ABSTRACT
This chapter discusses the role that finance plays in promoting the capital development of the economy, with a particular emphasis on the current situation of the United States and the United Kingdom. Quality can be improved through Schumpeterian innovation and ‘creative destruction’: new technologies come along that ‘destroy’ the productivity of old technologies. Schumpeter emphasised that innovation must be distinguished from invention; in many cases, the entrepreneur commercialises inventions that have not been applied because they represent a break with routine. Financial innovation is thus the ‘monetary’ counterpart to Schumpeter’s ‘new combinations’, which will require finance so they may be carried out. The origins of the financial crisis and the massive and disproportionate growth of the financial sector began in the early 2000s when banks increasingly lent to other financial institutions, largely via wholesale markets. Innovation policy will not work unless the financial system is reformed to provide more patient long-term committed capital to high-growth innovative firms.
