Ruchir Sharma’s analysis of capitalism’s flaws overlooks political solutions

While Sharma’s economic diagnosis is sharp, he misses the mark by ignoring the political dimensions necessary to resolve capitalism’s global crisis.

October 1929: Traders rushing in Wall Street as the New York Stock Exchange crashed, sparking a run on banks that spread across the country. October 1929 was the beginning of the 1929 Stock Market Crash. | Photo Credit: AFP

The title of Ruchir Sharma’s book seems to indicate that there was a time when all was right with capitalism, or at least most things were. He scotched that expectation in an early chapter, which declares that “there was no golden age”. In popular perception, the US is the home of capitalism, the acme of its perfection. In Sharma’s telling, the US is a case study of all that is wrong.

So where in the wide geography of the globe do we have capitalism going the right way? In his penultimate chapter, Sharma accords Switzerland top honours as a capitalist economy that works. Shifting his sights a little, Sharma finds two Scandinavian countries, Sweden and Denmark, often described as exemplars of socialist virtue in the US political milieu but driven in reality by core capitalist principles.

Taiwan is another country that has followed unshakeable capitalist principles to emerge as the “indispensable economy”, with its prowess in semiconductor technology. And while disdaining the China example, Sharma honours Vietnam for its pursuit of a distinct model, without quite explaining how it differs..

What Went Wrong With Capitalism

By Ruchir Sharma

Allen Lane, 2024

Pages: 353 + xvi

Price: Rs. 999

These are tiny glimmers of light where the fundamentals have not been lost. In the larger view, the system today is in a perilous state, with social consent fraying. This reality is manifest in youth protests over “widening inequality, dominant monopolies, [and] big corporate bailouts”. While accurate, Sharma sees these perceptions leading to wrong prescriptions, of a tight embrace of an imagined Scandinavian model of welfare socialism.

In his quest for the right diagnosis, Sharma looks back longingly to a time when governments were small, an era that “ended in the United States with the Depression” of the 1930s. Since then, governments have played a “more active role in allocating capital… whether by rescuing and regulating, or spending and borrowing”. From the 1970s, most of the advanced capitalist economies “began running significant deficits”, in excess of a percentage point of the GDP.

Deficits mean cheap money, which leads to a loss of discernment. If economic agents cannot tell between a smart application of capital and its opposite, bankruptcy will be a constant threat, creating, in turn, the political compulsion to cheapen money further. There is a cumulative logic here that leads to financial meltdown, with politically hazardous consequences. Governments trapped in the cycle have no recourse except digging in deeper with progressively larger bailouts.

Research has established that many of the banes of modern capitalism are on account of cheap money. Growing monopolies in most sectors and the extinction of small businesses are, counter-intuitively, a consequence of cheap money. And so too are the rising gaps in income and wealth between the top 1 per cent and the rest, particularly the virtual stagnation since the 1970s in the economic fortunes of the bottom 50 per cent.

What Went Wrong with Capitalism by Ruchir Sharma | Photo Credit: By Special Arrangement

In 2022 and 2023, a series of landmark histories of capitalism hit bestseller lists, all “grand narratives” united by the proposition that big government rose through successive decades from the Second World War, before falling back in the 1980s under the aggressive market fundamentalists Ronald Reagan in the US and Margaret Thatcher in the UK. Sharma finds this analysis inaccurate since the 1980s was a time when the US federal budget broke all bounds of prudence: an outcome of the trifecta of high interest rates, huge tax cuts, and a massive increase in military spending. It was a policy mix that confounded common sense but was an ideological commitment of the Reagan administration.

Since then, the US has stayed consistently in deficit, except briefly towards the late 1990s under Bill Clinton’s presidency. That gain, though, was quickly squandered by Clinton’s successor, George W. Bush, and his obsessive <FZ,2,0,31>belief that tax cuts were the way out of every economic quandary. There is an aspect of this time, germane to the story he tells, that Sharma seems indifferent to. The late 1990s was a time of euphoric growth in the US, and the federal budget was buoyed by windfall receipts of capital gains taxes. In aggregate terms, the US remained in deficit: corporate and household debt rose to record levels at the cusp between the Clinton and Bush presidential terms.

In 2004, the economics Nobel laureate Joseph Stiglitz published The Roaring Nineties, a history of what he called the world’s most prosperous decade, while pointing out inbuilt “seeds of destruction”. In 2010, Raghuram Rajan, Chicago University economist and a one-time Governor of the RBI, published Fault Lines, another sceptical take warning of “hidden fractures” in the world economy. The hazards were clear: the manic pace of financial deregulation, the dizzying rise of senior executive compensation, and government inactivity were pushing the global economy towards a harsh reckoning. Papering over the worst inequities by allowing increasing access to consumer debt was a strategy bound to end badly.

Sharma thinks that capitalism is the “economic soulmate of democracy” since every wealthy, developed economy (with the possible exception of Singapore) is also a “fully formed democracy”. But how do governments function within the capitalist order to promote the ends of growth and social stability? Sharma lauds Adam Smith and John Stuart Mill as the “original apostles of small government and free market capitalism” but misses the obvious point that neither lived or wrote within a democracy.

Smith looked at the distributive bargain that capitalism functioned under and fretted that the working class would invariably be left with the short end of the stick. He finally fell back upon the metaphysical conception of an “invisible hand” that would compose all conflicting interests and create a capitalist harmony.

Mill did not depend upon an unseen providence but saw the processes of liberal democracy—universal franchise and workers’ rights of association—as a sufficient assurance of distributive justice. He wrote at a time when the franchise was a right enjoyed by a few propertied and privileged males, as it would remain for many decades afterwards. But he imagined a better time in the future.

While economic theory floundered in the 1930s Great Depression, John Maynard Keynes theorised about deficits as a way of maintaining economic and social stability. Deficits have since become a way of keeping the good times rolling while sustaining the immutable privileges of capitalism. Keynes may have provided practical means for economies to emerge out of rough times, but his formulae were seen by the Austrian economist Joseph Schumpeter as destructive of the soul of capitalism.

Sharma speaks nostalgically about Schumpeter, a philosopher of capitalism who celebrated its progress through successive “waves of creative destruction” while remaining blind to the reality that the extinction of large swathes of an economy could trigger political upheavals. The franchise in all advanced capitalist economies since at least the 1930s has included the vast working-class majority, and democracy was more than a shallow pretence. “Creative destruction” had to be managed through strategic state intervention or else would have meant ripping up democratic consensus.

The US deficits, which have mounted relentlessly since the 1980s, are a crisis for economic theory, which has been unable to explain why it has involved no costs. In the practical realm, the mounting US deficits are an exercise in the power of seigniorage, the privilege the country enjoys as owner of the global reserve currency, which enables it to issue debt instruments that the rest of the world could hold. That privilege, as Sharma recognises, is wearing thin because of the promiscuity with which the US has used the dollar as a strategic weapon. With all this knowledge though, Sharma fails to see that the global crisis of capitalism will not be resolved in a technocratic way but through political means. And those strategic and political manoeuvres are already under way.

Sukumar Muralidharan is an independent writer and researcher based in the Delhi region.