Economics / Technology

Schumpeter and the end of Western Capitalism: Can crypto-currency prove him wrong?

I recently came across a newish article titled ‘Schumpeter and the end of Western Capitalism’ by William Kingston in the Journal of Evolutionary Economics. This line in particular caught my eye: “The decline of capitalism began when financiers were released from this discipline, and it ended with the catastrophe caused by belief that bureaucratic control could replace it.”


Overall the paper sketches what is a very interesting thesis (Schumpeter’s, that is) placed in the context of the GFC and beyond. Well worth the read. It is good to see someone calling out the crisis for what it was – something of a Schumpterian-Minskian-Olsonian-Hayekian Frankenstein’s monster. The common thread: overcentralisation and the pathology of control. It blows my mind that people writing decades ago, up to a century ago, could be so prescient.

The abstract is below and a link to the article is here.

Schumpeter’s forecast in his Capitalism, Socialism and Democracy(1942) that ‘a socialist form of society will inevitably emerge from an equally inevitable decomposition of capitalist society’ did great damage to his reputation. This was especially so after the fall of the Berlin wall, when the spectre of Communism seemed to have been finally exorcised. The current financial crisis, however, has vindicated him. For Schumpeter, capitalism rightly meant, not just individual property rights, but the ability to ‘create money from nothing.’ This is such an enormous and dangerous power that it obviously has to be subject to the strictest constraint, which was traditionally provided, however imperfectly, by denial of incorporation with limited liability to those who dealt in money. The decline of capitalism began when financiers were released from this discipline, and it ended with the catastrophe caused by belief that bureaucratic control could replace it. The cause of the change was the progressive capture of democratically elected politicians by interests. On this, Schumpeter’s The Crisis of the Tax State (1918) was almost as insightful as his later book. When Governments could not allow banks to fail, they signalled the definitive arrival of centralized financing, which is a fundamental characteristic of a socialist economy.

The question I am interested in asking is: are financial systems fatally overcentralised, and can we even imagine a regime of ‘unsocialised finance’? I would hazard a guess such a regime would look something like the ‘denationalisation of money’ or a system of competitive currencies (for Hayek on this, see here). And of course, the interesting developments around crypto-currencies, namely BitCoin, present a prospect for ‘unsocialised money’.

In the non-territorial governance framework I’ve been working on this amounts to ‘panarchised money’, with multiple systems within the same territorial area. But really, it’s just denationalised money, as per Hayek. Moreover, this might be a nice example of my thesis: a system that critically overcentralises  (e.g., via some form of self-organised criticality) that then requires a non-territorial solution as the only remaining means of navigating a complexity collapse. Niall Ferguson and Joseph Tainter talk about how societies tend toward centralisation, complexity and collapse – I propose that non-territorial secession/decentralisation (parallel systems) is a way around this. Then, the Schumpeter-Hayek nexus on financial systems and currencies might be a special case of this generic story: overcentralisation, cusp of collapse, and deterritorialisation.

On this score, Edan Yago (of the Lifeboat Foundation) made a presentation at the BitCoin 2013 conference where he strongly intimated that the world’s first cryptocurrency-based political zone is on the way. This would be a charter city, in the mould of what is happening in Honduras, that is specialised as a non-territorial currency zone (a system of systems). Could this provide the release valve (a lifeboat!) for our critically overcentralised political systems? Schumpeter may yet be proven wrong – but only through institutional experimentation will we find out.


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