"It
can be reasonably argued that the last half-century or so has witnessed
the largest, broadest sustained increase in income, and thus human
well-being, in the history of the world. While the immediate benefits of
the first sustained increase in economic growth in the 1700s and 1800s
were primarily concentrated in small countries in northwestern Europe
and North America, recent decades have witnessed even faster economic
takeoffs across vast portions of the world’s population. In China and
India average incomes have soared, lifting over two billion people above
subsistence levels for the first time in history. Add to this the many
millions more who have enjoyed sustained growth in the former communist
sphere and you can make a solid case for the positive world-historic
contribution that economic liberalism has made to human well-being.
So, what is everyone complaining about?
In his unfortunately titled book, What Went Wrong with Capitalism,
financier Ruchir Sharma provides some interesting arguments—primarily
focusing on easy money, financial markets, and inequality—for why we, at
least many in the West, aren’t loudly singing the praises of free
markets. However, the most compelling statement may be found not in his
explorations of, primarily, twentieth-century economic episodes, but on
the book’s dust jacket, which declares: “Capitalism didn’t fail, it was
ruined. . . .” This is an important argument that free-market economists
have been making for a long time. Frustratingly, all of those
well-reasoned arguments have largely failed to take root in the broader
social consciousness and discourse about economics. Deeper understanding
of this failure would be of great value. Sharma’s exploration, while
thoughtful, doesn’t move forward much our understanding of that failure.
The common hundred thousand foot-level overview of the last 35 years
goes something like this: communism failed, the world embraced an era of
neoliberalism, the era of big government was over, and then mounting
crises of capitalism culminating in record inequality, a growing
billionaire class, and the ascendance of oligarchy have left everyone
disillusioned with capitalism and clamoring for government
interventions. This is a tidy story; the reality is much messier. Sharma
does an admirable job dispelling some of that historical mythology.
Certainly, communism failed. But Sharma accurately disabuses the reader
of the commonly held notion that the West, or the United States in
particular, led a movement toward smaller government and freer markets.
The broad sweep of the historical narrative needs more nuance. There is
no doubt that in many parts of the world communist countries, such and
China and Poland, and socialist countries, like India and Sweden, made
enormous progress by moving away from command-and-control and toward
liberalism. But in much of the developed world—the United States,
Western Europe, Japan—the immense drag of intervention, redistribution,
and easy money, continued to weigh down progress.
Sharma makes a solid case that expansionary monetary policy and the
evolution of central bankers into guarantors against the financial
failure of major firms (sorry, Lehman Brothers) has promoted a system in
which ever more money leads to Hayekian malinvestment. Financial
markets are flooded with money looking for a place to land. The security
of bailouts results in socially inefficient risk taking, and the
crucial system of Schumpeterian creative destruction is replaced with
the tyranny of the status quo rather than innovation. It is perhaps not
surprising that given his background in financial markets, Sharma
focuses much of his narrative on the failure of easy money and the
destructiveness of too big to fail. There are deep roots to inform this
perspective in Austrian economics and other criticisms of the Federal
Reserve. However, there is much more to the story of how capitalism was
ruined. It can’t all be laid at the foot of central bankers. A broader
sociology of economic change and government growth are needed to handle
this issue adequately.
Part of the problem arises from the disconnect between political and
popular rhetoric and the reality on the ground. While much of the world
did make substantial moves toward liberalized economies in the last few
decades, the rhetoric of a neoliberal consensus was never realized in
legislatures or the sprawling Kafkaesque regulatory burdens of countries
around the world. India’s “permit Raj” was somewhat weakened; it wasn’t
eliminated. The specter of a streamlined, competitive Europe ’92 gave
way to the reality of a bloated, stagnant European Union in the
twenty-first century. The era of big government being over is over (or
more accurately never was), and in much of the world government budgets,
redistribution, and regulations continue to increase their immense
burdens on economies. In the “battle of ideas” the victory of free
markets over socialism was brief—or perhaps it never really was.
The twenty-first century has seen the pendulum of ideas swing away
from liberalism. The explanation for the increasing political movement
in the United States against income inequality, against the rise of the
billionaire class, and against oligopoly is more complex than Sharma’s
focus on easy money and credit allows. And indeed, the threats
represented by those factors are over exaggerated for political gain as
usual. Again, rhetoric and reality are at odds. Unfortunately, Sharma
seems to accept much of the rhetoric at face value, and his narrative
begins to breakdown trying to force an era of easy credit, increasing
inequality, stagnation, and the dominance of a billionaire class into a
neat box. He observes, “the rise in income inequality since 1980, like
the rise in wealth inequality, coincides exactly with the era of easy
money and easy-to-get government bailouts” (p. 224). But correlation is
not causation, and you need not call upon Paul Volcker to disabuse you
of the notion that the era of easy money began in 1980.
Yet it is true you can find signs of these phenomena around us today.
By standard measures, income inequality and wealth inequality have
increased. But this has not been a case of the rich getting richer and
the poor getting poorer. Virtually everyone has gotten richer, within
and across countries. Quantitative measures of inequality are not
reliable indicators of qualitative differences. The rise of the
recently-much-maligned billionaires club (some 3,000 members by recent
count) has less to do with easy money than it does with the remarkable
innovations of the last several decades. Elon Musk certainly benefits
from government largess, but of the subsidy and contract kind; and it is
hard to understand how the likes of Bezos, Gates, the Kochs, Bloomberg,
Zuckerburg, the Pritzkers, Soros, Adelson, etc. are built on just easy
credit and not innovation and wealth creation. And while easy money is
certainly a great scourge, it is hard to build lasting fortunes on easy
money. If it were all a house of cards, it would blow over. Demand
curves still slope down.
The evils foisted upon us by stagnation and oligopoly are also
exaggerated. Tyler Cowen and others have made strong cases for
explaining the whys and wherefores of an age of stagnation, the stubborn
flatline in productivity numbers in recent decades. But it is hard to
lay the blame for this measured stagnation, to the extent that it is
translated into lived reality, at the feet of easy credit. Indeed, lived
reality has been transformed by innovation and rapid technological
change in the last thirty years. Almost magically placing access to the
entirety of human knowledge into small devices in the hands of the
average person is not a phenomenon achieved by inflationary policy, or
well-suited to measurement by standard national income accounting. And
arguments about oligopoly do not explain why we are not still using
Netscape and America Online. Microsoft and Apple survive in dominant
form because they successfully revolutionized or sidelined their once
core businesses.
Yet capitalism does remain in crisis, not so much for its own
inherent flaws, but for ours. The crisis of faith in capitalism is an
old story. Its newest chapter is heavily influenced by 9/11, the Global
War on Terrorism, the Great Recession, and the Covid pandemic. Recently,
political coalitions against maintaining a liberal economic order are
on the rise. But capitalism continues to deliver for us, just as we
continue to fail to deliver for it."
