Capitalism: We need more, not less

Across the developed world, voters are angry with an economic system that feels rigged against the little guy and in favour of giant corporate oligopolies, and their billionaire owners. Capitalism is losing favour, particularly with the young and the left. By a margin of 2 to 1, American Democrats under 30 are more likely to have a “positive” view of socialism than of capitalism.They need to beware what they wish for.I was born in mid-1970s when India was staggering under its homespun brand of socialism. By nationalising big businesses, expelling foreign ones, govt was spending on welfare programmes without the revenue to pay for them. Shortages were routine; per capita income growth was below the global average. I was drawn as a young rebel to capitalism as the answer.In 1991, I got in to see the maiden parliamentary address of finance minister Manmohan Singh. With India on the verge of default, he promised a series of big-bang reforms that finally gave Indians more economic freedom. I was so exhilarated.That was 1990s. “Liberalisation” was cool. Singh became a global celebrity, but at home, as the crisis passed, the still deeply socialist political elite began lobbying him to slow reform. Singh complied. India’s progress slowed.To this day, the standard Indian excuse, when compared to China, is that the world’s largest democracy can’t force much development the way Communist China once did. But democracy is not the problem; many democracies have grown much richer than India. It is India’s lingering attachment to a state that overpromises and underdelivers.The irony now is that America’s headed the way of India. Leading Indian businessmen tell me they see in America’s turn to economic statism under Biden a dismaying echo of India in 1970s. Biden is effectively building on a govt that, in virtually all measurable respects, has been growing for almost a century.US govt spending has risen from 3% of GDP in 1930 to 36%. What changed under Reagan was that US govt started paying for its own expansion by borrowing, not taxing. Deficits went from rare to routine and US public debt has quadrupled since 1980 to more than 120% of GDP. Today, the young are turning to socialism because the standard histories of capitalism say it went wrong in an “era of small govt”, dating to Reagan. But since 1980, welfare spending has risen in most of the developed economies and has risen faster than the average in US.Even before Reagan, US govt had abandoned the original Keynesian idea that govt should save during recoveries, so it could spend heavily to ease recessions. Instead, US has run significant deficits in good times and bad, averaging 4% of GDP in recessions, and 3% in recoveries – basically, constant stimulus.By 1990s, Federal Reserve had joined the constant stimulus project, first by holding its own interest rates at historic lows. When crisis hit in 2008, Fed could not lower its rates much further, so it tried lowering borrowing costs a new way, by buying bonds and other debt in public markets in multi-trillion-dollar bulk. By soaking the system in debt, authorities were making it more fragile, ratcheting up pressure on themselves to respond to each crisis with bigger bailouts. Many Democrats call this supportive version of capitalism “socialism for the very rich”, but a more apt tag is “socialised risk”: state guarantees against economic pain for anyone.This growing tendency – to regulate, stimulate and rescue – peaked in the pandemic. The resulting crisis of capitalism is clear and present in the insidious ways overactive govt is widening the key flaws of modern capitalism – slower growth, less fairly distributed. Behind the slowdown is a collapse in the rate of growth in productivity, or output per worker. Before the pandemic, it had fallen by more than half since 1960s, and mounting evidence traces this decline to a business environment thick with govt regulation and debt, in which mega firms thrive and more corporate deadwood survives each crisis.Though “Big Tech” gets all the attention, three of every four US industries have ossified into oligopolies, dominated by three or four names. Worse, these oligopolies are more and more often the “bad kind”, prospering by lobbying regulators and killing off competitors, not innovating.Easy money also spawned “zombie companies”, which don’t earn enough to cover even interest payments on their debt, and survive by taking on new debt. Zombies barely existed outside Japan before 2000, and now account for as many as one in five public companies in US. Zombies also tend to hobble the performance of rivals in the same industry by sucking up talent and financing. Squeezed from the top by oligopolies and from the bottom by zombies, the corporate middle has stagnated. Before the pandemic, US was generating new firms at a little over half the rate and shutting down old ones at two thirds the rate of early 1980s. Throughout, income inequality was rising, but after 2000, it was no longer explained by the rise of CEOs. Now it stems from superstar firms like Google, where every employee is making more than peers at weaker firms. To work, capitalism needs space for the small and new to rise up and creatively destroy old concentrations of power. As oligopolies spread, more local labour markets came to rely on one big employer. Other than Britain, America is the nation where people are least likely to earn much more than their parents.I was one of the many who came to US inspired by Reagan’s vision of the “shining city on a hill”, and I still marvel at its allure. Among the 100 biggest US companies, 10 of the CEOs were born in India, testimony to a capitalist meritocracy. Yet I worry about where America is taking the world now.Its politicians are status quoists, hoping that the same old strategy – bigger govt – will produce better results. Instead, they are likely to get more billionaires and oligopolies, more popular anger. They should be seeking a middle ground between 1920s-style liquidationists and today’s liquefictionists. Help for the unemployed during downturns, and for markets when they are frozen by fear, makes sense. But authorities need to stop stimulating during recoveries, and leave financial markets free enough to falter on occasion. Their experimental quest for constant growth is a utopian step too far.Though politicians now speak of the economy as an “engine” subject to “fine tuning”, it is more like a natural ecosystem in which humans meddle at great risk to the system and themselves. Their thinking needs to change, before the overconfidence of modern economics – not nearly so hard a science as many imagine – does more damage. Capitalism is still the best hope for human progress, but only if it has enough room to work.The writer is an author and global investor. This essay has been adapted from his book What Went Wrong With Capitalism