Ruchir Sharma’s answer to the question posed in the title of his engaging book, What Went Wrong With Capitalism, is beguilingly simple: easy money. In the US, low interest rates made money cheap, and from this followed all the ills of capitalism. Low interest rates became the solution to every problem. Governments found it cheap to borrow. Except for a brief period under Bill Clinton, no government retrenched spending. So debt became a problem. The political choices in the US are tax cut and increased spending (Republicans) or tax and increased spending (Democrats). The Keynesian intuition that government spending should be counter-cyclical was replaced by a philosophy of a ‘permanent stimulus’.
Capital became ill-disciplined and grossly misallocated. The price of keeping zombie firms alive dropped. Reality-distorting valuations of unicorns became the norm. Cheap money created asset bubbles which fuelled deep inequality and capital concentration. Prices were distorted. Finance began to dominate the economy. Finance also distorted the moral compass: the best and brightest, instead of figuring out productivity-enhancing innovations, were now manipulating complex spreadsheets. Meanwhile, all these were being done in the name of the poor. Raising interest rates, they intoned, would hurt the poor. Never mind the fact that those without good credit scores still faced usury-like conditions on borrowing. Low inflation and price stability is generally a good thing. But no consideration was taken of the ways in which asset bubbles adversely affected the poor. Low interest rates became a civic religion; both the Right and the Left, with a few exceptions, jumped on the bandwagon of easy money.
It gets worse. Easy money produced the horror of horrors: socialism. This was not the socialism of the collectivisation of property, state ownership of means of production or equality. It was the creation of a society where all risk was socialised: you run a failed bank, no problem. The state will bail you out. You cannot compete on the labour market, there is welfare. Capitalism is meant to go through cycles — creative destruction and downturns that weed out the inefficient. But the promise of recession-proof economies meant that the Darwinian process of natural selection was stopped. We became infantile, insuring against every risk. And when you insure against every risk, an even worse horror follows — an overbearing regulatory state that has sapped American productivity. The successive chairs of the Federal Reserve that have ruled the world economy for the last 30 years: Alan Greenspan, Ben Bernanke, Janet Yellen and Jerome Powell are not the knights in shining armour. They are, instead, like the doctors who make us dependent on opioids — unable to cure the underlying disease, the addiction to easy money is wasting away the economy.
Sharma’s accessible and engaging book is now joining a growing chorus. Edward Chancellor’s The Price of Time: The Real Story of Interest (2022) made this case with immense depth and historical sophistication; Christopher Leonard’s The Lords of Easy Money (2022) told this story through the drama of central bankers. It is difficult to disagree with the central claim that the reign of easy money was immensely distorting. Sharma’s critique of the over-bureaucratised state rings true, and the risks of Bidenomics are well worth attending to. The lessons-to-be-drawn list is a bit odd: holding up Switzerland, Taiwan and Vietnam as economies to be emulated. There is a hint of a radical idea in the book that the US should get used to permanently slower growth, instead of pump-priming growth.
But you cannot help feel that the wonderful analytical insights of the book are also, perhaps unintentionally, in the service of ideological obfuscation. Sharma is too smart and self-aware a writer, so in parentheses a lot of other factors that have produced the crisis of capitalism are ticked off. But the tendency in the book is to overplay easy money at the expense of everything else. If you can blame the one central banker, it can let everyone in finance off the hook. The scandal was not the easy money, it was that those responsible for creating the banking crisis never bore the costs. Blaming the outcome on the Fed lets the entire structure of privilege — that so neatly tied the regulatory agencies, the economic profession, finance, and politics in one seamless whole — off the hook.
The book mentions but underplays the effect of lobbying, as the vast political science literature has demonstrated. The jeremiad against socialising risks is well-taken. But just as monetary policy became a blunt catch-all instrument, so has the critique of the welfare state.
A more honest appraisal of the permanent growth of the state would look at not just an aggregate size, but a deep dive into different forms of welfare. Or, take the three areas where the American economy produces distorted outcomes, housing, health and education that account for close to 40 per cent of GDP. Some of the distortions in this area have to do with easy money, but a lot with the political economy of interest groups. In fact, the one abiding lesson of the last three decades is that well-run capitalism needs immense nuance and not intellectual fads. The easy money thesis may also risk going from analytical insight to a fad, an easy explanation. As Billy Joel sang, “Easy money you say, I fool myself. But better me than being a fool for someone else.”
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First uploaded on: 22-06-2024 at 15:28 IST
