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Saturday, June 22, 2019

Ray Dalio is wrong on what ails capitalism

Bridgewater's Ray Dalio has been writing about the growing dysfunctionalities of capitalism and offers certain suggestions. He has even described not reforming capitalism as an "existential threat" for the US.  Two graphics that highlight the ovarian lottery in the US.

One, people in the US in the bottom income quartile have a 40% chance of having a father in the bottom quartile (in the father’s prime earning years) and people in the top quartile have only about an 8% chance of having a father in the bottom quartile, one of the worst probabilities of the countries analyzed.
Second, the odds of someone in the bottom quintile moving up to the middle quintile or higher in a 10-year period declined from about 23% in 1990 to only 14% as of 2011.
Dalio's essay points to several other indicators which illustrate why the ovarian lottery is the biggest determinant of a person's life outcomes. This has several more graphics and figures that highlight the dysfunctionalities of US capitalism. His descriptors of the problem are spot on. But the same cannot be said of his diagnosis, much less prescriptions. 

Dalio's diagnosis is that capitalism's dynamics, especially since it has been taken to its extremes (say, in seeking profits, efficiency, productivity, market share etc) is now "producing self-reinforcing spirals up for the haves and dow for the not-haves, which are leading to harmful excesses at the top and harmful deprivations at the bottom". In effect, Dalio blames the dysfunctional nature of modern capitalism to an impersonal contributor, some inexorable dynamic of capitalism, say peak capitalism.

I am not sure whether this is a complete diagnosis. By blaming the impersonal dynamic of capitalism itself, he conveniently absolves people of his own ilk, the elites, their contribution to this problem. In fact, it can be argued that there is nothing called excessive capitalism which is a natural phenomenon. Excesses, by nature, happen when the rules of the game breakdown or become compromised. As far back as Adam Smith, it has been known that markets were never supposed to work in isolation, and were to have been underpinned by social norms and market regulations. 

Unsurprisingly the rules of the game across markets (taxation, deregulation, financialisation, competition etc) and society (the social contract to support public goods, social safety nets etc) have been compromised. And this has been engineered, as has been the case numerous times in history, by elite capture of institutions and rule-making. In this capture, the economic elites have been provided the ideological platform and facilitation by  the academic elites and public opinion makers. 

It is therefore no surprise that Dalio's prescriptions to reform the system only skirts around the problem. He proposes homilies like leadership from the top, bipartisan consensus, alignment of incentives, redistribution without affecting productivity, metrics to judge success etc. These are the sort of things his peers in the elite group will cheer, as John Mauldin has done herehere, and here. They are costless and give the psychological comfort of having done something to address what is acknowledged as a problem. 

Unfortunately, none of these are likely to work because the power balance has become so skewed that those enjoying the benefits of the current regime are in complete control over the institutions and processes of rule-making. It may be a stretch to imagine these elites giving up their wealth and influence voluntarily through a consultative process. Have we ever heard in history of elites seized by enlightened self-interest to give up their wealth and power and radically reform regimes? 

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