My Review of Ruchir Sharma's "What Went Wrong with Capitalism?"

Frightened of Risk

The essence of capitalism is risk taking, but over the past forty years or so both governments and the public at large are frightened of risk. With governments and central banks following a low or even zero interest rate policies and with the fiscal taps wide open at the sign of the slightest disturbance in the economy, capitalism no longer functions as it should, according to Ruchir Sharma, chair of Rockefeller Capital Management.

As a result, we now live in a world of zombie companies that should have purged in recessionary environments and because of very low interest rates we have the giant corporations swallowing the smaller and more dynamic businesses. Further instead of investing in new projects, the low interest rate environment encourages share buybacks and financial engineering at a time when the economy needs real engineering. As a result, the growth in productivity has collapsed.

Thus, in exchange for less volatility in the overall economy, real growth has slowed, and capital flowed into the financial markets. As Hyman Minsky noted many years ago, stability leads to instability, hence the crisis in 2008 and the crisis that likely lies ahead of us.

Sharma notes that over the past 40 plus years the growth of government has inexorably continues. Even under the Reagan and Thatcher regimes, governments continued to grow, taking an ever-larger share of the economy, and piling debts upon debts. Sharma argues the ball and chain of debt has been one of the reasons behind the tepid growth among the developed economies.

Sharma’s thesis made a great deal of sense up until 2022. Why? The zero-interest rate environment ended in 2023 with dramatic rate hikes in most of the developed world, and yet the economy did not mis a beat. Deficits remained extraordinarily high and the higher rates, save for parts of the real estate sector, have yet to see a surge in bankruptcies.  

Sharma would like to have us return to an era of a smaller state sector and a more relaxed policy towards recessions. Perhaps all good in theory, but the public would not stand for it. There is the rub!