Home > Uncategorized > Capitalism collapses when money flows to the financial sector per se.

Capitalism collapses when money flows to the financial sector per se.

It is normal that capital floods to the newest and most profitable industries that display the highest rate of technical change and growth, be it Carnegie’s steel mills, Ford’s assembly lines or Bill Gates and his Microsoft. Capitalism collapses, on the other hand, when money flows to the financial sector per se, as if finance were an industry on par with steel, cars, or software. Thus, the fundamental flaw behind today’s global situation is the failure to distinguish sufficiently between the real economy and the financial economy (see Fig. 1 below). This clear distinction was once understood – not only in Islamic economics as today – but all along the political axis from Marx and Lenin on the left, to social democrat Rudolf Hilferding – a Jew who was killed by the Gestapo – to the conservatives Schumpeter and Keynes, all the way to Hitler’s economists on the far right. The German distinction between schaffendes Kapital (creative capital) and raffendes Kapital (roughly: capital which grabs existing wealth) is a useful parallel to good and bad greed, but unfortunately it was created by persons too close to fascism.

As Karl Polanyi points out, what communism, fascism and the New Deal had in common was a distrust of laissez faire. This included an understanding of the need to control the financial sector. Of the three ideologies that aimed at controlling the financial sector, it should be pretty obvious which one to choose: we need to recreate policies in the spirit of the New Deal.

Erik S. Reinert  

  1. John Hermann
    January 7, 2016 at 11:20 am

    Where is Figure 1 ?

  2. Vladimir Masch
    January 7, 2016 at 11:25 am

    Dear Editor:

    Some time ago there were blogs, stating that any economics is no more than the ideology of some group of society masked by mathematics. Can you please send me those blogs and comments? I’d greatly appreciate that.

    Lucy 2016 to you, Vladimir Masch


  3. January 7, 2016 at 12:44 pm

    Which breakdown?
    Comment on Erik S. Reinert on ‘Capitalism collapses when money flows to the financial sector per se’

    Capitalism breaks down because of immanent logical necessity (no crisis and no criminals and no banksters needed) as soon as private and/or public households start to redeem their debt in the aggregate (i.e. new credit, rollovers, and redemption netted out). See ‘Mathematical Proof of the Breakdown of Capitalism’

    This is a result of the correct profit theory. Profit theory has been messed up by economists (2014), including Marx. See ‘Profit for Marxists’

    How did the Walrasians, Keynesians, Marxians, and Austrians mess up profit theory and with it the rest of theoretical economics? Because they have in the main been occupied with political economics. Schumpeter identified the ultimate cause of the failure of economics:

    “In this and many analogous cases, of which modern economics is another deplorable example, economists indulged their strong propensity to dabble in politics, to peddle political recipes, to offer themselves as philosophers of economic life, and in doing so neglected the duty of stating explicitly the value judgments that they introduced into their reasoning.” (1994, p. 19)

    Agenda pushing is different from thinking. What political economists have delivered is pure scientific garbage. Obviously, the intellectual breakdown of economists long precedes the factual breakdown of the market economy. Let’s face the fact: both orthodox and heterodox economists are natural born scientific losers.

    Egmont Kakarot-Handtke

    Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741.
    Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.

  4. blocke
    January 7, 2016 at 1:33 pm

    Please contextualize. Are we talking about the City and Wall Street, or Berlin and Beijing. What time period?

    • blocke
      January 7, 2016 at 7:26 pm

      “what communism, fascism and the New Deal had in common was a distrust of laissez faire. This included an understanding of the need to control the financial sector.”

      When I spent 6 weeks in Silicon Valley in 2000 interviewing people in that start-up culture, the one great advantage that people I interviewed (mostly French and Germans) said existed in SV was availability of money. Money raising to finance start-ups was almost impossible to find in Europe; hence the gold rush to California. R. Locke & K. Schoene, The Entrepreneurial Shift. Cambridge UP, 2004. The financing of SV start-ups was laissez-faire run amok. So be careful how government control’s finance.

  5. January 7, 2016 at 4:41 pm

    I agree with Erik Reinhart . See our expert seminar on ” Reforming Electronic Markets and Trading” , now an official UN report to be released by UNEP on Monday, Jan 11th. http://www.unepinquiry.org/ publications/electronic-markets/ We recommend a Financial Transactions Tax as a start.

  6. January 7, 2016 at 11:41 pm

    Duh …

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