The Spirit of Capitalism in Iran: Institutional Congruity Approach to Function of Money as an Institution in Schumpeterian growth Framework based on the General Equilibrium Model

Document Type : Research Paper

Authors

1 PhD. Student, Shiraz University, Shiraz, Iran

2 Assistant Professor of Economics, Yasouj University,, Yasouj , Iran

10.22034/epj.2025.22185.2642

Abstract

Purpose: This study investigates the impacts of a) spirit of capitalism, first introduced by Max Weber to refer to the preference for wealth accumulation for its own sake, and b) the monetary contracts for production, modeled as a 'cash-in-advance constraint' as two crucial institutional forces. This is done within a monetary-based Schumpeterian growth framework, applied to the Iranian economy through a dynamic general equilibrium approach. The findings indicate that the cash-in-advance constraint significantly increases economic growth sensitivity to interest rates and amplifies the effects of contractionary monetary policies. Although the spirit of capitalism incentivizes saving and investment, under a strict cash-in-advance constraint, a shift towards wealth accumulation over consumption can hinder growth.
Methodology: This study utilizes a money-oriented Schumpeterian growth model to theoretically and empirically analyze the influence of the spirit of capitalism on Iran’s economic growth. The model was first theoretically developed and then calibrated for the Iranian economy. In this model, households are represented by a lifetime utility function that includes a direct preference for wealth (the spirit of capitalism). The spirit of capitalism is introduced as a parameter that affects household consumption and saving decisions, influencing labor allocation, research and development (R&D), and long-term growth. The model also considers the cash-in-advance constraint on consumption and investment, meaning that liquidity is required before transactions and investments take place. The research data were drawn from the Iranian economy, and parameters such as real interest rates, inflation, and economic growth were calibrated using credible domestic sources for further analysis within the model.
Findings and Discussion: The results suggest that, as a cultural institution, the spirit of capitalism has become an impediment to growth in Iran, given its misalignment with economic-legal structures like the cash-in-advance requirement. This finding corroborates the results of the study by Raanai et al. (2024) on "institutional congruity" and highlights the necessity of institutional congruity for sustainable economic growth. In contexts where institutional congruity is lacking, as with the spirit of capitalism and cash-in-advance, the potential for growth driven by the spirit of capitalism is stymied, resulting in adverse economic outcomes.
The study emphasizes the importance of institutional congruity between the spirit of capitalism and the cash-in-advance constraint. The institutional congruity between these factors in Iran has led to reduced growth rather than the anticipated economic benefits highlighted in the Schumpeterian and Weberian theories about the institutional role of capital. Accordingly, the Iranian institutional framework requires reforms to enable the mutual reinforcement of these institutions and facilitate sustainable growth instead of producing contradictory effects. The study on the spirit of capitalism and the institutional role of money demonstrates that money is not super-neutral, as institutional factors like the spirit of capitalism and cash-in-advance significantly influence economic dynamics beyond mere monetary policy effects.
Conclusions and Policy Implications: The study suggests that, to maximize welfare in Iran, the optimal nominal interest rate should be zero or negative. This result aligns with Friedman’s rule advocating nominal zero interest rates. It identifies a point where the cost of holding cash balances is minimized and, thus, social welfare is maximized. In contrast to studies which support positive optimal nominal rates, this result provides theoretical backing for negative interest rates. Friedman’s rule, once as a theory before the 2008 global financial crisis, has since become an accepted economic standard, with short-term nominal interest rates remaining near zero across developed economies such as the US, the Eurozone, the UK, and Japan. So, the recent experience of low interest and inflation rates indicates the viability of the Friedman rule. Similarly, a zero nominal interest rate policy maximizes economic growth, underscoring the long-term implications of recent low-rate policies.
Despite Iran’s higher spirit of capitalism than that in the United States, it has not contributed to economic growth; instead, it has prevented potential growth realization. Given the spirit of capitalism, why does Iran keep facing economic hardship? The power of the capitalist spirit alone does not determine an economy’s final state; institutional structure and alignment play integral roles in shaping an economy’s overall performance too. To leverage the potential of the spirit of capitalism and the cash-in-advance constraint, an institutional congruity framework is crucial.

Capitalist spirit and its potential

Policymakers should acknowledge the role of the capitalist spirit in shaping economic behaviors and outcomes. Promoting entrepreneurial culture and values can foster growth, particularly in sectors where the capitalist spirit plays a central role. Since money is not neutral within this framework, policymakers should adopt a nuanced approach to interest rate adjustments. Considering the interactions of those adjustments with the capitalist spirit and cash-in-advance constraint, policymakers should also design effective monetary policies. Long-term welfare maximization may be achieved through an optimal interest rate near zero.

Limiting the cash-in-advance constraint

Given the empirical findings that a high cash-in-advance constraint reverses the capitalist spirit’s benefits, legal and institutional frameworks should be developed to prevent excessive access to financial resources before production. Excessive pre-production liquidity does not contribute to economic growth.

Monetary policy

The results indicate that, in an economy with a high cash-in-advance constraint and a strong capitalist spirit, contractionary policies can reduce growth. Therefore, policymakers should avoid excessively tight policies if the cash-in-advance requirement is high. Reducing the cash-in-advance constraint could mitigate the adverse effects of high interest rates on growth. Additionally, since the capitalist spirit can reduce consumption and economic growth, policies such as wealth taxes and support for investment in productive sectors can shift incentives towards consumption and production, balancing wealth accumulation with economic growth.

Institutional congruity

Appropriate institutional congruity can coordinate the roles of the capitalist spirit and cash-in-advance constraint in improving growth. Structural reforms and supportive policies that increase credit access help to reduce financial risks, and promoted innovation and entrepreneurship could create an effective institutional congruity, thus enhancing economic performance.

Keywords

Main Subjects

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The Journal of Economic Policy
Volume 17, Issue 34
August 2025
Pages 289-336

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