The Schumpeterian role of financial innovations in the New Economy's business cycle

Abstract

Alan Greenspan claims that modern financial innovations, especially financial derivatives, were major contributors to a Schumpeterian process of ‘creative destruction’ which produced a high-growth ‘New Economy’ and opposes their regulation. A different perspective emerges when it is recognised that the ‘New Economy’ followed the general contours of a Schumpeterian business cycle, and the role of modern financial innovations is examined in that context. The authors argue that the primary role of financial derivatives has been in contributing to ‘reckless finance’ and speculative excesses in the second phase of that cycle, and that Schumpeter would favour subjecting the use of derivatives to more regulation.