Yesterday Raghuram Rajan published an interesting article on competition in finance. He made the important point that competition was a very positive force in the financial sector after deregulation in the 1980s. The drawback was, however, that forces of competition never really became real in finance as they would be in an ordinary industry, because regulators sheltered banks from the ultimate consequences of failure.
Yet I was left feeling a little puzzled about Rajan’s references to Schumpeter. Rajan seemed to suggest a contrast in Schumpeter’s writing between early praise for competitive entrepreneurial innovation and later tolerance of monopoly. When I read Schumpeter’s early and later writing I was not left with this stark picture of a ‘younger’ and ‘older’ man. My lasting impression was only that Schumpeter cleverly and successfully pulled off the remarkable feat of reconciling monopoly with competition in the special case of innovation.