, the most important points of the analysis of Rajan and Zingales are described; in the second part, the elements of Schumpeter’s theory that they overlook are pointed out, and it is shown that by using the Schumpeterian theoretical framework it is possible to analyse the relation between financial structure and economic system growth in a more coherent and in-depth way than the one used by Rajan and Zingales.

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Bibliographic Info

Paper provided by Department of Economics, University of Insubria in its series Economics and Quantitative Methods with number qf06013.

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Length: 29 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:ins:quaeco:qf06013

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  1. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  2. Gary Gorton & Andrew Winton, 2002. "Financial Intermediation," Center for Financial Institutions Working Papers 02-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
  3. Allen N. Berger & Gregory F. Udell, 1998. "The economics of small business finance: the roles of private equity and debt markets in the financial growth cycle," Finance and Economics Discussion Series 1998-15, Board of Governors of the Federal Reserve System (U.S.).
  4. Blinder, Alan S & Stiglitz, Joseph E, 1983. "Money, Credit Constraints, and Economic Activity," American Economic Review, American Economic Association, vol. 73(2), pages 297-302, May.
  5. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
  6. Leopoldo Fergusson, 2006. "Institutions for Financial Development: What are they and where do they come from?," Journal of Economic Surveys, Wiley Blackwell, vol. 20(1), pages 27-70, 02.
  7. Goodhart, C A E, 1987. "Why Do Banks Need a Central Bank?," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 75-89, March.
  8. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
  9. Salvatore Capasso, 2003. "Financial Markets Development And Economic Growth: Tales Of Informational Asymmetries," Working Papers 2_2003, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  10. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
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  12. Giovanni Ferri, 2006. "Essay Review on Raghuram G. Rajan and Luigi Zingales (2003), Saving Capitalism from the Capitalists, Random House, New York," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 35(2), pages 219-225, 07.
  13. Paul Wachtel, 2003. "How much do we really know about growth and finance?," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 33-47.
  14. Richard Sylla, 2006. "Schumpeter Redux: A Review of Raghuram G. Rajan and Luigi Zingales's Saving Capitalism from the Capitalists," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 391-404, June.
  15. Stiglitz, Joseph E., 2001. "Information and the Change in the Paradigm in Economics," Nobel Prize in Economics documents 2001-8, Nobel Prize Committee.
  16. Robert E. Carpenter & Bruce C. Petersen, 2002. "Capital Market Imperfections, High-Tech Investment, and New Equity Financing," Economic Journal, Royal Economic Society, vol. 112(477), pages F54-F72, February.
  17. Jeffrey Wurgler, 1999. "Financial Markets And The Allocation Of Capital," Yale School of Management Working Papers ysm123, Yale School of Management, revised 01 Mar 2001.
  18. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 803-832, December.
  19. Rajan, Raghuram G & Zingales, Luigi, 2003. "Banks and Markets: the Changing Character of European Finance," CEPR Discussion Papers 3865, C.E.P.R. Discussion Papers.
  20. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-89, December.
  21. Stiglitz,Joseph & Greenwald,Bruce, 2003. "Towards a New Paradigm in Monetary Economics," Cambridge Books, Cambridge University Press, number 9780521810340.
  22. Levine, Ross, 2002. "Bank-Based or Market-Based Financial Systems: Which Is Better?," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 398-428, October.
  23. Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
  24. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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Cited by:
  1. Giancarlo Bertocco, 2011. "Global Saving Glut and housing bubble: a critical analysis," Economics and Quantitative Methods qf1112, Department of Economics, University of Insubria.
  2. Agbloyor, Elikplimi Komla & Abor, Joshua & Adjasi, Charles Komla Delali & Yawson, Alfred, 2013. "Exploring the causality links between financial markets and foreign direct investment in Africa," Research in International Business and Finance, Elsevier, vol. 28(C), pages 118-134.
  3. Law, Siong Hook & Azman-Saini, W.N.W. & Ibrahim, Mansor H., 2013. "Institutional quality thresholds and the finance – Growth nexus," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5373-5381.

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