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Mechanisms of Financial Crises
in Growth and Collapse:
Hammurabi, Schumpeter,
Perez, and Minsky.
Erik S. Reinert, UKM* & Tallinn University of Technology
April 2012
CONTACT: Rainer Kattel, kattel@staff.ttu.ee; Wolfgang Drechsler, drechsler@staff.ttu.ee; Erik S. Reinert, reinert@staff.ttu.ee
the other canon foundation, Norway
Tallinn University of Technology, Tallinn
Working Papers in Technology Governance and Economic Dynamics no. 39
* Professor Erik S. Reinert is the holder of the Distinguished Chair of Tun Ismail Ali, Permoda-
lan Nasional Berhad (PNB) at the Faculty of Economics and Management, Universiti Kebang-
saan Malaysia (2012).
2
Abstract. This paper provides a historical and theoretical overview of the
mechanisms leading up to financial crises and financial bubbles. It sug-
gests that the potentially explosive growth of the financial sector at the
expense of the real economy fed by compound interest has – since before
Ancient Mesopotamia under the rule of Hammurabi – represented a real
threat for such crises. A more modern and additional factor that builds up
crises is Joseph Schumpeter’s observation of the clustering of innova-
tions. Carlota Perez has more recently developed Schumpeter’s vision
into a theory of techno-economic paradigms which – about midway in
their trajectory – produce the build-up to financial crises. The theories of
Schumpeterian economist Hyman Minsky, describing the mechanisms
producing the collapse of financial bubbles complete the overview. The
paper ends with recommendations to bring the West out of the present
crisis by –once again – putting the real economy rather than the financial
economy in the driver’s seat of capitalism.
Keywords: Financial crises, innovations, Hammurabi, Joseph Schumpet-
er, John Maynard Keynes, Hyman Minsky, Carlota Perez.
Introduction
Financial crises occur when the relationship between the real economy
(the total production of goods and services) and the financial economy
(money in the widest sense) comes out of balance in such a way that the
financial economy no longer primarily supports the real economy, but
takes on an independent life of its own in such a way as to damage the
real economy. Today’s economics (neoclassical economics, standard
textbook economics, mainstream economics) accepts such an imbalance
between the real economy and the monetary sphere when it comes to
inflation (rising price levels) and deflation (decreasing price levels), but not
when it comes to financial crises. This is in sharp contrast to other kinds
of economics – the experienced-base type of economics I refer to as The
Other Canon – which traditionally have understood and still understand
crises, but which have been marginalized.
Financial crises represent imbalances which – in contrast to inflation and
deflation – are not immediately visible in the consumer price index as ris-
ing or falling prices, but rather in the form of asset inflation and debt
deflation, which in sum have very important impacts on income distribu-
tion. The assets in which massive incomes from the financial sector are
invested, will experience an asset inflation. On the other hand, the falling
levels of prices and wages that result from the crises, will result in debt
deflation, a continually rising real quantity of outstanding debt.
3
The transfer of income and assets from the real economy to the financial
economy is the most important long-run effect of a financial crisis. If
these imbalances are not addressed by making big investments in the real
economy, any recovery – in that case by definition weak – will be driven
by demand from the financial sector, and the losses in the real economy
may be permanent. This is now what is happening in the US and in
Europe, where the EU’s ‘internal devaluations’ in the Baltic in some
places have reduced real wages by up to 50 per cent, while at the same
time unemployment is alarmingly high.
If the financial imbalances in the EU periphery had been addressed by a
traditional formula of debt cancellation and devaluation – which was suc-
cessfully done in Argentina about ten years ago – this would have penalized
the financial economy, but in the long run supported the wage level. In the
case of the Baltic countries this would have meant letting the (mostly for-
eign) banks and the financial (real estate) side of the economy take the
losses, while saving the production economy. Instead Europe made the
decision to ‘save’ the financial economy in the short run, which is likely to
permanently destroy the wage level. This is why Martin Wolf of the Finan-
cial Times is of the opinion that a possible recovery will be a ‘yacht and
mansion’ recovery. This paper argues that the way the problems of the
financial crisis is being solved – under the general heading of austerity – will
lead to a permanent domination over the economy by the financial sector
at the expense of the real economy, citing examples of this development in
Latin America in the 1970s and in the former Soviet sphere in the 1990s.
Financial Crises were understood from left to right – but unlearned
all along the political axis
The interesting thing is that once upon a time financial crises were a well
known and well understood phenomenon along the whole political axis.1
Karl Marx wrote about them (volume 3 of Das Kapital), and Lenin said
that control of the financial economy represented the last stage of capital-
ism. In the theories of the Austrian social democrat Rudolf Hilferding2,
1 An extensive bibliography and brief overview of previous theories of financial crises is found
in Reinert, Erik S. & Arno Daastøl, ‘Production Capitalism vs. Financial Capitalism - Symbiosis
and Parasitism. An Evolutionary Perspective and Bibliography’, The Other Canon Foundation and
Tallinn University of Technology Working Papers in Technology Governance and Economic
Dynamics, No. 36, 2011 (original 1998). This paper is an edited version of the author’s report
to the Norwegian Parliamentary Commission on the Financial Crisis. The origins of this paper go
back to the 1990s and is influenced by the scholarship and friendship of Jan Kregel and Carlot
Perez.
2 On Hilferding, see Smaldone, William, Rudolf Hilferding. The Tragedy of a German Social
Democrat, DeKalb, Ill, Northern Illinois University Press, 1998.
4
financial crises were once a social democratic strongpoint. Joseph Alois
Schumpeter and John Maynard Keynes – possibly the most important
theoreticians on financial crises – were politically conservative, and the
most important Norwegian representative, Torkel Aschehoug, was head
of the conservative party. Even though the present loss in the real econ-
omy in favor of the financial sector ought to be extremely important for
any government, it is still barely visible on the political agenda. Today’s
economics – compared to in earlier times – has important blind spots as
regards the role of the financial sector, and these blind spots also transfer
to the perspective of politicians.
Earlier terminologies, which understood and described the mechanisms of
crises, are now largely lacking. Lately some economists, particularly
Americans, have ‘rediscovered’ some of the old theories, Irving Fisher’s
‘debt deflation’ being one of them. However, as this paper argues, many
more basic mechanisms and insights are up for rediscovery.
To understand financial crises a terminology distinguishing between the
financial economy (what Schumpeter called ‘die Rechenpfennige’, the
‘accounting units’) and the real economy (the production of goods and
services, Schumpeter’s Güterwelt) is necessary (See Figure 1). The fam-
ily tree of today’s mainstream economics, originating in the late 1700s
with Quesnay and the Physiocrats, and continuing with the English eco-
nomics of David Ricardo (1817), does not have a monetary or financial
sector and is therefore generally blind to financial crises, abstaining from
studying the relationship between the financial sector and the real econ-
omy. In the alternative tradition, The Other Canon in my terminology, this
difference has always been important. Starting with the Anti-Physiocrats,
who tried to stop the free trade and resulting speculation leading up to
the French Revolution, The Other Canon type of economics – where dis-
tinguishing between the financial economy and the real economy is a key
feature – dominated after the 1848 revolutions. However, as this his-
torical and fact-based economic theory virtually died out after World War
II, with it the crisis theories also disappeared along the whole political
axis. Under the assumption of perfect competition and in the absence of
any conflicts between the financial sector and the real economy, neoclas-
sical economics models the market economy as machinery where friction
is absent: a machinery creating automatic harmony. The theories handed
down from Ricardo do not contain the categories to make possible the
understanding of crises.
5
Figure 1. The Real Economy and the Financial Economy as Different Spheres.
The Hammurabi Effect and ‘Debt Deflation’
The simplest model for understanding the disproportion between the real
economy and the financial economy originated in Mesopotamia3 under
Hammurabi (2030-1995 BC). Claiming that the roots of civilization were
found here is indeed more than an empty phrase.
Hammurabi’s economists calculated that due to compound interest the
financial economy would increase far more than the real economy would
be able to absorb. After normal bookkeeping principles the assets of the
financial economy would have their counterparts as debt in the real
economy. Thus did English economist Richard Price (1769) express the
force of compound interest:
‘A shilling invested at 6% interest at the birth of Christ would ...
have increased to an amount (gold) larger than could be contained
in the whole solar system, if this is constructed as a sphere with
the diameter of Saturn’s bane around the sun’.
As someone must obviously have invested 1 shilling at the time of the
birth of Christ, this means that any system permitting compound interest
necessarily must break down at intervals. Hammurabi and his descendants
3 For an account of debt dating back to the Sumerian Kingdoms, se Graeber, David, Debt. The
First 5,000 Years, New York, Melville House, 2011. I am grateful to Michael Hudson for having
introduced me to the Hammurabi mechanisms in the eraly 1990s.
6
took the consequences of this, and irregularly cancelled all debt (except
short run commercial debt) to avoid the death of the real economy due to
ever increasing debt. In the Old Testament we still find references to this
system. The years when debts were cancelled were called Jubilee Years.
Money and gold are then conceptually different from the goods and ser-
vices that can be acquired with their help. History is filled with warnings
against what has been called chrysohedonism, confusing money with what
money can buy. The legend of King Midas, who was granted his wish that
whatever he touched should be turned into gold – and then later discov-
ered this to be a curse – is a brilliant example of the danger of confusing
riches of money and gold with riches of ‘goods and services’. Without
Jubilee Years the financial sector would end up as a King Midas, with loads
of money and gold, but with a real economy extremely weakened – or
dead – because of the debt burden. This is the track we are on now.
The Bible (Matthew 25, 14-30) tells us that the coins – the ‘talents’ –
should not be buried, but invested. In the mid 1300s the early money
theorist Nicolas Oresme complained about too much money ending in
treasure chests instead of being productively invested. This is not why
we created money, he writes. Around 1600 Francis Bacon writes that
money is like manure, only useful when spread. Through the whole his-
tory of Civilization we find as a red thread that the ‘financial sector’ is
only useful when invested in the real economy.
The Muslim prohibition against interest – riba – and the Christian prohibi-
tion against charging interest up until the 1600s must be seen in this
perspective. Amassing fortunes without lifting a finger was seen as
qualitatively very different from earning money by ‘honest work’, com-
merce and production. That Judaism – as opposed to Christianity and
Islam – accepted lending against interest is a historically important point.
At the same time Jews were not permitted to own land.
When Western Christianity in the early 1600s started collecting interest,
this was with a view – as Francis Bacon’s – of the importance of innova-
tion. Innovations required risk capital, and the acceptance of lending out
capital against interest seems to have coincided with the discovery of the
role of innovations.4 Capital became, in the words of Keynes, ‘a bridge in
time’, something financed today may last for a very long time.
4 For a discussion on the changing view on innovations and the growth of Europe, see Reinert,
Erik S. & Arno Daastøl, ‘Exploring the Genesis of Economic Innovations: The religious gestalt-
switch and the duty to invent as preconditions for economic growth’, in European Journal of
Law and Economics, Vol 4, No. 2/3, 1997, pp. 233-283, and in Christian Wolff. Gesammelte
Werke, IIIrd series, Vol. 45, Hildesheim, Georg Olms Verlag, 1998.
7
Here it is important to understand Schumpeter’s theory of capital: if noth-
ing new happens in the world (innovations) capital is theoretically without
value. If we again look to the bookkeeping perspective – which is abso-
lutely necessary to understand financial crises – all investments in a
world without innovations could be covered by depreciation. The innova-
tions give value to capital. Capital in itself is sterile (cf. King Midas/the
buried talents).
Financial crises occur when the financial sector stops functioning as a
bridge in time for the real economy, and starts earning money on itself in
pyramid-scheme type constructions. We shall discuss this in the section
on Hyman Minsky. In the inter-war period German discourse sharply dis-
tinguished between schaffendes Kapital (capital employed in the creation
of goods and services) and raffendes Kapital (capital that only accumu-
lates more capital without creating anything). Today American economist
Bill Lazonick differentiates between wealth creation and wealth extrac-
tion. In his Treatise on Money (1931) Keynes sees depression approach-
ing when money goes from being in industrial circulation to being in
financial circulation. Some years later, in 1936, another conservative
Englishman, later prime minister, Harold Macmillan, complained that his
own party was dominated by casino capitalism.
Even if Lenin, as above mentioned, concluded that financial capital taking
command over the system would mark the final stage of capitalism (it
would presumable collapse for lack of demand, as we presently witness
in Greece), skepticism towards the financial sector – the whole banking
system – has been great also among conservatives. Thomas Jefferson,
the most conservative of the US founding fathers, was also the one most
critical towards banking and finance. To be conservative (rightist) for
Torkel Aschehoug meant that he wanted to protect the real economy
from devastating speculations; to be a neo-liberalist (rightist) now means
to believe that the market cannot be wrong. For conservative think-tanks
to act as claques for the financial sector is a completely new phenome-
non. Neoclassical economics and neo-liberalism have replaced the conser-
vative voices that traditionally have acted as a bulwark against the
excesses of the financial and speculation economies. This will most
likely make the present crisis both deeper and longer lasting.
Conclusion: History has shown that to have a system permitting com-
pound interest makes financial crises a certainty. Historian Reinholdt
Mueller at the University of Venice describes how the Venetian State in
the 1200s had to step in and save the whole financial system only few
years after the first financial center had been established. Capitalism had
to be saved by the state right at the start! Since then financial crises have
8
been frequent in capitalism, and – as illustrated in Fig. 2 – are easy to
find by checking the quantity of books published about economics and
when. The first international financial crisis in 1720 - which simultane-
ously hit the large financial centers Paris, London, and Amsterdam –
shows the same pattern as today’s crisis.
The book This time is different. Eight Centuries of Financial Folly by Car-
men Reinhart and Kenneth Rogoff5 gives us an historical perspective on
financial crises. However, the book contains more data than it contains
theory and analysis.
Figure 2. Number of Economics Books Published (1715-1723).
Source: Own calculations from the holdings of Kress Library, Harvard University.
A symbol-filled illustration from one of the many books published in 1720
– Fig. 3 – shows a typical trait of a financial crisis: a stock exchange
project artificially kept up by speculators. These are named ‘wind mer-
chants’ because they buy and sell merchandise which can only be bought
and sold in a fantasy world, not in the real economy.
5 Princeton, Princeton University Press, 2009. The fact that neither Schumpeter, Keynes, Min-
sky or Veblen figure in the name index of this 463 page book is remarkable, and certifies to the
tendency of present economics to ‘reinvent wheels’ and not learn from the theories (as opposed
to the facts) that grew out of similar experiences in the past.
9
Figure 3. Speculative Stock Exchange Projects That Cannot Keep in the Air
Without Artificial Help.
Source: Het groote tafereel der dwaasheid (‘The Great Mirror of Folly’), Amsterdam 1720.
10
Hyman Minsky
In contrast to Hammurabi’s model with two sectors, the real economy
and the financial sector, the American Schumpeterian economist Hyman
Minsky (1919-1996) had other sectors: households and non-financial
activities + financial intermediaries and government. Recently US econo-
mists have contributed a more precise definition of what we can call the
enlarged financial sector: Finance, Insurance, and Real Estate: the FIRE
sector.
Hyman Minsky built his theories on earlier insights from Thorstein Veblen,
John Maynard Keynes and Joseph Schumpeter. A leitmotif in his carrier
was that ‘it’ (i.e. another financial crisis like the one in the 1930s) ‘can
happen again’. Minsky’s two important books were John Maynard
Keynes (1975) and Stabilizing an Unstable Economy (1986). Both were,
because of the financial crisis, republished in 2008.6
Like Schumpeter, Minsky says that innovations in the financial sector dif-
fer from innovations in the rest of the economy, and that economies that
have financial innovations (which are both useful and necessary) will
necessarily have crises because, a) financial innovations make debts
grow faster than the ability to repay these debts (cf. Hammurabi). In
other words the capacity of the financial sector to generate funds through
new innovations exceeds the ability of the real economy to absorb these
funds in a profitable way, and b) such crises move income and wealth to
a class of rentiers whose tendency to spend is lower than in the real
economy (cf. Martin Wolf’s yacht and mansion recovery). This way the
demand that is needed to help the countries out of the crisis is not cre-
ated. A typical example is the US today. Real wages are roughly at the
level they were in the mid 1970s, which means that most fruits of eco-
nomic growth since then has gone to the FIRE sector. Any stimulation
packages will not work well unless the balance between the FIRE sector
and the real economy is adjusted.
One of Minsky’s important contributions was the understanding of the
‘destabilizing stability’, a point we see clearly already in Torkel Asche-
houg’s writings: As the good times seem to go on, the banks will take
increasingly greater risks. Finally they will finance projects so speculative
that they will not even be able to serve the interest on the debt. Minsky
called such loans Ponzi schemes, and the subprime crisis matched this
description perfectly. Loans were granted to home owners who could not
6 For an overview of Minsky, see Papadimitriou, Dimitri & L. Randall Wray, The Elgar Compan-
ion to Hyman Minsky, Cheltenham, Elgar, 2010.
11
even pay the interest on the loans. This creates a bubble in the economy
– an imbalance between the financial economy and the real economy –
which is bound to burst. Understanding Minsky’s model it was fairly clear
that the Terra scandal – a scandal virtually bankrupting several Norwe-
gian municipalities – might be the start of a serious financial crisis (e.g.
my article in newspaper Dagbladet, November 26, 2007).
As Minsky wrote in 1964: ‘At present real estate assets seem to be a
more important source of financial distress than stock exchange assets...
real estate assets are collateral for an extensive amount of debt, both of
households and of business firms, owned by financial institutions... If the
price of real estate should fall very sharply, not only will the net worth of
households and business firms be affected, but also defaults, reposses-
sions, and losses by financial intermediaries would occur.’
This 1964 paragraph is still an adequate description of what happened
during the last financial crisis. It is important to note that in this perspec-
tive financial crises are no ‘black swan’ – something happening surpris-
ingly and very seldom. Such crises are endogenous to the technological
selection mechanisms of the capitalist system, forming an integral part of
the relationship between the innovation cycles in the real economy and
the innovations in the financial sector.
Minsky’s idea was that anyone can create money, the only problem is to
get that money accepted. Minsky imagined a hierarchy – a pyramid – of
different kinds of money, organized by solidity and confidence. Before the
last financial crisis there were financial innovations that – probably liter-
ally – no one understood, like mortgage-based securities (MBS), collater-
alized debt obligations (CDO), and credit default swaps (CDS). These
financial innovations, securitization, created a systemic risk, they created
a debt that was larger than the system’s capacity for paying back the
debt. When the confidence in the less secure financial instruments col-
lapses during crises, people tend to seek the more secure ones, cash, and
finally gold (which Keynes called ‘a barbaric relic’).
My Chilean colleague Gabriel Palma (University of Cambridge) has quan-
tified the increasing imbalance between the real economy and the finan-
cial economy in a paper.7 Figure 2 of this paper shows the increase in
the balance between financial assets and GDP in the period 2002 to
2007, before the financial crisis. Here Schumpeter’s and Minsky’s point
is clearly illustrated: financial assets increased heavily compared to the
7 ‘The Revenge of the Market on the Rentiers. Why neo-liberal reports of the end of history
turned out to be premature’, Cambridge Journal of Economics 33(4), July 2009, pp. 829-869.
12
size of GDP. In a country like Spain financial assets as a percentage of
GDP increased from a little over 300% to more than 550% from 2002
to 2007.
Palma’s Figure 3 shows growth in GDP and growth in the debts of house-
holds and non-financial business firms in the US from 1950 to 2007. He
shows that debt growth and economic growth more or less kept pace
until 1982, debt grew with 3.8% annually while GDP grew with 3.4%.
In the period 1982 to 1987 debt grew with 4.7% annually, while GDP
still had a growth of 3.4%. In the period 1988 to 2007 debt grew with
0.5% annually, while GDP only had a growth of 2.8%. This could not
possibly go on for long.
The moment when the market realizes that the financial economy is a
non-sustainable pyramid game is now often called ‘The Minsky Moment’.
Another name is ‘The Wile E. Coyote Moment’ after the cartoon figure
who has rushed over the edge of an American canyon and – in the
moment he starts falling – realizes what has happened.
Carlota Perez: Financial Crises and Technological Change
In his three-volume Social-Oeconomik (1905-1908) Norwegian economist
Torkel Aschehoug points out that financial crises have their origins in
technological changes. Venezuelan scholar Carlota Perez has developed
this reasoning in a way which in my view is convincing, in her 2003 book
Technological Revolutions and Financial Capital: The Dynamics of Bub-
bles and Golden Ages8. As Perez herself points out in the introduction,
The Other Canon conference in Oslo in 1998, referred to in footnote 1,
was important for the development of the theory. Her theories build on
the works of Russian economist Nicolay Kontratief (1892-1938) and
Joseph Schumpeter (1883-1950).9
A main point in her theory is that technological revolutions create new
firms with high stock exchange value. Through several hundred years
such technological revolutions have created financial bubbles, the canal
bubble, the railroad bubble etc. Lastly the IT bubble which burst in 2000.
Such bubbles that are a result of a new and revolutionary technology are
useful, they seem to be a necessary part of the dynamics of capitalism,
and serve to upgrade the whole production system of the real economy.
But what we saw after the burst of the IT bubble was bubbles that did
8 Cheltenham, Elgar, 2003.
9 In particular his Business Cycles, 2 volumes, New York, Mc-Graw Hill, 1939.
13
nothing for the real economy, on the contrary they weakened it. Figure 4
shows that before the IT bubble burst 60% of new companies on the US
stock exchanges were (IPO = Initial Public Offering) technological com-
panies (ICT = Information and Communication Technology), while only
10% were companies from the financial sector. In 2003 the roles were
changed: 60% of all new companies on the stock exchange were finan-
cial ones, while only 10% were from the IT field.
Figure 4. Technology Bubble (‘Useful Bubble’) vs. Finance Bubble (‘Useless
Bubble’).
Source: Carlota Perez.
To Perez the rational increase in stock prices of companies with new and
revolutionary technologies will spread irrationally also to hopeless proj-
ects and to pyramid schemes in the financial sector (see figures 3 and 5).
In times when capitalism functions well the financial sector and the real
economy live in a kind of symbiosis - they support each other - while in
times of crisis the financial sector becomes a parasite weakening the real
economy. What was rational (investing in new technology) gradually
becomes irrational (investing in pyramid games).
An early contribution to this literature was the book ‘Extraordinary Popu-
lar Delusions and the Madness of Crowds’ by Charles Mackay, published
in 1841. The former head of the Federal Reserve, Alan Greenspan,
14
described this phenomenon as ‘irrational exuberance’. Fig. 5 shows how
a cartoon author (Dilbert 1999) understood the irrationality of the stock
exchange bubble a year before the burst of the bubble. Note the similar-
ity of this to the idea behind the drawing in Figure 3.
Defending capitalism as by definition being ‘rational’ has been a serious
hindrance for the economics profession’s understanding of financial cri-
ses. The present Chairman of the Federal Reserve, Ben Bernanke, wrote
a book about the 1929 crisis and the Great Depression. There he men-
tions Hyman Minsky once, but just in order to dismiss him because Min-
sky ‘had to depart from the theory of rational economic behavior’10. To be
a ‘mainstream’ economist the last 30-40 years has meant not to accept
mechanisms that doubtlessly are very important in a financial crisis
because they were in conflict with the fundamental assumptions of stan-
dard economic theory. In this way even the people with the main respon-
sibility for handling the crisis have been isolated from the most relevant
theory of crisis.
It is quite clear that for a single individual earning money in the financial
sector without at the same time creating real economy values, the spec-
ulative build-up towards a financial crisis is rational. The important thing
is to be close enough to the door to get out before the rest when ‘the
Minsky Moment’ strikes. That this should be rational from the viewpoint
of society is something completely different. Here the markets fail, and
regulations are needed. During Clinton’s presidency, and with Ayn Rand
pupil Alan Greenspan at the Head the Federal Reserve, the very wise and
well-built institutional defenses against financial crises that had been
erected after the crisis of 1929 (Glass-Steagall Act) were removed. A
main argument for dismantling the defenses was that there were no cri-
ses, so the defenses were not needed. The obvious fact is that the regu-
lations that were removed were indeed the very reasons that there had
been no crises!
10 Bernanke, Ben S. (editor), Essays on the The Great Depression. Princeton, Princeton Univer-
sity Press, 2000, page 43.
15
Figure 5. Finance Capital Goes Berserk During a Techno-Economic Paradigm Shift.
Source: Dilbert cartoons, 1999 (the year before the stock market collapse).
The tulip bubble in Holland in 1636-37 was also such a bubble, where
the tulip bulbs from far countries – this was indeed an innovation –
played the role of ‘new technology’ (see Figure 6).
16
Figure 6. The Anatomy of a Bubble. The Tulip Bubble in 1636-37.
Save the Financial Economy or Save the Real Economy?
Joseph Schumpeter was of the opinion that governments should not
intervene in a financial crisis, as such a salvage operation would strength-
en the very forces which had created the crisis in the first place. The
crisis should burn out by itself. Today we see the wisdom of that. But the
crisis became so serious that governments had to do something, as
Keynes suggested. But we see that Schumpeter’s intuition on one level
was correct: it is hard to do this without encouraging new speculative
bubbles. The huge financial packages that were made to save the real
economy by saving the banks, in effect in many countries fail to reach
the real economy. At the moment (2012) both banks and large corpora-
tions are left with huge cash balances, while lacking demand and conse-
quently lagging investments are preventing a healthy recovery.
Financial crises both create and are results of imbalances. During the
Bretton Woods-discussions Keynes suggested a ‘tax on imbalances’. As
the world’s imports must equal its exports, Keynes suggested an interna-
tional tax on export surpluses over a certain amount. This would avoid
international imbalances and prevent some nations from savings glut
while others built up enormous debts. It would also serve as an incentive
for nations not to keep their exchange rates artificially low, as China has
been doing. The suggestion was blocked, mainly by the US, but if Keynes
17
had had his will, the United States would today have been saved from
their own irresponsibility, saved from building up such enormous debts to
the rest of the world as they have done.
Classical crisis theories operate with the terms ‘overproduction’ and
‘underconsumption’. An important part of today’s financial crisis is the
Global Savings Glut (GSG). ‘Real’ saving may be said to occur when it is
matched by a dis-saving in form of investment or consumption as a book-
keeping counterpart in. In the absence of investment or consumption,
without a dis-saving, saving becomes unproductive hoarding. The Quan-
titative Easing – the creation of huge amounts of money – on both sides
of the Atlantic, matched with austerity policies simultaneously reducing
demand, are creating the conditions that the Bible (idle ‘Talents’), the
Midas legend, Oresme, and Lenin all warned against. These all represent
a wisdom which cannot seemingly be captured by today’s mainstream
economics, unable as it apparently is to conceive of the financial econo-
my being something other than the mirror image of the real economy.
The lack of balance between the financial economy and the real economy
can only be solved by one part – or both – being adjusted. One can
choose to protect the inflated financial sector, or protect the real econo-
my. Often, as during the Asia crisis, production units are left to go broke
to save the banks. The Argentine crisis at the end of the 1990s ended up
reducing real wages by more than 40%.
EU’s handling of the crisis shows us the choices. The deficits in the PIIG
countries (Portugal, Italia, Ireland, and Greece) would traditionally have
been solved by the countries devaluating, so the local production systems
would restore their competitiveness. At the same time the debt, tradition-
ally often in local currency, would be reduced, leading to a loss for foreign
creditors.
The alternative to this is what is called internal devaluation. This means
that wages are pressed downwards, without touching the exchange rate,
while at the same time even larger loans are taken up, to service the debt.
This will let the real economy take the whole loss, while downward spi-
rals of lessened buying power and lessened national production start.
The Estonian example shows that these are mechanisms that can be
started also without the country in question being in debt. The country
has had an internal devaluation reducing wages with more than 20%.
Wages have fallen for 9 quarters in a row, and unemployment is high.
What gives food for thought is that such internal devaluations now seem
to be the model also for the larger countries in the EC periphery. It seems
18
likely that the downward adjustment of people’s buying power – the buy-
ing power of whole nations – may be permanent.
Traditionally it has been possible to differentiate between two models for
economic adjustments, the European model and the American one. The
European model had adjusted exchange rates. In the US the whole coun-
try of course has the same currency. When one of the states has an
economic crisis, like Michigan with its car industry, the adjustment
mechanism is that people move to other states. By not giving up the Euro
to let countries in crisis devaluate, Europe has in effect chosen the Amer-
ican model. Greeks will have to move to Germany, even though neither
Greeks nor Germans see this as an optimal solution. Europe is probably
not prepared for the demographic movements which will be the result of
the ongoing crisis.
The Growth of the FIRE Sector Displaces the Real Economy
We have earlier referred to Gabriel Palma’s article, which shows the dis-
proportionate growth in the financial economy over the real economy.
This is a phenomenon that started already in the 1970s in the economic
periphery of the world. The period from 1950 to 1973 registered the
highest economic growth ever in the world, but after 1973 there was a
change in political economic ideology that (consciously) led to a market
and free trade shock which again led to the FIRE sector taking over a
larger part of the total value of GDP at the expense of wages and the
income of the self-employed. Figure 7 shows the changes in GDP growth
rates in certain countries in the Second (ex communist) World and the
Third World.
Asia in general, but particularly China and India, avoided this development
because of what can be called ideological inertia. While shock therapy
and free market logic became the fashion in the rest of the world, China
and India stuck to the same conscious industrial strategy they had had
since the end of the 1940s. The markets opened, but slowly.
19
Figure 7. Economic Growth Falls Drastically, Except in Asia.
Source: Rainer Kattel, Tallinn University of Technology
The FIRE Sector Takes Over: The Third World
From the mid 1970s Latin America and Africa were the victims of a so
called structural adjustment policy. In several of these countries real
wages were more than halved in a very short time. We shall take Peru as
an example. The structural changes led to a rapid fall in wages, as a very
quick opening up for free trade killed the industry and weakened the
unions.
Real wages were more than halved, but on the other hand exports
increased rapidly (see Figure 8).
20
Figure 8. Peru: Deindustrialization, Falling Wages and Increasing Raw Materi-
als Exports.
Source: Reinert 2007, p. 162.
11
The interesting thing here is that just looking at GDP, things do not seem
too bad in Peru. But looking at the composition of this GDP, it has
changed very much: the FIRE sector has taken over an ever larger per-
centage of GDP.
Figure 9. Composition of GDP in Peru: The FIRE Sector Takes Over.
Source: Banco Central de Reserva del Perú. These data have not been published after 1990.
11 Reinert, Erik S., How Rich Countries got Rich…and why Poor Countries stay Poor, London,
Constable, 2007.
21
The data from Peru’s central bank show that in 1972 wages represented
51.2% of GDP, and the income of self-employed 26.5%, total 77.7%.
Figure 9 shows how this percentage fell with deindustrialization. In 1990,
the last year Peru’s central bank produced these statistics, the wage part
of GDP was almost halved, while the part of the self-employed had fallen
to 15.9%. In total wages and income of the self-employed had fallen by
45% from 77.7% of GDP to 42.4%.
I spent much time in Peru in those years when wages were halved, and saw
poverty increase dramatically. My wife commented that the same children
outside the Lima supermarket, who had usually begged for sweets, now
begged for canned milk and other food. To me it has always remained a mys-
tery that this development was not regarded as interesting, and why such a
dramatic theme has not shown up on an academic or a political agenda.
With Europe’s internal devaluations these same dramatic mechanisms have
started in Europe. We get a permanent fall in wages and self-employed
income as part of GDP and in absolute numbers. In the short run this can
look good for industry, as wage costs fall. But still industry as a whole will
suffer, as demand contracts dramatically. In Peru the halving of wages led
to a brutal closing down of newspapers (before the age of internet). High
wages are in many ways very important for development, not only do
markets grow through higher demand, high wages are also driving techno-
logical development. With the wage reductions Europe now experiences,
we risk Hyman Minsky’s ‘financial fragility’ creating a ‘technological fragil-
ity’: Cheap labor makes for less investment in new technology.
The FIRE Sector Takes Over: The Second World
In 2000 I was invited to a conference in Parliament in Mongolia’s capital
Ulaanbaatar, and was asked to prepare a report on the economic develop-
ment of the country. Again I found the same pattern as in Latin America:
real wages were more than halved. The real interest level was 35%,
which made it virtually impossible to start any production, while there
was much gain in moving money into the country. This money was not
invested in the real economy. I was told that the high real interest was
necessary to avoid a financial crisis.
Figure 10 shows the fall in production in a typical ex-Soviet republic, Lat-
via. Production was more than halved, but when this graph was made, in
1994, everybody believed growth would return rapidly. Time has shown,
though, that most of the growth in the Baltic really has been housing
bubbles. Growth after 1994 has had the same pattern as in Latin Ameri-
ca: the wage part has fallen.
22
Figure 10. The Latvian Economic Collapse after the Fall of the Iron Curtain.
Source: Latvian Ministry of the Economy, 1994.
Also Russia shows the same kind of development (Figure 11). Real wag-
es were halved, but as Russian GDP now gets closer to the 1989 level,
income distribution is totally different. Particularly interesting is the obser-
vation that a strong overvaluation of the Ruble in the mid 1990s is
closely connected to the fall in production and in real wages.
It is worth noting that democracy arrived in Russia at the same time as
real wages were halved. The ‘oligarchs’ who had the economic power
earned their money in the financial sector, while the real economy plum-
meted. A revaluation of the Ruble made it easy to transfer the oligarch’s
booty from financial speculations abroad at a very high value in dollars or
pounds. But this reevaluation at the same time weakened the production
economy even more, as Russian produced goods became very expensive
and imports cheap. As in many other instances, the financial sector and
the real economy have opposite interests.
23
Figure 11. Russia: Halving of Production and Wages.
Source: Reinert & Kattel 2010
12
The FIRE Sector Takes Over: The First World.
The finance sector’s taking over an ever larger part of GDP started in Latin
America in the 1970s, hit the earlier Soviet sphere in the 1990s, and is now
badly hitting USA and Europe. The destroying effect of overrated currencies
is a common element for them all. The Euro as a straightjacket sets off the
same mechanisms in Greece and Spain now as they did in Russia in the
1990s (see Figure 11), but now through internal devaluations.
Carlota Perez sees this as cyclical movements: during financial crises income
is badly distributed, while in times when technological development hits the
real economy income distribution improves (see Figure 12). Before the finan-
cial crises (1928 and 2006) the wealthiest 1% of the tax payers had about
25% of USA’s total personal income. In times when technology and the real
economy are seen as important, this number falls to about 10%. This will
not happen without strong political pressure, as with Roosevelt and his
economists’ New Deal in the 1930s. It is hard to find anything like that
economic and political strength today.
12 Reinert, Erik S. & Rainer Kattel, ’Modernizing Russia: Round III. Russia and the other BRIC
countries: forging ahead, catching up or falling behind?’, The Other Canon Foundation and Tal-
linn University of Technology Working Papers in Technology Governance and Economic Dynam-
ics, No 32, 2010. http://tg.deca.ee/files/main/2010090707562222.pdf
24
Figure 12. Part of Total Income in USA Earned by the Top 1% of the Tax
Payers.
Figure 13 shows that the financial sector’s part of GDP in USA is under
10%, while Figure 14 shows that measured by total income in USA the
financial sector’s part has at times reached 45%.
Figure 13. The Financial Sector as Part of US GDP.
25
Figure 14. The Financial Sector’s Part of Total Income in USA.
Conclusion: The Mentality that Created the Crisis, its Consequen-
ces and possible remedies.
The crisis was made possible by an economics profession that no longer
differentiated between financial economy and real economy. Influential
economists even came to think that financial economy was the real
essence of the economy. One of Obama’s main advisor Larry Summers’s
favorite expressions is ‘Financial markets do not just oil the wheels of
economic growth. They are the wheels.’ Summers is then getting close
to what we have called chrysohedonism, to confuse money itself with
what money can buy. The financial economy became more real than the
real economy. Important economists’ close connection and common
26
vested interests with the financial sector have become a theme in the
discussions about the financial crisis, e.g. in the documentary film Inside
Job. Another documentary movie on the crisis, When Bubbles Burst
(2012), bases its understanding on the tradition emphasized in this paper:
Schumpeter, Keynes, Veblen, Minsky and Perez.
The counterweight to this understanding is found in a German and Amer-
ican tradition from before World War II. This tradition was cross-disciplin-
ary and covered economic theory and money theory, finance, law, phi-
losophy, and political science, all within the same volumes. Examples are
Georg Friedrich Knapp’s The State Theory of Money (1905)13, Georg Sim-
mel’s Philosophy of Money (Philosophie des Geldes)14, and Karl Elster’s
The Soul of Money (Die Seele des Geldes)15. Schumpeter contributed to
this debate with an article from 1917 (‘Das Sozialprodukt und die Rech-
enpfennige’, roughly ‘GDP and the Accounting Units’)16 and his book Das
Wesen des Geldes (The Nature of Money) written in the late 1920s, but
not published until 197017. Schumpeter draws the line between financial
economy (the Rechenpfennige, accounting units) and the real economy
(The Güterwelt, ‘the world of goods and services’), concepts that are
required in order to understand financial crises (Figure 1).
The old American institutional school of economics, founded by Norwe-
gian-American Thorstein Veblen, also made important contributions to
the study of business cycles and crises. Veblen – who predicted the crisis
of 1929, but died a couple of months before it started – sharply differen-
tiated between people in ‘industrial activities’ (‘engineers’) and specula-
tors who quite peripherally contributed to production. He saw these
speculators as the last remnants of the pirates and robber barons of
earlier times. In his classic bestseller The Theory of the Leisure Class
(1899) Veblen ridicules what he sees as a completely unproductive class,
and its rituals, which he compares to the rituals of primitive races.
The US institutional school literally produced massive volumes on finan-
cial crises. Veblen’s student Wesley Clair Mitchell work Business Cycles
weighs in at 4 kilos of solid scholarship. Joseph Schumpeter had moved
13 Knapp, Georg Friedrich, The State Theory of Money, San Diego, Simon Publications, 2003
(reprint of 1924 English translation).
14 Simmel, Georg, Philosophie des Geldes, Munich & Leipzig, Dunker & Humblot, 1920.
15 Elster, Karl, Die Seele des Geldes, Jena, Fischer, 1923.
16 Schumpeter, Joseph Alois,’ Das Sozialprodukt und die Rechenpfennige: Glossen und
Beiträge zur Geldtheorie von heute’, in Archiv für Sozialwissenschaft und Sozialpolitik, No. 44,
1917-1918, p. 627-715.
17 Schumpeter, Joseph Alois, Das Wesen des Geldes, Göttingen, Vandenhoeck und Ruprecht,
1970.
27
to the US and Harvard in the early 1930s, and his Business Cycles fills
two heavy volumes. Mitchell’s student Arthur F. Burns was the last rep-
resentative of the old US institutional school to head the Federal Reserve,
from 1970 to 1978. His presidency was dominated by a financial crisis
– the so-called oil crisis – and under Burns’ chairmanship this crises was
typically solved by saving the real economy, production and real wages,
at the expense of the financial sector (through inflation and negative real
interest rates). The negative real interest rate forced money out of banks
and into productive investments.
In his 1949 book The Veil of Money, Cambridge professor Cecil Pigou
described the seesaw of sequential domination of the financial economy,
with corresponding crises, and the real and productive economy: ‘During
the 1920s and 1930s ... money, the passive veil, took on the appearance
of an evil genius; the garment became a Nessus shirt18; the wrapper a
thing liable to explode. Money, in short, after being little or nothing, was
now everything... Then with the Second World War, the tune changed
again. Manpower, equipment and organization once more came into their
own. The role of money dwindled to insignificance.”19. This tradition of
qualitative understanding in economics disappeared with the mathemati-
zation of economics after World War II. The fact that it had disappeared
made the coming crisis so much harder to see, and the consequences so
much harder to understand and to remedy.
In this old tradition money was seen as created and regulated by society’s
law and order (German: Das Geld ist ein Geschöpf der Rechtsordnung).
The business cycles of capitalism were seen as needing continuous
adjustments, not only of the interest, but also of the reserves of the bank-
ing sector in relation to its loans. My 1970s textbook from the University
of St. Gallen in Switzerland20 teaches the students how the economy must
be fine-tuned through the business cycles i.e. by increasing or decreasing
the reserve requirements regulating the banking sector. Under the ideo-
logical influence of neoliberalism, these adjustments were stopped. The
reserve requirements were set very low, and the leveraging and the risks
of the global financial system became correspondingly higher. The Basle
process is now readjusting this somewhat. But the reserve requirements
are still low, and do not have to be fully adhered to until 2019, so ‘we’ll
manage to have a couple of financial crises before that time’, as Martin
Wolf says.21 Even if regulations tighten a bit, it is very clear that the finan-
18 The poisoned shirt that killed Hercules.
19 A. C. Pigou, The Veil of Money, London, Macmillan, 1949, pp.18-19.
20 Schneider, Erik, Einführung in die Wirtschaftstheorie. Vol. III. Geld, Kredit, Volkseinkommen
und Beschäftigung, Tübingen, Mohr (Siebeck), 1969.
21 Martin Wolf, ‘The Mouse that did not Roar’, Financial Times, September 14, 2010.
28
cial sector is still directing capitalism. As long as this situation remains, it
is hard not to expect the crisis to go on, and deepen.
If we take a look at how the crisis which started in 1929 was solved, it
is clear that several theoretically radical – though often politically conser-
vative – economists, not only Keynes and Schumpeter, played an impor-
tant part. It could be said that Schumpeter delivered the theory explain-
ing the crisis, while Keynes delivered the cure. American economist
Rexford Tugwell (1891-1979) was an important adviser to Roosevelt and
his New Deal. No economists of that kind have any power today. There
is no conspiracy, but it seems clear that there exists a powerful political
group in the US with the goal to reverse the New Deal reforms. The
vested interests of this group overlap with the interests of financial
capital. If this group/fraction is successful – as it seems to be – financial
capital will take over for a long time, and the fall in real wages will be
permanent, also in the developed world.
The process of falling wages and an increasing FIRE sector as a percent-
age of GDP described in this paper, which started in the economic periph-
ery in the 1970s now has world coverage. The processes in the periphery
have been totally neglected and now, as the Americans say, the chickens
are coming home to roost. The West is itself being overtaken by mistakes
made long ago and far away. The crisis theories presented in this paper
based on observations of historical facts – what I refer to as The Other
Canon of Economics – have now been marginalized by theories which
tend to treat the financial sector as a mere mirror image of the real econ-
omy. Instead, in the Other Canon tradition, the financial sector may
abruptly change from being a faithful servant to the real economy – living
in symbiosis – to a parasitic monster feeding on possibly permanent cuts
in wages, production, and human welfare such as Greece is experiencing
at the moment. Capitalism needs purchasing power, and to remove so
much purchasing power from the majority of the population as is now
done – with Greece leading the pack – will sooner or later destroy capital-
ism as we have known it since World War II. What we may be creating
in its place is a kind of post-industrial feudalism.
This paper is written from the point of view of oil-rich Norway. The financial
crisis will probably force Norway to reconsider the strategy behind the oil
fund. Already when visiting Oslo in 2008 Martin Wolf was of the opinion
that the Norwegian oil fund was part of GSG, The Global Savings Glut. Our
first Nobel Prize winner in economics, Ragnar Frisch, once wisely wrote
something which is not obviously understandable except in the setting of a
financial crisis, as experienced in the 1930s: ‘Savings from the point of
view of an individual and from the point of view of society as a whole are
29
two entirely different concepts. They ought to be distinguished by using
two different labels, not the same as now. This just causes confusion.
Society as a whole can only save through productive investments’.22
This is because financial savings in times of financial crisis will easily lose
much of their value. Norway’s first reserve fund for a rainy day was
established in 1904 and invested in government bonds – which every-
body thought was the safest investment. Most of the investments were
lost during the crises following World War I. Particularly during times of
financial crisis, Ragnar Frisch’s advice should be followed: More should
be invested in productive investments and less in financial markets.
When, sooner or later, the financial sector will receive ‘a haircut’ through
nations defaulting on their debts, while at the same time share prices fall
because of diminishing purchasing power (a result of falling wages), part
of the Norwegian oil fund will be lost. If the mechanisms of financial cri-
ses are properly understood, it is also easy to see that in the long run the
oil fund has an aspect of ‘Monopoly’ money. There are times when sav-
ings are counterproductive in all their aspects, and the wisest thing to do
is to spend money fast before they lose too much of their value.
The crisis in Europe will probably pass through the same stages as the
one in Argentina in the 1990s. Right now we are at the stage of rigidly
holding on to the currency exchange rates, while wages are falling (in
Argentina this was an exchange rate at 1:1 with the dollar.) Sooner or
later the nations of the European periphery will have to do as the Argen-
tinians did, default and at the same time devalue. When the crisis in
Argentina was over, real wages had fallen by 40%. The longer one waits,
the worse it gets, because with time the productive sectors of the crisis
economies are gradually destroyed. Markets dwindle and machines phys-
ically rust while the best brains leave the crisis countries.
During the crisis of the 1930 selective protectionism – so called Trade
Wars – prevented a very uneven outcome of the crisis among the devel-
oped countries. This policy measure prevented a winner-takes-it-all out-
come: that the developed world avoided being split into one camp of
winners and one camp of losing nations. The Marshall Plan after World
War II completed this work, before Europe again could start growing
under a symmetrical free trade regime (among industrialized countries at
similar levels of development). Today the mistaken idea that protection-
ism caused the crisis is widespread, and instead of Trade Wars the world
is embarking on Currency Wars. An important difference between Trade
Wars and Currency Wars is that while the former primarily creates jobs,
22 Ragnar Frisch, Noen Trekk av Konjunkturlæren, Oslo, Aschehoug, 1947, pages 41 and 42.
30
wages, and income in the real economy, the latter primarily creates rents
to the financial sectors from bids and speculations. “Trade Wars” aiming
at symmetrical industrial development are infinitely superior to Currency
Wars. This financial crisis may represent a permanent blow to Western
economies, with Asia being the winner that takes it all.
The last period of big shifts in the economic ranking between European
states was the 1700s, when small city states were forced to yield eco-
nomic power to strong nation-states. Venice and Amsterdam declined,
while England and France rose. Faced with a growing real economy in Asia
and, at home, a vicious circle of financial-sector growth and productive-
sector decline, the West now basically has to choose between declining like
Amsterdam – relatively, but keeping a healthy productive sector – or declin-
ing like Venice – declining absolutely, first losing the productive sector and
then the financial sector – in order to become a museum. The former will
requires the resurrection of policy instruments which went out of fashion
in the 1970s, and started the trend of falling real wages, first in the Third
World, then in the Second World, and now in the First World: the West.
Capital in itself – without possibility for investments – is sterile. If the
possibilities for investment are lacking, amassing of capital will be coun-
terproductive and prolong the crisis. The world economy is – as it was in
1929 – a pyramid game or Ponzi scheme, which collapses under increas-
ing debt deflation if we do not maintain and increase the speed of innova-
tion in the real economy. In the US the GDP level from 1929 was not
reached again until mid World War II. The US stock market did not regain
its 1929 level until the early 1950s. War is the ultimate Keynesian
machinery for investment and consumption because it creates a situation
where political and economic worries about inflation disappear, and enor-
mous amounts of money are invested and spent in the real economy. The
world does the opposite of oversaving, it dis-saves. War is also an impor-
tant driver for technological change, because the state wants and
demands products at the limit of what is technologically possible, thus
advancing the frontier of knowledge.23 If these mechanisms are properly
understood, it is possible to invest more in the real economy by declaring
war against environment pollution and old fashioned energy forms, and
obtain the same economic boom that has always been the result of con-
ventional wars. Such massive investments in renewable energy and green
technology in my view represent the only way out of the present crisis.
23 Werner Sombart’s 1913 book on War and Kapitalism explains this and other mechanisms
(Krieg und Kapitalismus, Munich & Leipzig, Duncker & Humblot 1913).
31
Working Papers in Technology Governance and Economic Dynamics
The Other Canon Foundation, Norway, and the Technology Governance
program at Tallinn University of Technology (TUT), Estonia, have launched
a new working papers series, entitled “Working Papers in Technology
Governance and Economic Dynamics”. In the context denoted by the title
series, it will publish original research papers, both practical and theo-
retical, both narrative and analytical, in the area denoted by such con-
cepts as uneven economic growth, techno-economic paradigms, the his-
tory and theory of economic policy, innovation strategies, and the public
management of innovation, but also generally in the wider fields of indus-
trial policy, development, technology, institutions, finance, public policy,
and economic and financial history and theory.
The idea is to offer a venue for quickly presenting interesting papers –
scholarly articles, especially as preprints, lectures, essays in a form that
may be developed further later on – in a high-quality, nicely formatted
version, free of charge: all working papers are downloadable for free from
http://hum.ttu.ee/tg as soon as they appear, and you may also order a
free subscription by e-mail attachment directly from the same website.
The working papers published so far are:
1. Erik S. Reinert, Evolutionary Economics, Classical Development
Economics, and the History of Economic Policy: A Plea for Theoriz-
ing by Inclusion.
2. Richard R. Nelson, Economic Development from the Perspective
of Evolutionary Economic Theory.
3. Erik S. Reinert, Development and Social Goals: Balancing Aid
and Development to Prevent ‘Welfare Colonialism’.
4. Jan Kregel and Leonardo Burlamaqui, Finance, Competition,
Instability, and Development Microfoundations and Financial
Scaffolding of the Economy.
5. Erik S. Reinert, European Integration, Innovations and Uneven
Economic Growth: Challenges and Problems of EU 2005.
6. Leonardo Burlamaqui, How Should Competition Policies and
Intellectual Property Issues Interact in a Globalised World? A
Schumpeterian Perspective
7. Paolo Crestanello and Giuseppe Tattara, Connections and Com-
petences in the Governance of the Value Chain. How Industrial
Countries Keep their Competitive Power
8. Sophus A. Reinert, Darwin and the Body Politic: Schäffle,
Veblen, and the Shift of Biological Metaphor in Economics
9. Antonio Serra, Breve Trattato / A Short Treatise (1613)
(available only in hardcopy and by request).
32
10. Joseph L. Love, The Latin American Contribution to Center-
Periphery Perspectives: History and Prospect
11. Ronald Dore, Shareholder capitalism comes to Japan
12. Per Högselius, Learning to Destroy. Case studies of creative
destruction management in the new Europe
13. Gabriel Yoguel, Analía Erbes, Verónica Robert and José Borel-
lo, Diffusion and appropriation of knowledge in different orga-
nizational structures
14. Erik S. Reinert and Rainer Kattel, European Eastern Enlarge-
ment as Europe’s Attempted Economic Suicide?
15. Carlota Perez, Great Surges of development and alternative
forms of globalization
16. Erik S. Reinert, Iulie Aslaksen, Inger Marie G. Eira, Svein
Mathiesen, Hugo Reinert & Ellen Inga Turi, Adapting to Cli-
mate Change in Reindeer Herding: The Nation-State as Prob-
lem and Solution
17. Lawrence King, Patrick Hamm, The Governance Grenade:
Mass Privatization, State Capacity and Economic Develop-
ment in Postcommunist and Reforming Communist Societies
18. Reinert, Erik S., Yves Ekoué Amaïzo and Rainer Kattel, The
Economics of Failed, Failing and Fragile States: Productive
Structure as the Missing Link
19. Carlota Perez, The New Technologies: An Integrated View
20. Carlota Perez, Technological revolutions and techno-economic
paradigms
21. Rainer Kattel, Jan A. Kregel, Erik S. Reinert, The Relevance of
Ragnar Nurkse and Classical Development Economics
22. Erik S. Reinert, Financial Crises, Persistent Poverty, and the
Terrible Simplifiers in Economics: A Turning Point Towards a
New “1848 Moment”
23. Rainer Kattel, Erik S. Reinert and Margit Suurna, Industrial
Restructuring and Innovation Policy in Central and Eastern
Europe since 1990
24. Erkki Karo and Rainer Kattel, The Copying Paradox: Why Con-
verging Policies but Diverging Capacities for Development in
Eastern European Innovation Systems?
25. Erik S. Reinert, Emulation versus Comparative Advantage:
Competing and Complementary Principles in the History of
Economic Policy
26. Erik S. Reinert, Capitalist Dynamics: A Technical Note
27. Martin Doornbos, Failing States or Failing Models?: Account-
ing for the Incidence of State Collapse
28. Carlota Perez, The financial crisis and the future of innova-
tion: A view of technical change with the aid of history
33
29. Rainer Kattel and Annalisa Primi, The periphery paradox in
innovation policy: Latin America and Eastern Europe Com-
pared
30. Erkki Karo and Rainer Kattel, Is ‘Open Innovation’ Re-Invent-
ing Innovation Policy for Catching-up Economies?
31. Rainer Kattel and Veiko Lember, Public procurement as an
industrial policy tool – an option for developing countries?
32. Erik S. Reinert and Rainer Kattel, Modernizing Russia: Round
III. Russia and the other BRIC countries: forging ahead, catch-
ing up or falling behind?
33. Erkki Karo and Rainer Kattel, Coordination of innovation policy
in the catching-up context: Estonia and Brazil compared
34. Erik S. Reinert, Developmentalism
35. Fred Block and Matthew R. Keller, Where do Innovations
Come From? Transformations in the U.S. Economy, 1970-2006
36. Erik S. Reinert & Arno Mong Daastøl, Production Capitalism
vs. Financial Capitalism - Symbiosis and Parasitism. An Evo-
lutionary Perspective and Bibliography
37. Erik S. Reinert, Zeitgeist in Transition: An Update to How rich
countries got rich…and why poor countries stay poor
38. Marek Tiits & Tarmo Kalvet, Nordic small countries in the
global high-tech value chains: the case of telecommunications
systems production in Estonia
39. Erik S. Reinert, Mechanisms of Financial Crises in Growth and
Collapse: Hammurabi, Schumpeter, Perez, and Minsky
The working paper series is edited by Rainer Kattel (kattel@staff.ttu.ee),
Wolfgang Drechsler (drechsler@staff.ttu.ee), and Erik S. Reinert (reinert@staff.ttu.
ee), who all of them will be happy to receive submissions, suggestions or referrals.
