A friend sent me this article and I found it to be a really good summary of what is wrong with capitalism in the United States and in an increasing extent the rest of the world. However, its proposed solutions don’t completely address the problem. This isn’t surprising as the intrinsic problems with capitalism as a system aren’t easy to solve for.
The author is Raymond Dalio. According to Wikipedia, he “is an American billionaire investor, hedge fund manager, and philanthropist.” He has pledged to give half of his total wealth away to charity, in line with a pledge from Bill Gates. While philanthropy is a good thing, I can’t help but feel that only a billionaire’s pet charities will see any money. For example, he has directed millions of dollars towards the promotion of and research on Transcendental Meditation. He has also directed money other worthy charities but it seems to me that money going to the public good, especially such large sums, should be directed by the public rather than by private entities. This is an aside to the main article but it’s helpful to get a measure of the person writing the article. He does seem to have his heart in the right place but suffers from the same issues that all excessively wealthy people are prone to. He understands poverty, at least at a high level, but proposes solutions that arent terribly concrete and rely heavily on the private sector to do the right thing. I’m not sure any one person is going to come up with an all-encompasing solution to wealth inequality so while I have some criticisms of his solutions, he does a good job of starting the conversation on solutions. The main issues with his proposed solutions are that he doesn’t give enough details around them, and that he feels the status quo political apparatus will just roll over and allow the majority of their constiuents to have a say in how things are done. Thus, his article comes off a little naive and thin on details.
In general, his article is well-researched (at least from the perspective of defining the problems with capitalism as it is currently) and he provides an exhaustive list of references. Mr Dalio divides his article into two logical sections. He first outlines the problems he sees and then proposes his solutions in a following section. I will, in turn, look at each section and provide my thoughts (for what they are worth…) on them each.
In his article, he states “The problem is that capitalists typically don’t know how to divide the pie well and socialists typically don’t know how to grow it well.” In general, one can’t argue with his statement too much. Captialists can’t divide the pie well because capitalism, unchecked as it is in the US, works in a way in which people and companies find it profitable to follow a strategy of reducing their people costs, generally the highest cost item for a company. This, in Mr Dalio’s words, “lessens a large percentage of the population’s share of society’s resources.” Martin Ford’s “The Lights in the Tunnel” looks at the consequences of this trend towards automation and the lessening of labour costs. While Mr Ford proposes the concept of Universal Basic Income as a solution to this inevitable automation and of the consequent job losses, this concept is notably absent from Mr. Dalio’s article. Another interesting side effect of this automation, is what is outlined in David Graeber’s “Bullshit Jobs: A Theory”. With many of the meaningful jobs in the market being automated or underpaid/undervalued, there is a proliferation of meaningless “make-work” jobs in the market. Mr Graeber thinks that this is a method of controlling dissent in the general population by keeping them “busy”. You can make of that what you will. I question the idea that “socialists typically don’t know how to grow [the economic pie] well.” (though the author does use the word “typically”). There are plenty of examples of “mixed economy” countries that have much less issues with income disparity. However, the trend in these countries in the highest economic group (Level 4 – see the Gapminder site for more information about economic levels as defined by the UN) is towards more concentration of wealth in the hands of a few. The US is just the most glaring example. Therefore, his statement has some merit.
Mr Dalio goes on to state, “Those companies and people who are richer have greater buying power, which motivates those who seek profit to shift their resources to produce what the haves want relative to what the have-nots want, which includes fundamentally required things like good care and education for the have-not children.” Ultimately this motivation is self-limiting, as there aren’t enough rich people in numbers to purchase all the “stuff” goods and services that the companies in question need to profit. This is discussed at length in “The Lights in the Tunnel”
Proponents of naked capitalism hold forth that an increase the value of companies should, in theory, should cause them to create more opportunities for everyone to earn more and buy more. However, this idea of “trickle-down” economics has been shown not to work as wages for the working class (e.g. the 99%) have been stagnant since the 70s, as stated by the author and supported by economic data. Of course, most of the financial wealth generated by the rich 1% is generated through financial instruments that are increasingly not available in a meaningful way to those who aren’t wealthy. This is stated by the author in his analysis.
As mentioned previously, Mr Dalio does a good job of outlining the problems with capitalism, as he sees it, and it is difficult to argue with his main points. His solutions, however, have more room for criticism.
Mr Dalio proposes that society makes investments in projects that produce “double bottom line” returns. He defines these as investments that produce both good social returns and good economic returns. The examples the author provides make a lot of sense. He first proposes Education as an investment, stating that, “Early childhood education programs that produce returns of about 10-15% annualized in the form of cost savings for the government when one accounts for the lifetime benefits for the students and society. That is because they lead to better school performance, higher earnings, and lower odds of committing crimes, all of which have direct economic benefits for society.” The evidence of the benefit of investment here is quite clear which is likely why this is his first example. A second example of a “double bottom line” investment he gives is Infrastructure. Based on 33 studies, he notes that “smart infrastructure programs” have a “10-20% rate of return in terms of increased economic activity”. He goes one to state that infrastructure projects are good things for the government to borrow money for based on their solid economic benefit. Finally, Mr Dalio proposes Public Health as a good investment target. He quotes 52 studies that looked the return on investment of preventative health programs, like vaccines and smoking cessation, and found that they created “$14 of benefit for every $1 of cost”. All these types of programs are compelling examples of good public investment. There is a little more one needs to say about it.
Mr Dalio then moves to a more problematic proposal. He states that there needs to be “leadership from the top”. Yes, this is, of course, very true but this statement amounts to saying something along the lines of “we should be nicer to people” or “we should stop being so damned selfish”. The validity of the statement is self-evident but it is, in reality, nearly impossible to achieve. All three high-ROI examples given earlier are the exact three areas that are being cut by populist right-wing governments. With democratic electoral systems either compromised, deeply flawed, or outright broken, it is next to impossible to get any accountability from a government or any fresh ideas into office. In a recent local (for me) example, a conservative party that ran on a populist platform, won a “majority” mandate on a vote where only around 57% of the population deigned to cast a ballot (we don’t have mandatory voting laws and the vote happens on a weekday when everyone has to rush home from work and reach the polls before they close). This majority came from achieving 40.50% of the popular vote (or 23% of the total population), which translated into 76 seats of a total of 124 available (around 61% of the seats). They have gone on to make a number of unpopular changes including large cuts to public health funding which is opposed by the majority of the population. Governments are formed without real accountability so they pursue whatever ideological agenda they want with little fear of backlash from the voting public. Until there is real accountability of our elected officials, there will be little real leadership from them.
As a follow-on point, the author proposes to bring together some sort of policy group made up of people from “different communities” with the mandate to “reengineer the system to simultaneously divide and increase the economic pie better.” The people are there and ready to be engaged but the political will is not there and politicians in general are very compromised by wealthy donors interested in maintaining the status quo. Mr Dalio want to have “clear metrics” to judge success and hold the people in this policy group accountable to achieve this success. It’s hard to argue with his idea but implementing it in practice is going to be very diffcult. Again, the statistics have been available for years but no-one in politics is looking at them and the masses, unfortunately, buy into policies that are not in their best interest. It’s going to be a monumental task to get anything like this off the ground and have not be subverted by those already in power.
Mr Dalio then speaks about a very high-level concept: “Redistribution of resources that will improve both the well-beings and the productivities of the vast majority of people.” Well, of course it will! This requires the 1% to give up some of their wealth in the form of taxes so it will be more fairly distributed. Does anyone see this as happening? Is there any way to do this that doesn’t involve something akin to the Russian Revolution? Again, Mr Dalio makes a statement that most everyone will agree with but then doesn’t give any inkling as to how one gets to that lofty goal.
The author now moves to something more practical to try but also potentially problematic: Private-Public Partnerships (P3s). Mr Dalio proposes that various stakeholders including governments, philanthropists, and private companies would, “jointly vet and invest in double bottom line projects that would be judged on the basis of their social and economic performance results relative to clear metrics.” Great care needs to be taken with engaging in P3s. They need to be very strictly monitored in order for the public good to be kept as the central motivation. A good overview of the concerns with P3s is covered by the Canadian Centre for Policy Alternatives in their article “The Problem with Public-Private Partnerships“. These projects are often more expensive than just running the project in the public domain with the same outcome. The money put in the project by the public partner may be used to increase the profitability of private partner rather than improve the quality of the end result. The public partner, not wanting the project to fail, will be compelled to continue to sink money into the P3 project to avoid political fallout. Thus, profit is often taken by the private partner while the risk is assumed by the public one. A fairly big example with global ramifications in relatively recent history are the bailouts of the 2008 financial crisis. Joseph Stiglitz, Nobel-Prize winning economist, has described these bailouts as a “new form of public-private partnership, one in which the public shoulders all the risk, and the private sector gets all the profit.” The author states that these P3s “…would be judged on the basis of their social and economic performance results relative to clear metrics.” though this is a vague statement that is easy to agree with but lacking in detail. Mr Dalio also says the funding and quality such projects would increase, “because people who have to put their own money on the line would be responsible for them.” This statement seems to only justify the concerns sited about P3 projects.
Mr Dalio does touch on the subject of taxation, which is central to the whole issue of wealth inequality. Since “Reaganomics”, taxes have been cut and cut again, disproportionally helping the rich while starving programs in the public interest. If re-engineering of the capitalist system needs to occur, one could do worse than starting with a close examination of taxation. Mr Dalio proposes to “tax pollution” (without any details on how to do this) and other “causes of bad health that have sizable economic costs for the society”. Basically, he’s calling for so-called “sin taxes” on gambling, alcohol, cigarettes, and now marijuana in certain jurisdictions. Contrary to what is often thought, a recent study published in The Lancet supports the fact that sin taxes actually do improve public health outcomes and don’t disproportionally hurt the poor. The study states that are especially effective when the revenue is directed to support public health programs, which Mr Dalio shows in his article creates “$14 of benefit for every $1 of cost”.
Unfortunately, he is less concrete in some of his other proposals for solutions. He wants to raise “money in ways that both improve conditions and improve the economy’s productivity by taking into consideration the all-in costs for the society”. In addition he states that we should raise “more from the top via taxes that would be engineered to not have disruptive effects on productivity and that would be earmarked to help those in the middle and the bottom primarily in ways that also improve the economy’s overall level of productivity, so that the spending on these programs is largely paid for by the cost savings and income improvements that they create.” This is a lot of hand-waving without a lot of concrete steps outlining what should be done. Again, Mr Dalio makes statements that one can agree with but they are so high-level and lacking in details that they are essentially without value.
In conclusion, this article does a very good job of outlining the problems with capitalism, especially as it is found in the United States. His statements are well-supported by references to literature. However, his solutions are more varied in their value. They range from well-supported to vague statements without detail. This isn’t surprising; solutions to the ingrained inequality found in current economic systems aren’t going to be easy to achieve even if they are well-defined. Mr Dalio does well in highlighting the problems with capitalism but needs to go further to flesh out his proposed solutions.
- “Why and How Capitalism Needs to Be Reformed (Parts 1 & 2)” – Original article on LinkedIn
- Ray Dalio (LinkedIn profile)
- Ray Dalio (Wikipedia)
- Principles by Ray Dalio (“personal” website)
- “The Lights in the Tunnel” by Martin Ford
- Basic Income (Wikipedia)
- Bullshit Jobs: A Theory by David Graeber
- Factfulness: Ten Reasons We’re Wrong About the World… by Hans Rosling, et al
- The Gapminder site – a wealth of useful statistics
- Canadian Centre for Policy Alternatives – “an independent, non-partisan research institute concerned with issues of social, economic and environmental justice” (quote from their site)
- Joseph Stiglitz (Wikipedia)
- Reaganomics (Wikipedia)
- The Lancet Taskforce on NCDs and economics
- “Sin taxes work and don’t disproportionately harm the poor, study says” (Global News)