An evolutionary perspective on the endogenous instability of capitalist dynamics

This article examines the financial dynamics of the 21st century market economies with regard to the systemically relevant conditions for macro-stability. In light of the 2007-2008 crisis, it liberally draws upon Schumpeter's and Minsky's analyses of the weaknesses of loose financial regulation and places the focus on financial innovations as sources of systemic concerns. It develops two core hypotheses: a capitalist economy is a monetary and non-ergodic evolutionary system that develops through continuous entrepreneurial innovations along with financial innovations, and such a system cannot be studied as a steady-state equilibrium but rather as a dynamic and unstable economy whose working mechanics endogenously generate recurrent financial crises and require specific system-wide regulation. From an institutionalist and evolutionary perspective, the dynamics of capitalism are contingent on monetary and financial features and related innovations. The micro-dynamics of innovations may result both in creative and destructive outcomes due to crisis-prone financial markets and dissonant individual behaviour. There are some crucial differences between entrepreneurial innovations à la Schumpeter as the force of positive economic development, and financial innovations à la Minsky as the source of instabilities. The article puts forward weaknesses and inconsistencies of unregulated markets and suggests a few principles for relevant financial regulation in an endogenously unstable monetary economy. Financial stability is a public good to be provided by a visible public hand, macroprudential regulation and supervision. The study of the conditions of systemic financial stability proves to be a matter of a specific social dilemma that concerns the organisation and management of financial markets according to a given regulatory framework. The ultimate issue is to allow market innovation dynamics and systemic financial stability and viability to be compatible with each other through a relevant regulation and supervision environment. The latter should be framed to tame the tendency of financial markets to generate systemic crises instead of supporting productive innovative activities. This article is related to a larger research project about the financial instability of a market economy and the relevant regulatory answers to systemic financial crises. This project, that mainly draws from evolutionary and institutionalist economics, considers different facets of the financial instability issue, in relation with the financial conglomerates, the insurance market evolution and systemic concerns that it might generate, the general assessment of the after-2007-08 crisis regulatory reforms in advanced and emerging market economies, and the characteristics of financial innovations and their systemic effects on economic evolution.