Money, Banks and Finance in Economic Thought

Schumpeter, the Banking System, and Innovation: Small versus Big Business

Lambert Thomas , University of Louisville

Joseph Schumpeter’s writings on entrepreneurship and innovation have had a profound impact on economic theory and economic thought. Schumpeter initially saw the small entrepreneur as the source of innovation and economic growth within an economic system but later saw large corporations as the source of much innovation. Because large corporations, and in modern times many governments and universities as well, play such a large role in funding research and development and new innovations, much of the bank financing of innovation is done by smaller banks for small entrepreneurs and their ideas. Venture capitalists and self-financing are the other two major forms of small entrepreneur/small business financing. Meanwhile, the financial markets (stocks and bond markets) only indirectly play a role in funding the innovation of large corporations via changes in these firms’ stock prices. Changes in stock prices reflect an estimate of the large firms’ research and development efforts and their prospects for profitable, future innovation. Much corporate research and development is financed internally within the organization as an expense of doing business. Meanwhile, government and university funding through tax dollars and non-profit sources indirectly subsidize corporate innovation because governmental entities and universities take on risks that the private sector will often not tolerate. Yet, large corporations are often the beneficiaries of such governmental and university financing of research and development efforts. In today’s times, Schumpeter would be impressed with the success of large firms regarding innovation but probably would be disappointed about the marginalization of the small entrepreneurial firm and the banking system and their diminished roles in innovation. This paper summarizes Schumpeter’s views on how the banking system and financial markets could play a role in innovation and explains how a modern day monopoly capital system (Baran and Sweezy 1966) and its financial system have transformed entrepreneurship and innovation away from small business and innovation by the small entrepreneur. Baran, Paul A, and Paul M Sweezy. 1966. Monopoly Capital: An Essay on the American Economic and Social Order. New York: Monthly Review Press.

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Keywords: banking, financialiazation, monopoly capital

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