Schumpeter on money, banking and finance: an institutionalist perspective

In this paper, we provide an institutional interpretation of Schumpeter's analysis of money, banking and finance. This interpretation is founded on an overall investigation into Schumpeter's writings addressing those issues from different perspectives. In section 1, we discuss the widespread evolutionist interpretation of Schumpeter and rather assert an institutionalist perspective. In support of our interpretation, we highlight the specific role played by economic sociology in Schumpeter's methodological approach. Economic sociology, indeed, provides the foundations of a theory of institutions and institutional change, which is often undermined by the usual evolutionary interpretation. We believe, however, that taking this dimension seriously into account may have implications for our understanding of economic and institutional change in Schumpeter. Section 2 illustrates this general statement by focusing on Schumpeter's analysis of money, banking and finance, and their respective roles in the process of economic development . Starting from the angle of the three pedagogical stages of Schumpeter's analysis of economic development - the circular flow, the steady-state and the development cases - we show how institutional change is progressively introduced into those respective cases and emphasize the leading role of the banking system in the overall evolution of the financial system. Two functions of the banking system will be specifically pointed out. On the one hand, the banking system, through its function of credit creation, is seen as the 'ephor' of the capitalist system, as an institutional setting pre-existing to it and rendering its expansion possible. On the other hand, the banking system face inner tensions due to transformations taking place within the economic system and must adapt to those changes. In this perspective, the banking system may be conceived as a vector of innovation in the field of banking and corporate finance, which, similarly to the real sector, is ruled by the law of creative destruction