A capitalist's lament

Ruchir Sharma's book is illuminating and heart-warming in its optimism that despite its many flaws, capitalism remains our 'best hope for economic and social progress

What Went Wrong with Capitalism

Author: Ruchir Sharma

Publisher: Allen Lane

Pages: 384

Price: Rs 999

This book is about an early love of the author — capitalism — and why it lost its magical efficiency by feeding voraciously on “easy money” willingly generated by governments and central banks to safeguard growth. Contemporary observers would shrug and say what is new? All economic philosophies become unrecognisable during implementation.

That capitalism has failed is obvious. Forty per cent of young Americans favour European-style political controls and state intervention to dilute inequality — one of capitalism’s ugly manifestations. In the developing world, rampant crony capitalism creates similar disaffection among workers and the poor.

Counterfactually, the author asserts that the downsides associated with capitalism are not inherent contradictions. These are aberrations caused by inept political and financial regulation, which while legitimately throttling its excesses, ends up exaggerating its economic and social downsides — such as deep and long downturns — and diminishes its upsides — such as efficiency in the allocation of capital.

The author experienced stunted capitalism in India of the late 1970s. Pervasive state controls resulted in economic stagnation and shortage of goods. In comparison, Lee Kuan Yew’s Singapore was a “liberating breath of fresh air.” State-led capitalism and a benign United States lifted all boats, albeit sans  political freedoms. Subsequently, in the Ronald Reagan-led United States — which was undoing the economic shackles of the New Deal — the author’s ship docked home to discover his true love, a heady cocktail of capitalism and light-touch regulation wrapped in the glitter of democratic freedoms. His return to India in 1990 coincided with the fall of the Soviet Union, which ignited the neo-liberal consensus around free market economies being the best option for sustained economic well-being.

In retrospect, this consensual surge towards regulated capitalism had mixed results, particularly in democracies. Globalisation, a child of capitalism, conferred enormous economic benefits via efficiency-enhancing competition. But the distribution of such benefits has been skewed in favour of developed economies and within the elite in developing economies. Theoretically, capitalism has in-built stabilisers — the “natural” forces of “creative destruction” that allocate capital only to deserving firms, thereby levelling out both downturns from business cycles and disciplining the “irrational exuberance” of boom times. Nor are taxation of wealth and income — both legitimate interventions to insulate those left behind — the main barriers to efficient capitalism.

We must look instead to the growing arsenal of monetary management tools, starting with the ability to influence interest rates by issuing and buying back government bonds. Post the 2008 financial crisis, this practice was extended to buying corporate debt unselectively to spur growth during the downturn, based on a Japanese template to beat negative growth following the 1990 real estate downturn there.  Add to this the indiscipline of growing market expectation that central banks shall “bail-out” inefficient borrowers, unable to service their debt to avoid further contagion.

Between 1980 and 2008 the global economy grew rapidly, fuelled by easy debt ,which grew even faster, more than tripling to 350 per cent of global gross domestic product (GDP) even as productivity fell. By 2022 generating $1 of growth required $3 to $5 of debt — triple the level in the 1970s. “Easy money” — low interest debt available without conditionality — distorts investor sentiments away from prudent investment in growth- and productivity-enhancing opportunities (as was the case in the post-World War II years) to simply betting that the financial return on investments would exceed the regulated, low interest rate at which the loan has been taken.

One pernicious outcome is investor interest in “junk bonds” — very high-return bonds issued by companies with dodgy financials, or investments in “zombie companies” with no growth track record or prospects that simply stay afloat on dollops of public subsidies. This will resonate with Indian readers since we have only recently recovered from the “twin balance sheet problem” of corporate indebtedness. The proclivity of central bankers and governments to fiddle with financial markets is on the ascendant. The Covid-19 crisis took intervention to new heights. We should expect more of the same.

Nevertheless, to anchor faith in the practicality of a capitalist regime, the author points to some success stories. The Socialist democracies of Scandinavia and the ex-Soviet republics continue to shun centralised economic management, albeit with varying levels of democracy. Switzerland, Taiwan, and Vietnam are small economies across the high, and lower-middle spectrum, which balance capitalism and state controls efficiently. The exclusion of China from this list of successful non-democratic capitalist economies seems inexplicable (assuming that the Xi era is an aberration) given the stirring impact of Deng Xiaoping’s 1978 capitalist slogan “to be rich is glorious” leading to China’s giddy rise.

For the author, the United States, warts, and all, remains a “shining city on a hill” particularly for immigrants like himself. Most elite and middle-class Indians would agree. Quixotically, becoming a similar shining example means decentralising government in India, institutionalising freedom of expression and private property rights and opening up the economy to external competition, at a time when both the US and India are going in the opposite direction.

This eminently readable book is illuminating and heart-warming in its optimism that governments can learn to manage the primeval force of capitalism better, for it remains our “best hope for economic and social progress.” A panoramic must-read for professionals in financial services, financial regulators, and public policy wonks.

The reviewer is a consultant on economic governance and energy regulation