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How Capitalism Destroyed Itself

Technology Displaced by Financial Innovation

William Kingston

Capitalism has been sustained by inherited moral values that are now all but exhausted. A unique combination of a new belief in individualism and a long tradition of property rights had traditionally ensured that self-interested action also produced public benefit. However, these rights, including the laws underwriting economic and financial innovation and parliamentary democracy, were gradually captured and shaped by those who could benefit most from them. This fascinating book shows that the outcome is a reduced ability to generate real wealth combined with exceptional inequality, as well as a worldwide breach of the vital trust between voters and their representatives. Capitalism’s injuries are both self-inflicted and fatal.
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What capitalism was

Technology Displaced by Financial Innovation

William Kingston

Capitalism was not an inevitable historical evolution, but a unique combination of a particular emphasis on the value of individuals and individual property rights. During the past three centuries, as McCloskey has estimated it, individuals in the Western world have become richer by a factor of 30. Schumpeter wrote what was intended to be history of it in terms of economic ‘cycles’, but was weak on the causality of these because he did not give enough importance to institutions. However, in the form of changing property rights, these are the key to the origin and development of capitalism. The wealth that this generated came from technological innovation, but the pace of this slowed after World War I, and after a brief resurgence due to the Second World War, it was progressively replaced by innovations in finance. Capitalism’s power to generate real wealth was eroded from within, and Schumpeter’s prediction of its replacement by socialism became increasingly plausible.

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Where capitalism came from

Technology Displaced by Financial Innovation

William Kingston

The institutional basis of capitalism, individual property rights, was an invention of the ancient Greeks, and was subsequently the basis of Roman wealth. Christianity then introduced a new emphasis on the importance of the individual, so that this combination produced a medieval form of capitalism, first in the shape of monastic innovation and wealth, and then in independent cities. Although about Church doctrine, the Reformation was at least equally about who was to own this new wealth, and in the course of this a change was made which reversed a principle that had been accepted for millennia, which was that money could not be lent at interest. Once usury was accepted, capital for investment became available as never before, and this was particularly availed of by followers of John Calvin. Rejection of a religious basis for society required a secular one, and this was provided by what was known as the Enlightenment, which was essentially the application of rationality to the solution of all human problems.

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The capture of market power

Technology Displaced by Financial Innovation

William Kingston

The wealth produced by the early waves of capitalism was spread very unevenly, and produced a reaction that could have destroyed it were it not for two responses by capitalists and governments. The first of these was even further generation of wealth, and this was shared more equally as a result of the second response, democracy. Giving people a vote enabled them to put pressure on governments to tax the wealth being generated by property rights and distribute it to those who had none. However, democracy can only survive if a significant proportion of incomes is not dependent on the state. Property owners in turn responded by financing political action to capture the laws of property and turn them to their own advantage. This was first seen in respect of property in information, so that eventually laws relating to patents copyright and trademarks were effectively only drafted by those who could benefit from them. These laws underwrote globalization, characterized by a large and widening gap between rich and poor countries.

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The fatal capture of money

Technology Displaced by Financial Innovation

William Kingston

Much the most important aspect of the capture of property laws by interests was in relation to money. Banking had always been recognized as different from other kinds of business, and so when these kinds were allowed to invest without having their whole fortunes at stake, this was denied to those who dealt in money. However, they did eventually get this privilege, which allowed them to ‘create money from nothing’ to such an extent as to cause the 1929 crash and subsequent recession. They were then put under legal discipline, but exerted their influence on politicians to have this removed, and repeated the expansion of credit that resulted in the crash of 2008. In the process, innovation in technology was so largely replaced by innovations in finance that the power of Western economies to generate real wealth was seriously harmed. Combined with the extent to which nominal wealth was concentrated in the financial sector, economic inequality of a high order was inevitable. In attempts to prevent this turning into active revolution, governments increased intervention in their economies to a degree that proved Schumpeter right in his forecast that capitalism would destroy itself and be replaced by socialism.

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Could anything have saved it?

Technology Displaced by Financial Innovation

William Kingston

To throw retrospective light upon the causes of the decline of capitalism, some wrong turnings are discussed. First, law should never have allowed corporations to be ‘natural persons’, separate from their owners, and consequently the vehicle for worldwide tax avoidance. Second, bankers would have to have been denied limited liability if creative energy was to be focused on technological innovation of the kind that generated the early wealth of capitalism. Third, laws to protect information needed to be redrawn so as to benefit genuine innovators instead of being supports to firms that have other types of market power. An aspect of this would be to reverse international agreement which were imposed on poorer countries. This would enable these countries to copy and so learn by doing, which is how Western countries had become rich themselves. The introduction of teams in bureaucracies whose task would be to develop better property laws as an alternative to intervention by the state, could also have helped to slow the decline of capitalism. However, the burden of evidence is that this decline is irreversible, because interest-group politics is now so entrenched.

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Epilogue: The centre could not hold

Technology Displaced by Financial Innovation

William Kingston

Joseph Schumpeter claimed that ‘there is inherent in the capitalist system a tendency towards self-destruction’. Economists were scornful of this view until the 2008 recession proved him right. The founder of modern economic thought, Adam Smith, assumed that an ‘invisible hand’ would lead individuals, in following their own interest, to serve the public good as well. A century and a half later, Edward Cannan pointed out that this would only happen if individual action was directed effectively by society’s institutions. It is clear that modern institutions are no longer operating in this way, and the reason is that they have been captured by interests that should be being disciplined by them. The purpose of the book is to show how this happened. It points out that the French and Russian revolutions only happened only after the nobility were deprived of their functions but left their privileges, and asks whether bailing out banks could be analogous.

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William Kingston

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William Kingston

This content is available to you

William Kingston