How much does finance benefit society?
Keywords:good finance, bad finance, enterprise, speculation
The financial crisis that erupted in 2007 has generated feelings of deep aversion towards finance among the public. Zingales (2015) urges the economics profession not to underestimate these feelings, noting that economists tend to overestimate the benefits of finance and to ignore that the ‘best form of finance’ is accompanied by a ‘bad type of finance’. The problem with these statements is that the macroeconomic theory elaborated over the last decades is unable to provide a satisfactory explanation for the coexistence of these two forms of finance. The aim of this work is to present a sound explanation of the distinction between ‘good’ and ‘bad’ finance, based on: i) Keynes’s distinction between ‘enterprise’ and ‘speculation’; ii) Schumpeter analysis of the role of bank money in a capitalist economy.
JEL codes: G01, G20, E12, E44
Keywords: good finance, bad finance, enterprise, speculation
Admati A.R. and Hellwig M. (2013), The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It, Princeton (NJ): Princeton University Press.
Akerlof G. (1970), “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”, Quarterly Journal of Economics, 84 (3), pp. 488-500.
Altuzarra A., Peinado P., Rodriguez C. and Serrano F. (2016), “Changes in the Relationship between the Financial and the Real Sector and the Present Financial Crisis in the European Union”, FESSUD Working Paper Series, no. 159, June, Leeds (UK): Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
Bernanke B.S. (1992-1993), “Credit in the Macroeconomy”, Federal Reserve Bank of New York Quarterly Review, 18 (Spring), pp. 50-70.
Bernanke B.S. (2007), “The Financial Accelerator and the Credit Channel”, speech at the “Credit Channel of Monetary Policy in the Twenty-First Century” Conference, Federal Reserve Bank of Atlanta, Atlanta, Georgia, 15 June.
Bernanke B.S. (2012), “Some reflections on the crisis and the policy response”, speech at the Russell Sage Foundation and The Century Foundation Conference on ‘Rethinking Finance’, New York,13 April.
Bernanke B.S. and Gertler M. (1995), “Inside the Black Box: The Credit Channel of Monetary Policy Transmission”, Journal of Economic Perspectives, 9 (4), pp. 27-48.
Bertocco G. (2007), “The Characteristics of a Monetary Economy: A Keynes-Schumpeter Approach”, Cambridge Journal of Economics, 31 (1), pp. 101-122.
Boyer R. (2000), “Is a finance-led growth regime a viable alternative to Fordism? A preliminary analysis”, Economy and Society, 29 (1), pp. 111- 145.
Capasso S. (2004), “Financial Markets, Development and Economic Growth: Tales of Informational Asymmetries”, Journal of Economic Surveys, 18 (3), pp. 267-292.
Davidson P. (2007), John Maynard Keynes, London: Macmillan.
Diamond D. and Rajan R. (2009), “The Credit Crisis: Conjectures about Causes and Remedies”, NBER Working Paper, no. 14739, February, Cambridge (MA): National Bureau of Economic Research.
Dosi G. (2012), “Economic Coordination and Dynamics: Some Elements of an Alternative ‘Evolutionary’ Paradigm”, in Dosi G., Economic Organization, Industrial Dynamics and Development, Selected Essays, Vol. 2 (pp. 1-35), Cheltenham, UK and Northampton, Ma: Edward Elgar.
Dosi G., Fagiolo G. and Roventini A. (2010), “Schumpeter Meeting Keynes: A Policy-Friendly Model of Endogenous Growth and Business Cycles”, Journal of Economic Dynamics and Control, 34 (9), pp. 1748-1767.
Fergusson L. (2006), “Institutions for Financial Development: What Are They and Where Do They Come From?”, Journal of Economic Survey, 20, (1), 27-70.
Festré A. and Nasica E. (2009), “Schumpeter on Money, Banking and Finance: An Institutionalist Perspective”, The European Journal of the History of Economic Thought, 16 (2), 325-356.
Goodwin R. (1993), “Schumpeter and Keynes”, in Biasco S., Roncaglia A. and Salvati M. (eds.), Markets and Institutions in Economic Development: Essays in Honour of Paolo Sylos Labini (pp. 83-85), London: Macmillan.
Gorton G. (2012), Misunderstanding Financial Crises: Why We Don’t See Them Coming, Oxford: Oxford University Press.
Gorton G. and Winton A. (2002), “Financial Intermediation”, NBER Working Paper, no. 8928, May, Cambridge (MA): National Bureau of Economic Research.
Gurley J. and Shaw E. (1956), “Financial intermediaries and the saving–investment process”, Journal of Finance, 11 (2), pp. 257–276.
Haldane A. (2016), “The Costs of Short-Termism”, in Jacobs M. and Mazzucato M. (eds.), Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth (pp. 66-76), Chichester (UK): Wiley-Blackwell.
Hein E. (2012), The Macroeconomics of Finance-Dominated Capitalism – and Its Crisis, Cheltenham (UK) and Northampton (Ma): Edward Elgar.
Hein E. and Dodig N. (2015), “Finance-Dominated Capitalism, Distribution, Growth and Crisis: Long-Run Tendencies”, in Hein E., Detzer D. and Dodig N. (eds.), The Demise of Finance-Dominated Capitalism (pp. 54-114), Cheltenham (UK) and Northampton (Ma): Edward Elgar.
Hein E., Detzer D. and Dodig N. (2015), The Demise of Finance-Dominated Capitalism, Cheltenham (UK) and Northampton (Ma): Edward Elgar.
Keynes J.M. (1930), “Economic Possibilities for Our Grandchildren”, in Nation and Athenaeum, 11 and 18 October; as reprinted in The Collected Writings of John Maynard Keynes, vol. IX, Essays in Persuasion (pp. 321-332), London: Cambridge University Press for the Royal Economic Society.
Keynes J.M. (1933), “The distinction between a co-operative economy and an entrepreneur economy”, draft of the second chapter of The General Theory according to the last index prepared in 1933, reprinted in The Collected Writings of John Maynard Keynes, vol. XXIX, The General Theory and After: a Supplement (pp. 76–106),London: Cambridge University Press for the Royal Economic Society
Keynes J.M. (1936), The General Theory of Employment, Interest, and Money; as reprinted in The Collected Writings of John Maynard Keynes, vol. VII, The General Theory, London: Cambridge University Press for the Royal Economic Society.
Keynes J.M. (1937), “The ‘Ex Ante’ Theory of the Rate of Interest”, Economic Journal, 47 (188), pp. 663-669; as reprinted in The Collected Writings of John Maynard Keynes, vol. XIV, The General Theory and After: Part 2. Defence and Development (pp. 241-252), London: Cambridge University Press for the Royal Economic Society.
Kregel J. (2014), “Minsky and Dynamic Macroprudential Regulation”, PSL Quarterly Review, 67 (269), pp. 217-238.
King R. and Levine R. (1993), “Finance and Growth. Schumpeter Might Be Right”, Quarterly Journal of Economics, 108 (3), pp. 717-737.
Kurz H. (2016), “Keynes and Schumpeter. United in dissent – Divided in destination”, Paper given at the conference “The General Theory and Victoria Chick at 80: A celebration”, at the University College, London, 11 July.
Levine R. (1997), “Financial Development and Economic Growth: Views and Agenda”, Journal of Economic Literature, 35 (2), pp. 688-726.
Levine R. (2002), “Bank-based or Market-based Financial Systems: Which Is Better?”, Journal of Financial Intermediation, 11 (4), pp. 398-428.
Levine R. (2004), “Finance and Growth: Theory and Evidence”, NBER Working Paper, no. 10766, September, Cambridge (MA): National Bureau of Economic Research.
Mazzucato M. (2013), “Financing Innovation: Creative Destruction vs. Destructive Creation”, Industrial and Corporate Change, 22 (4), pp. 851-867.
Mazzucato M. and Wray R. (2015), “Financing the Capital Development of the Economy: A Keynes-Schumpeter-Minsky Synthesis, Levy Economics Institute Working Paper, no. 837, May, Annandale-on-Hudson (NY): Levy Economics Institute of Bard College.
Merton R .and Bodie Z. (2005), “Design of Financial Systems: Towards a Synthesis of Function and Structure”, Journal of Investment Management, 3 (1), pp. 1-23.
Messori M. (2002), “Credit and Money in Schumpeter’s Theory”, Departmental Working Papers, January, Rome: Tor Vergata University, CEIS, DOI: 10.2139/ssrn.320883.
Messori M. (2013), “A Schumpeterian Analysis of the Credit Market”, LUISS Guido Carli/Department of Political Science Working Paper, no. 1/2013, Roma: LUISS Academy.
Minsky H. (1975), John Maynard Keynes, New York: Columbia University Press.
Minsky H. (1986), “Money and Crisis in Schumpeter and Keynes”, in Wagener H.J. and Drukker J.W. (eds.), The Economic Law of Motion of Modern Society: A Marx-Keynes-Schumpeter Centennial (pp. 112-122), Cambridge (UK): Cambridge University Press.
Minsky H. (1993), ‘Schumpeter and Finance’, in Biasco S., Roncaglia A. and Salvati M. (eds.), Markets and Institutions in Economic Development: Essays in Honour of Paolo Sylos Labini (pp. 103-115), London, Macmillan.
Minsky H. (1996), “Uncertainty and the Institutional Structure of Capitalist Economies. Remarks Upon Receiving the Veblen-Commons Award”, Journal of Economic Issues, 30 (2), pp. 357-368.
Morishima M. (1992), Capital and Credit. A New Formulation of General Equilibrium Theory, Cambridge, UK: Cambridge University Press.
Nasica E. (2002), “Financing Economic Activity: Schumpeter vs Keynes”, in Arena R. and Dangel-Hagnauer C. (eds.), The Contribution of Joseph Schumpeter to Economics (pp. 241-256), London: Routledge.
Palley T. (2013), Financialization. The Economics of Finance Capital Domination, Basingstoke (UK): Palgrave Macmillan.
Rajan R. (2006), “Has Finance Made the World Riskier?”, European Financial Management, 12 (4), pp. 499-533.
Rajan R. (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton: Princeton University Press.
Rajan R. and Zingales L. (2003), Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity, Princeton: Princeton University Press.
Reinhart C. and Rogoff K. (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton: Princeton University Press.
Roncaglia A. (2013), “Hyman Minsky’s Monetary Production Economy”, PSL Quarterly Review, 66 (265), pp. 77-94.
Schumpeter J.A. , Theorie der wirtschaftlichen Entwicklung, Duncker & Humblot, Berlin; English edition (1949), The Theory of Economic Development, Cambridge (MA): Harvard University Press.
Shiller R. (2008), The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do About It, Princeton: Princeton University Press.
Stiglitz J. and Greenwald B. (2003), Towards a New Paradigm in Monetary Economics, Cambridge: Cambridge University Press.
Stulz R. (2001), Does Financial Structure Matter for Economic Growth? A Corporate Finance Perspective, in Demirgüç-Kunt A. and Levine R. (eds.), Financial Structure and Economic Growth: A Cross-Country Comparison of Banks, Markets, and Development (pp. 143-188), Cambridge (MA): The MIT Press.
Tridico P. (2017), Inequality in Financial Capitalism, Abingdon: Routledge.
Ülgen F. (2014), “Schumpeterian Economic Development and Financial Innovations: A Conflicting Evolution”, Journal of Institutional Economics, 10 (2), pp. 257-277.
Vercelli A. (1997), ‘Keynes, Schumpeter and Beyond: A Non-reductionist Perspective’, in: Harcourt G. and Riach P. (eds.), A ‘Second Edition’ of the General Theory, vol. 2 (pp. 284-299), London: Routledge.
Wachtel P. (2003), “How much do we really know about growth and finance?” Federal Reserve Bank of Atlanta Economic Review, First Quarter, pp. 33–47.
Whalen C. (2001), “Integrating Schumpeter and Keynes: Hyman Minsky’s Theory of Capitalist Development”, Journal of Economic Issues, 35 (4), pp. 805-823.
Wray L.R. (2016), Why Minsky Matters, Princeton: Princeton University Press.
Wurgler J. (2000), “Financial markets and the allocation of capital”, Journal of Financial Economics, 58 (1-2), pp. 187-214.
Zingales L. (2015), “Presidential Address: Does Finance Benefit Society?”, Journal of Finance, 70 (4), pp. 1327-1363.