Finance and development: Is Schumpeter's analysis still relevant?

Abstract

In recent years, numerous studies have been published highlighting the role of financial structures in the development process of contemporary economies. In these recent studies, there is always a reference to the pioneering work of Schumpeter; in particular in the writings of Rajan and Zingales [Rajan, R., Zingales, L. 2003a. Banks and markets: The changing character of european finance, NBER Working Paper Series, No. 9595, March; Rajan, R., Zingales, L. 2003b. The great reversal: The politics of financial development in the twentieth century, Journal of Financial Economics 69, 5-50; Rajan, R., Zingales, L. 2003c. Saving Capitalism from Capitalist, Crown Business Division of Random House, New York], important elements of Schumpeter's theoretical framework are used. These works afford us an interesting opportunity to re-evaluate the importance of Schumpeter's contribution. 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. © 2007 Elsevier B.V. All rights reserved.