Industrialisation is what fired capitalism. Prior to that most capital was held in the form of land and buildings with not a lot of spare cash lying around waiting to be invested. Nor any pressing need for it. But when industrialisation began in the eighteenth century, it required major infrastructural investment in things such as canals, turnpike roads and subsequently railways. These huge projects took years before producing any return and the sums required were way beyond the capacity of wealthy individuals. Dispersed shareholding and large scale credit finance were brought into existence to enable the massive capital investments of industrialisation.
Contributory sums from large numbers of relatively small investors were multiplied by the bankers new found capacity for lending a proportion of deposits lodged with them for safe keeping. Even Marx acknowledged the ‘capitalistic system’ worked, having ‘created more massive and more colossal productive forces than have all preceding generations together.’ That was years before joint stock companies were allowed to provide the luxury of limited liability to their shareholders. When Marx was working on the Communist Manifesto, shareholders responsibility for their companies was total. If the company went bankrupt, they were liable for its debts and would in all probability go bankrupt with it. The possibility of bankruptcy was what gave the ‘capitalistic system’ its edge. As widely asserted, capitalism without bankruptcy is like religion without hell.
Real entrepreneurship doesn’t enjoy limited liability. The start-up entrepreneur is required to put their money where their mouth is. But mostly they don’t have money. So they frequently have to offer their house, or what part of it they own, as security against the business failing. That’s real capitalism. It makes the entrepreneur strive hard to achieve results, and above all, to avoid failure.
Today, the ‘capitalistic system’ no longer really serves the ‘entrepreneur’, but the bankers (broadly defined), who as always make their profit out of other people’s money. Without repeating the analysis elsewhere including on this site, it is clear that governments are scared stiff of big bank failure. Cold factual analysis of such an outcome is in short supply. Dogma suggests the whole financial system would go into melt-down, or some such unfathomable state. Too big to fail has been the cry for the past three years.
But too big to fail was what they said about the Titanic. Some might have believed it of Lehman Brothers and clearly many still do about Goldman Sachs. Frightened governments in US and UK apply the concept to big banks generally and have wasted inconceivable quantities of taxpayers’ money supporting the limited liabilities of top bankers and their ilk. So fearful are they, or corrupted, they’ve even extended limited liability to professional partnerships such as hedge funds and private equity operations. But bankruptcy is essential to the continuation of capitalism. Not only are the banks not too big to fail. Unless they are regulated adequately, some of them must. Their preservation by government intervention and public funding isn’t capitalism. It’s socialism.
Capitalism itself is clearly not too big to fail. That failure may well be the process we are currently experiencing.