Capitalism and the Forgotten Role of Credit

Are you an economist? Can you explain to a fellow citizen or economist what characterises capitalism? In my experience, few economists and fellow students don’t have a clear picture – and I used to be one of them. If they do, they usually go about a market economy, whose features (trade and prices) they then start off reciting. Consequently in the public discussion, we mix up a market economy with capitalism. With this I want to offer some Schumpeterian inspiration on that topic:

Schumpeter’s definition of the capitalistic economic system (1):

‘‘. . . capitalism will be defined by three features of industrial society: private ownership of the physical means of production; private profits and private responsibility for losses; and the creation of means of payments – banknotes or deposits – by private banks.”

In summary:

  1. Private ownership of the means of production
  2. Private responsibility for profits and losses
  3. Credit (purchasing power) created ad-hoc, “out of thin air”, by private banks.
    I have to add, and that is of utmost importance, that Schumpeter had competitive commercials banks in mind. He had something in mind which resembles rather free banking (critique by Schumpeter literates welcomed), which assures that  banks are held accountable for credit losses! A (central) bank indeed can be a juristically private company, but de facto is cartelized/oligopolized and has socialized responsibility for losses (and profits). A banking cartel “led” by a central bank and regulated by the government would be deemed a socialist element, not a capitalistic one.

Credit? What? We forgot!

While every economist would agree to the first two features, the third he might feel repelled of. In contrast, many finance guys I talked to have instinctively acknowledged the importance of credit. Schumpeter assures:

The first two features suffice to define private enterprise. But no concept of capitalism can be satisfactory without including the set of typically capitalist phenomena covered by the third.

I do believe mainstream economics don’t really acknowledge credit’s pivotal role in economic development, which I (JAS) want to lay in out at TES. E.g. at HSG master studies in economics, there is not a single course which mentions the nature and crucial role of credit. Even when I opted for a central banking class, which was led by a first rank economist at the SNB, we didn’t came further than pointing to some money functions. Since we are blind in economics on the third feature, I also claim that economists remain unable to explain to “mainstreet” people the functioning of the capitalistic society they live in. So who will they take advice from then? My guess: Youtube, lobbyists, politicians and other simplicists. That is the actual big tragedy of our scientific discipline in todays world.

Then again, we maintain optimism…

The neglected role of credit throughout my studies motivated me to write a thesis about it. As I am exploring right now, what the current’s academic research stance toward credit and capitalism is, I’m also gaining optimism. Big names like Luigi Zingales, Philippe Aghion & Daron Acemoglu and a broad range stemming from the “monetary circuitists” re-discover Schumpeter’s ideas. His old insights seem to arrive very slowly and tentativly at the academical research frontier.

Looking farther ahead, I’d even argue that there is a credit theory “after Schumpeter” and in his spirit. Schumpeters view on credit can be meaningfully evolved so to adapt todays financialized knowledge economy. This becomes at some point necesseray as western economies rarely are “industrial” anymore like Schumpeter wrote decades ago. We may rather speak of a “financial structure” of multiple purchasing-power creating institutions, which do the job of banks in the industrial ages.

Nevertheless, this does not render Schumpeters original writings less valuable. The basic assumptions of ad-hoc credit and economic development, as well as the contrast to neoclassical theory (and some Keynsian fallacies), remain fully valid and insightful. To begin with, this convincing-job has to be done. Put differently, even older assumptions than those of Schumpeter have to be overcome first. At TES, we are on it!

Food for thought:

How pronounced do you think we still find the three features prevalent in todays economic system?

  • How much free banking?
  • How much the regulation on the use of means of production?
  • How much responsibility for losses in a inflation-mode economy?


Schumpeter, Joseph A. (1943): Capitalism in the postwar world. In: Seymour Edwin Harris (Hg.): Postwar economic problems. 5th impression. New York N.Y: McGraw-Hill.

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2 thoughts on “Capitalism and the Forgotten Role of Credit

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