What Went Wrong with Capitalism

Matthew E. Brown reviewed the book by Ruchir Sharma.

"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."