Capitalism is often defined as the economic system of the last 300 years characterized by (i) free markets and (ii) private ownership of the means of production. But according to McMillan, this definition is flawed.

Markets have existed for thousands of years; it is not something new in the last 300 years. And privately owned means of production have also existed since humans started farming.

So, what is capitalism? What is the new thing that emerged some 300 years ago that characterizes capitalism? The answer is corporations. Capitalism meant that the capital (the means of production) moved from individual ownership by farmers, craftsmen, shippers, etc. to collective ownership via large corporations.

The Trading Corporation

Illustration of transformation of real capital into financial capital conducted by The Trading Corporation.

1.  Limited personal liabilities. Corporations are separate legal entities. They can borrow money for big and crazy projects, without putting the entrepreneur's personal finances at serious risk. If something went wrong, the company will take the hit and go bankrupt instead of the entrepreneur being personally liable for all the company's debts.
   
   
2. Capital transformation. Suppose you want to invest in a ship, but you can only afford a third of a ship. It would be rather useless to physically chop the ship into three pieces and buy one piece. A better solution is to let a corporation own the ship, and instead you own a third of the corporation. 

In 1694 the Bank of England was founded. Two years later, the Bank suffered a massive bank run. But the king was so indebted to and the wealthy so heavily invested in the Bank that its failure would threaten their interests. So the government saved the bank from bankruptcy. 

State-backed bank corporations became an unprecedented success story. Thanks to public sponsorship, they could take greater risks than ever before and create more safe and stable money. 

State backed corporate banking short-circuited the transformation of capital and enabled the creation of financial assets on steroids. This initially allowed for an expanding money supply and higher growth. But it also lifted banking instability to a systemic level, created boom-bust cycles, and triggered deep economic crises

Capitalism is a deal with the devil that is no longer paying off. At the turn of the 21st century, the failures of capitalism have become worse while its ability to promote general prosperity has disappeared. 

Previous attempts to fix capitalism have failed. Today, capital can move and transform so fast that regulations and monitoring are not keeping pace. As Deutsche Bank's research department states "bank reporting has now become so complex it has spiraled out of all control and meaning".

In the digital age, capital transformation has gone out of control. Capitalism is building up systemic risk everywhere. Everything from investment banks to insurance corporations and energy trading corporations have to be rescued by public safety nets to avoid economic collapse. However, this only creates more moral hazard and builds up larger risks, that sooner or later will result in a huge financial crash in the future.

What can be done? To fix capitalism, more regulation is not an option. As Einstein noted: "Insanity is doing the same thing over and over again and expecting a different result".

We are thrilled to present Jonathan McMillan, the brilliant minds behind the 2014 book The End of Banking, who will speak about their new book Capitalism and the Market Economy.

Jonathan McMillan is a pseudonym representing the collaboration between two exceptional authors—one a banker from a major international bank who has chosen to remain anonymous, and Jürg Müller, director of Avenir Suisse, the largest liberal think tank in Switzerland.