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Chapter 2. Destroyed by the Bubble > The Social and Economic Utility of Capital... - Pg. 8

Destroyed by the Bubble 8 The Social and Economic Utility of Capital Markets Economic activity is not simply for the benefit of those involved; it also serves a social purpose, or it is ordinarily not permitted. For example, dealing in heroin is an economic activity that the United States believes serves no social purpose and so prohibits. People who participate in capital markets assert that capital markets serve several major social purposes--including that they are crucial to innovation and therefore improving living standards. Capital markets are said to fund innovation, and innovation to drive our economy, an argument given its modern formulation by Joseph Schum- peter in the 1920s and 1930s. Innovation improves living standards either directly, through new products and services, or indirectly, by driving up productivity in producing existing products and services. Western capital markets, especially those in America and Europe, claim to be the best in the world at allocating capital to competing uses, especially among likely innovations. The markets are said to be large, highly developed, efficient, and transparent (and thereby worthy of investors' trust). Because of these features, western capital markets are able to pour investment dollars into inno- vations and push them ahead much faster than would otherwise be possible. Since innovation drives progress, and capital is said to drive innovation, the role which is claimed for the capital markets is as significant as any which can be imagined. This is the core of capitalism. It's the economic mechanism widely acknowledged now to be the most effective at creating wealth and thereby improving living standards for large numbers of people. The capital market firms that are engaged in supporting innovation, and building a link between entrepreneurs and the investing public, are more complex than might be expected because they have two functions: They must not only help embody promising technologies in products and serv- ices, they must also embody the products and services in financially successful firms.