Abstract

Capitalism is one of the most consequential economic systems in human history, generating unprecedented advances in productivity, innovation, and aggregate wealth. Yet capitalist systems repeatedly generate crises, deepen inequality, produce corruption, and sustain speculative manias — often despite the presence of formal error-correction mechanisms. This paper proposes that these phenomena are systematically explained by Self-Referential Ignorance (SRI), a formally defined condition in which an agent, institution, or system increasingly validates its beliefs through internally generated assumptions rather than external corrective feedback. SRI is operationalized as a measurable index (SRI-I) derived from four observable dimensions: epistemic closure, feedback suppression, error persistence, and adaptive rigidity. Drawing on the Universal Balance Feedback Framework (UBFF) — whose master equation Wr = ∫(Is · Bu · FL · IN) · Dc governs systemic welfare as a function of integrity, balance, feedback, and nodal interconnection — this paper develops a formal dynamical model of SRI accumulation and systemic correction. Lyapunov stability analysis demonstrates that capitalist equilibria are conditionally stable and that SRI constitutes a destabilizing force whose magnitude is bounded by institutional feedback capacity. Historical cases including the Dot-Com bubble, the 2007–2009 Global Financial Crisis, and the organizational failures of Kodak and Nokia are examined as empirical instantiations of the SRI dynamic. Falsifiable predictions are derived from the model. The paper concludes that the long-term stability of capitalist systems depends not on profit maximization per se, but on the structural preservation of feedback integrity.