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How Capitalism Destroyed Itself: Technology Displaced by Financial Innovation.  

William Kingston

19th May 2017

William Kingston

In his controversial new book, Business School veteran William Kingston, charts the rise and projects the fall of capitalism. Below we share an extract from preface of the book.

The Austrian economist, Joseph Schumpeter, forecast that ‘a socialist form of society will inevitably emerge from an equally inevitable decomposition of capitalist society…there is inherent in the capitalist system a tendency towards self-destruction...it not only destroys its own institutional framework but it also creates the conditions for another.’

He was rubbished for this, but the financial crisis of 2008 and the Great Recession proved him right. Capitalism has indeed produced an ‘atmosphere of universal hostility to its own social order’, and the present book shows how this came about. Its standpoint is that capitalism has been an exceptional and transitory episode in human history, brought about by the coincidence of individual property rights with a belief system that directed human creative energy towards economic activity.

Such property rights were themselves a remarkable social invention of the ancient Greeks, and they then provided the economic basis of the Roman Empire and, later, of the theocratic society of the Middle Ages. Not only can individual property enable creative energy express itself in economic ways, it also has the potential to force self-interest to serve the public good – it can at least partially civilize it. Markets can only exist on the basis of property rights, and the kinds of markets there will be depend upon the kinds of property rights there are.

Adam Smith could envisage the beneficial operation of his famous ‘invisible hand’ because he was able to take it for granted that the existing rights of property would generally lead private and public interests to converge. A century and a half later, Edward Cannan could not assume the same, so he wrote that ‘the working of self-interest is generally beneficent, not because of any natural coincidence between the self-interest of each and the good of all, but because human institutions are arranged in directions in which it will be so’.

Another century onwards, and we can no longer rely on the ‘human institutions’. Precisely because they are shaped by human decisions, property rights are vulnerable to imperfection, decay and manipulation. People being disciplined by property laws readily grasp the advantage they would gain if they could modify these laws to suit themselves. Pleas for ‘free’ markets are invariably made by those who want markets to be shaped in ways from which they will benefit.

How Capitalism Destroyed Itself: Technology Displaced by Financial Innovation

Law-making captured by interests

Consequently, modern economic history reflects a long process of capture of the laws of property by interests that can benefit from them. Most importantly, those who deal in money got control of the laws relating to it, which made Western economies less capable of generating real wealth, because it became so much more profitable to invest in financial innovation than in technology. The entire worldwide corpus of intellectual property law, for example, was developed to underwrite innovation, but now its use to move money internationally for tax avoidance and evasion is by far more economically important.

When it became clear that capitalism, for all its capacity to generate wealth, was also generating powerful opposition, the remedy adopted was not to correct the laws of property that were the cause of this, but to leave them unchanged, to tax their results and to make financial transfers to those who were not sharing in the benefits. This was the beginning of the socialism of Schumpeter’s forecast, and there is now also growing awareness of another aspect of it: that States would eventually be unable to meet the demands of their populations for such transfers.

Inevitably, capitalism’s real wealth-generating ability progressively declined with growth in intervention, but this has been obscured by the use of highly misleading measures of prosperity. Only appropriate laws of property can enable self-interest to generate both private and common wealth simultaneously and on an extremely large scale. If we do not get the laws right, intervention cannot work, but to the extent we can get them right, however limited this may be, intervention becomes unnecessary.

Growth in inequality

The decline of capitalism, therefore, is a story about getting these property laws wrong, by allowing them to be captured by those who should be civilized by them – above all, by those who deal in money. The most visible and disturbing symptom of this is a huge increase in economic inequality, the reaction to which has now reached a level where it is manifestly undermining representative democracies.

In fact, even those who have little or no capital themselves are not irreconcilably opposed to differences in wealth and status. What seems to matter is not so much the degree of these, but whether or not they are seen to be necessary. People will accept – and even value – inequality as long as they see it linked to the performance of useful social functions. Feudalism was highly unequal, but it was a system of mutual rights and duties as between lords and vassals.

The entire thrust of de Tocqueville’s writing on the French Revolution, indeed, is that it only happened after the king had brought the provincial nobles to the Court, depriving them of their local functions but leaving them their privileges. For the Soviet expert Richard Pipes a similar transition explains why Russian serfs, who had borne the burdens of serfdom for so long, did not start to find them intolerable until after 1762, when the Crown freed the gentry from compulsory service and transformed them into a leisure class around the Court. Events then began to move inexorably to the Bolshevik Revolution of 1917.

During the decline of capitalism, the relative levels of power and wealth attained by financiers have become very comparable to those of the nobles in both countries in their time, and those who deal in money are now seen to be every bit as privileged and lacking in social functions and responsibilities.

This inevitably poses two questions, and the first of these is: When governments bailed out their bankers in 2009, was it the equivalent of bringing them to the Court?

Which leaves the final question: And if it was?

Biography

Bill joined Trinity Business School in 1967 to introduce the teaching of Innovation, on which he published three books and many articles before retiring in 1995. Since then, he has continued his research in the School, resulting in three more books, including Interrogating Irish Policies, and has also delivered an evening Course for Computer Science each year.

How Capitalism Destroyed Itself: Technology Displaced by Financial Innovation is published by Edward Elgar Publishing.