Finance and Development: is Schumpeter’s Analysis still relevant?

In recent years numerous studies have been published highlighting the role of financial structures in the development process of contemporary economies.1 These works represent a break with a widely-held theoretical view holding that income, wealth and economic growth are independent of the monetary and financial variables, and which thus considers money and the financial structure as neutral variables.2 In these recent studies there is always a reference to the pioneering work of Schumpeter; in many cases it is just a superficial mention, in other ones and in particular in the writings of Rajan and Zingales (2003a, 2003b, 2003c), important elements of Schumpeter’s theoretical framework are used. Hence, these works afford us an interesting opportunity to re-evaluate the importance of Schumpeter’s contribution.3 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. This paper is divided into two parts. In the first part, the most important points of the analysis of Rajan and Zingales are described; in the second part, the elements of Schumpeter’s theory that they overlook are pointed out, and it is shown that by using the Schumpeterian theoretical framework it is possible to analyse the relation between financial structure and economic system growth in a more coherent and in-depth way than the one used by Rajan and Zingales.