What Went Wrong With Capitalism?

What Went Wrong With Capitalism?

Author Ruchir Sharma has authored a work bearing that very title.

His answer is that nothing went wrong with capitalism. Instead, capitalism itself was wronged.

Wronged, that is, by tinkerers and meddlers.

In its childhood capitalism was seized by the boundless energy and ambition of youth.

Before it rose a vast vista of endless possibility. Into this seeming infinity it plunged headlong… with all abandon.

Youthful capitalism raised the curtain on a golden age of economic progress… an era of such high razzle-dazzle… it faces no equal in history.

A Century’s Worth of Growth in a Single Year

From year one through the year 1820, the West’s economic growth averaged an invisible 0.06% a year.

0.06% annual growth equals 6% per century.

Yet in the latter portions of the 19th century, adolescent capitalism went rampaging — through the fields, through the shipyards, through the stables, through the guilds, through the cities — through all of society.

6% economic growth was no longer the work of a century… but often the work of a year.

United States economic growth alone exceeded 6% in the years 1962, 1965, 1966 and 1984.

Since 1880, this Sharma fellow informs us, the standard American has gained 40 years of life and four inches of height.

The “Forgotten Depression”

Are you familiar with the “Forgotten Depression” of 1921? You likely are not because it is the Forgotten Depression.

Yet United States industrial production plunged 31% between 1920 and 1921. Stock prices plummeted 46%… and corporate profits a depressive 92%.

Unemployment ran as high as 19%. Storefronts everywhere gaped empty.

It was the grand migraine of the day.

Then suddenly it was gone. The pain was acute… but the pain was brief.

By 1922 prosperity was finding its legs again.

By the mid-1920s the gross domestic product was galloping at an average 8% gait.

Why? Because the government sat upon its hands… and capitalism’s animal spirits repaired the damages.

Capitalism Was Still Capitalism

Despite the Progressive Era’s encroachments and WWI’s assaults, laissez-faire still had roots in American soil — roots both deep and wide.

In the America of 1920 the stock market looked after itself… and buried its own dead.

Business was on its own hook. And banishing the business cycle was not the work of government.

Just seven years old, the Federal Reserve was still in knee pants.

Its role at the time was simple and it knew it — to provide liquidity to the banking system in the event of another banking crisis.

Inconceivable today, the Federal Reserve sat back as the economic machinery seized in 1920.

The Remembered Depression

The remembered depression commenced in 1929.

Shortly thereafter the collectivists, do-gooders and world-improvers ran capitalism down… and got their hands on its collar.

They sat it down on a stool, broke out their whips and tamed the thing. Formerly their punishing master, they made capitalism their docile servant.

Capitalism remains the tamers’ docile servant to this day.

They may have sanded down capitalism’s rougher edges — which certainly existed — yet they have driven the vigor from it.

They have hacked into its vitals.

Or, to mix the figures, they have quieted capitalism’s gales of creative destruction. Thus we wallow in doldrums.

Socialized Risk for Everyone

Mr. Sharma:

Governments of the leading developed nations have played a more active role in allocating capital since the Depression of the 1930s, whether by rescuing and regulating, or spending and borrowing… Capitalism has been twisted into an unfair and inefficient form, but not mainly by rules stacked in favor of big companies and tycoons.

It has been distorted above all by governments and central banks pumping more money into the economy than the markets can possibly invest effectively. More than just socialism for the very rich, the underlying issue is socialized risk for everyone — the government extending the safety net beyond the poor to the middle class and the rich, at a pace and scale that have corrupted capitalism with debt.

Bigger government will only magnify the distortions.

The meddlers must therefore fumble constantly to suppress the vast distortions they themselves have meddled into existence.

A Tiger by the Tail

They have created the tiger… and they truly have it by the tail:

Fear that the resulting debt bubbles will blow up and take down the economy has come to haunt policymakers, and has grown more acute since the crisis of 2008, when we witnessed the most damaging collapse of a debt bubble since the Depression.

Today governments watch for jitters in the markets and rush in to support them with easy money and bailouts at the first sign of trouble.

The result is a very sad caricature of capitalism — a Ferrari reduced to a Chevy:

When government becomes the dominant buyer and seller in the market — as it has in recent decades — it distorts the price signals that normally guide capital. Money starts to flow down the paths of least regulatory resistance, or most government support. Each crisis brings bigger bailouts, leaving capitalism more mired in debt, more dysfunctional and fragile.

In the 2000s, and even more in the 2010s, the governments of advanced countries began injecting money into economies that were not in crisis. They were in recovery. Disappointingly slow recovery, but still. Intended to boost the pace of growth in these economies, these experiments had the opposite effect. By flooding the engines of capitalism with easy credit, they created more kings of debt, more excesses in the financial markets.

Unintended Consequences

Should it then surprise you that productivity growth has more than halved since 2010?

It should not surprise you in the least. A debt-soaked economy is a guttering economy.

And the system the meddlers have fabricated — purportedly to save the little guy — primarily saved the big guy:

The periodic financial crises — erupting in 2001, 2008 and 2020 — now unfold against the background of a permanent, daily crisis of colossal capital misallocation. Its most visible symptoms are the big economic players who have the resources to thrive in a system awash in complex debt products.

That is a major and overlooked reason why most American and European industries are concentrating in the hands of fewer companies, and the individuals who founded and lead those companies now measure their wealth in hundreds of billions, not mere billions.

Don’t Blame Capitalism

Many point their accusing fingers at capitalism. Yet they are fingering an innocent man:

Flaws that economists blame on “market failures,” including inequality and inordinate corporate power, often flow more from government excesses. In particular, constant government support and intervention in financial markets has crippled the competition that would break up concentrations of personal and corporate power, were capitalism allowed to function properly.

Yet capitalism is not allowed to function properly.

Long deprived of its youthful fire, the meddlers have reduced capitalism to a timid, trembling crippledom.

Give us the fiery capitalism, we say.

Give us the rambunctious, pugnacious and youthful capitalism.

It may have been harsh. It may have even been — in its way — cruel.

Yet it worked. The tamed and crippled version does not.

As Mr. Churchill might have styled it:

“Capitalism is the worst form of economic system… except for the rest.”