Is the financial innovation destruction creative ? A Schumpeterian reappraisal

This essay examines the consequences of financial innovations for the economic stability through a monetary reappraisal of the Schumpeterian approach and states that changes occurring in financial markets may adversely affect financing conditions of firms and impede economic development. In the economic literature, it is usually asserted that liberalized financial markets lead to innovations that allow banks to provide better risk management, information acquisition, and monitoring services. Therefore financial liberalisation would support the Schumpeterian vision of creative destruction process. However, recent financial crises cast doubt on the creative nature of financial innovations on weakly regulated markets. When speculative bank behaviour gains ground, it leads to the financialisation of economies. Financial markets dominate over the productive activities and provoke disastrous consequences at the macroeconomic level. Unlike the Schumpeterian entrepreneurial innovations, the evolution of financial markets leads to reckless finance that generates destabilizing dynamics. Then the Schumpeterian creative destruction process turns out to be a destructive creation and the systemic sustainability of market economies calls for more consistent regulatory frameworks.