Creative Destruction Meets Financial Instability: Toward a New Synthesis

This paper reconstructs Joseph Schumpeter's major works to propose a coherent new departure point for analyzing economic and social change. I argue that Capitalism, Socialism and Democracy (1942) (CSD) marks a radical departure from Schumpeter's earlier attempts in The Theory of Economic Development (1912 [1934]) (TED) and Business Cycles (1939) (BC) to merge equilibrium theory with evolutionary dynamics. In CSD, equilibrium disappears, cycles recede, and capitalism is recast as a process of creative destruction--turbulent, conflictual, and institutionally embedded. Yet the building blocks of this paradigm--innovation, the entrepreneurial function, credit creation, capital as a social relation, and the seeds of financial fragility--were already present in TED and BC, though obscured by equilibrium reasoning. The originality of this reconstruction lies in recovering Schumpeter's neglected concept of the "secondary wave," buried in BC, which anchors financial fragility within the creative destruction paradigm and provides the bridge to Keynes's liquidity preference and Minsky's financial instability hypothesis. Reconstructed in this way, Schumpeter's trilogy yields a framework in which credit, innovation, technological disruptions, and financial fragility are inseparable. The synthesis illuminates both the resilience and the instabilities of contemporary capitalism and, when extended, helps to explain the logic of "hybrid institutional architectures"--above all the "China model," today's most ambitious and misunderstood experiment in innovation-led, state-directed development in contemporary political economy.