The Brooklyn Rail

Regular readers of Field Notes will know that I appreciate Ruchir Sharma’s columns for the Financial Times. He approaches the economy as a practical financier (he worked at MorganStanley for twenty-five years), mocking theory “focused on abstract models,” and he has a strong grasp of economic reality. His new book, What Went Wrong With Capitalism,¹ exemplifies the strengths and failings of his approach. His fact-based description of the economic state of things is revealing, but his analysis and proposed solutions are weak and unconvincing.

Sharma came to the US from India filled with excitement at the thought that Ronald Reagan had vanquished government intrusion and restored freedom to enterprise. Despite his personal success in the promised land of economic liberty, he was disappointed to discover that both Reagan and neoliberalism generally “did not slow the momentum of big government.” Government continued to grow, occupying more and more economic space; what changed was “the way government pays for itself—by borrowing to cover the perennial deficit.” And not just in the US—all the large capitalist countries began running larger and larger deficits from the late 1970s on, paid for by expanded debt. Sharma describes this as an addiction: just as Americans turned to opiates to deal with physical and psychological pain, governments borrowed money to manage the pain of economic crisis. Then, in the 2000s, governments “began injecting money into economies that were not in crisis” but “in recovery.”

But if the idea was to accelerate growth, this spending had the opposite effect. As government money plays an increasing role in the market economy, “it distorts the price signals that normally guide capital.” Instead of investing with an idea to long-term expansion, money flowed into financial speculation in search of large short-term profits. Not only does “easy money [inflate] the prices of all financial assets—equity and debt, stocks and bonds,” so that “the financial markets grew even more bloated than the debts alone,” risk-taking finance could count on being bailed out when things went south.

The result was an end to what Joseph Schumpeter called “creative destruction,” when competition allows more productive firms to destroy older, less profitable businesses, creating a growing economy. “The downsides of this rough cyclical justice are more downturns in the economy and churn in the markets. The upside is human progress.” But during the last half century, as governments “met each new crisis with more bailouts, more weak companies survived. … Since more troubled companies survived each crisis, each bailout needed to be bigger than the last.” The fear of socioeconomic pain, inspiring the prevention of the deep crises that marked capitalism’s history in the nineteenth and early twentieth centuries, has led to slowing productivity growth and so to slowing economic growth. The result is an increasing loss of faith in capitalism, popular discomfort with rising inequality, and a general sense that “the system is unfair … In many ways, the economic crisis is not merely brewing, it is here.” But it is not a good crisis, like those of the past, when deflation was “generated by innovations in technology or finance that raise productivity, lower costs, and boost economic growth,” giving rise to a new upswing. Fear of deflation led to government interventions and so to inflation—if not of consumer goods prices then of assets like stocks and real estate (for a long time, anyway, after 1980). Crisis was contained—and made permanent, in the form of a stagnant economy in which finance took the place of productive progress.

This is startlingly close to a Marxist analysis of contemporary capitalism; at any rate Sharma’s description of developments shares many points with my own version of events (as presented, for instance, in my recent The Return of Inflation), such as the shift from production to finance, the emergence of profitless zombie companies, the centralization and concentration of capital and quasi-monopolization, the slowdown in investment and therefore growth, the relentless rise of private, business, and government debt, and a tendency towards non-stop inflation. The difference comes in how this situation is explained: where Marxist explanations of “what went wrong with capitalism” tend to identify structural features of the system, Sharma relies ultimately on the idea of ruling-class moral weakness—the failure of nerve that produced governmental addiction to the opiate of debt-fueled bailouts. And his only explanation for the capitalist decline that provoked this situation is that growth, apart from productivity, is a function of population size; apart from the absurdity of this idea in an overpopulated world (China’s growth is slowing, for instance, despite massive youth unemployment), the main cause Sharma suggests for population decline in rich countries is women’s wish to have fewer children. With population growth at a standstill, productivity must grow; but this requires the creative destruction of crisis to continue. As a result, “economies simply cannot grow as fast as they once did.”

Relying on the addiction metaphor, he does not pause to ask why, when a serious recession raised its ugly head in the early 1970s, capitalist states did not allow the full play of “creative destruction,” with the large-scale bankruptcies and mass unemployment that would entail. While he rightly locates the start of government economic involvement in the New Deal of the 1930s, he does not think deeply about why capitalist elites might have wanted to avoid a return of depression conditions that had led not only to long-lasting mass unemployment but political turmoil and a world war that killed seventy million people and ended with the extension of what at the time seemed anti-capitalist communism. For him the Great Depression was a glorious moment—“the US economy has never been more dynamic than it was in the 1930s.” In the same way he looks fondly back to a day where there were fewer regulations, and businesses were free to poison the environment and work their employees to death without the red tape that limits their destructive creativity today.

On the other hand, Sharma himself can’t really face the return of full-on creative destruction. In a world where the state accounts for approximately 40% of economic activity worldwide, a return to balanced budgets would mean a catastrophe on the scale suggested by the initial moments of the Great Recession of 2008 and the pandemic-induced contraction of 2020. Instead, Sharma calls for “balance”; “the question now is how to get the balance right—between state regulation and individual freedom, growth and redistribution.” Ah, but there’s the rub: how to get the balance right. When you get it wrong, as just the other day in Bangladesh, the decision-makers might even be forced to flee the country in helicopters; in France the “reform” of pensions required police violence to quell nation-wide demonstrations. Unfortunately, Sharma provides no recipe for identifying the correct balance between state and private economy. Meanwhile, those who rule the world, so long as they have the choice, would rather be safe than sorry: this is why “policies that put political leaders firmly in charge of the economy have taken hold all over the world. India, Brazil, Malaysia, and many European capitals have all signed on. Leading the way is the United States, which for decades had spearheaded the campaign for open markets and hands-off government.”² Thus, despite its clear-eyed grasp of capitalism’s ongoing decline, Sharma’s book joins the long tradition of well-meant but ignored advice from political economists.