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In his tour de force What Went Wrong with Capitalism, Ruchir Sharma, Financial Times columnist, author, and current head of international business at Rockefeller Capital Management exposes the extent to which he believes capitalism has been distorted in the United States over decades, smothering what the economist Joseph Schumpeter refers to as ‘creative destruction’ by an ever expanding, and excessively regulatory government.
At what cost? “After the first two years under Biden,” Sharma writes, “new regulations added an annual average of around $160 billion in economic cost and 110 million hours of paperwork for impacted businesses as well as state and local governments”, far more than under his predecessor Donald Trump.
Then there is the growing power — with lack of accountability — of the world’s premier financial institution, the US Federal Reserve or Fed.
After the 2008 financial crisis, Sharma explains, the “Fed began buying from a wide array of sellers including hedge funds, private equity firms, and other shadow banks. This suddenly expanded the pool of sellers made it possible for the Fed to create billions more dollars per keystroke.”
Fed’s handouts
The Fed’s machinations have led to increasing availability of easy credit leading to handouts, and the financial infusions that went into propping up zombie companies and more so, rescuing large corporations from sure liquidation “since they were too big to fail.”
This, Sharma tells us, is almost entrenched policy since the 1984 rescue of flailing Continental Illinois at taxpayers’ expense of $11 billion to the 2023 insuring of depositors’ funds in the Silicon Valley Bank to the tune of billions. The profligacy of successive Presidents most recently Trump and Biden only added to America’s problems. Sharma finds little to cheer about America’s current vertiginous economic performance.
Debt overhang
That the country’s economic growth is outstripping those of the EU or China while its unemployment stands at a low 4 per cent needs to be tempered by the fact that its budget deficit is closing in on $2 trillion in 2024 and the overall debt of America tops its world-beating GDP.
Sharma’s book has none of the cautious optimism exuded by Raghuram Rajan in his 2003 co-authored work Saving Capitalism from Capitalists that the fairness of the marketplace could be restored or that the “power of narrow interests,” can be checked.
The financial system in the United States — the country whose actions most influence the world — is so shot out that it cannot fulfil, what Martin Wolf in his 2023 book, The Crisis of Democratic Capitalism states are the four positive aims of economic policy — ‘security, opportunity, prosperity, and dignity.’
In Sharma’s gloomy understanding, in the evolution of the financial system in the United States and elsewhere “Governments and central banks face few objections, indeed they are encouraged by opinion makers, to meddle: to force faster growth by injecting rivers of dollars into the economy, to divert capital flows through a concrete latticework of regulation, to nurture even zombies and other invasive species through bailouts.”
American hangover
If America does not correct itself soon, it spells trouble for the rest of the world. As a recent issue of the Economist observed, “The more the world depends on American dynamism and faith in the dollar, the greater the damage political dysfunction and reckless fiscal policy in Washington could eventually inflict.”
Sharma’s book loaded with centuries of global financial history and data, amply illustrate that there are unmissable parallels in the past to what is happening today.
While his book is mostly about the state of American capitalism it does touch upon the Chinese and European variants including the massive 2010 Greek bailout.
Having said that, he should know better than to state that “capitalism is still humanity’s best hope for economic and social progress, but only if it is free to work.”
In history, capitalism has delivered despite being constrained and compromised, not the least by the slave trade, colonialism, and innumerable wars. One passing statement of Sharma’s appearing early in his book, that “many democracies have grown much richer than India. It is India’s lingering attachment to a state that overpromises and under-delivers”, deserves to be contested.
If one looks at India’s post-independence history its success in keeping itself together and progressing in impossible conditions is unmatched in human history. But one must, for this review, let that pass!
What Went Wrong with Capitalism is a wonderfully illuminating book, written with a historian’s eye, a Paul Samuelson’s lucidity combined with the immediacy of an intrepid correspondent’s despatches from the frontlines of American finance.
It is where the action is, making Sharma’s book an essential read.
The reviewer taught public policy and contemporary history at IISc. Bengaluru.
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