What went wrong with capitalism
Ruchir Sharma
Allen Lane
Rs.999
Pages 368
An enlightening narrative of how far USA has strayed from the basic principles of capitalism. It also highlights capitalism success stories abroad
New York-based Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management for 25 years until 2022 when he founded Breakout Capital, a global investment firm, is one of few economists worldwide who writes readable books.
Sharma is refreshingly readable because he routinely advises governments and publics of emerging third world economies to jettison fine-sounding communist/socialist ideology and adapt and practice enlightened capitalism, which he believes offers the best prescription for growing the wealth of nations in the 21st century. In this cause he has done signal service by writing several comprehensible books (all reviewed in EW see educationworld.in archives) including Breakout Nations (2012), Rise and Fall of Nations (2016), Democracy of the Road (2019) and 10 Rules for Successful Nations (2020).
In his latest oeuvre, Sharma, an alum of the Shri Ram College of Commerce, Delhi who began his career as a correspondent of the Economic Times before he was recruited into the Mumbai office of Morgan Stanley, examines what’s gone wrong with capitalism in the US, the fons et origo of capitalism aka free markets ideology, which in the 19th and 20th centuries powered its rise to the world’s richest, most inventive and militarily dominant nation. Fortunately, as is his wont, Sharma doesn’t restrict himself to analysing the crisis of capitalism in the US and West, he also highlights the success stories of countries world over that have benefited from following best practices of free markets ideology.
Sharma experienced an epiphany in 1991, “the darkest year in post-independence India’s history” when the country was “on the verge of defaulting on its foreign debts” and Union finance minister Dr. Manmohan Singh presented the Congress government’s historic economic liberalization and industry deregulation budget. Although at the time Sharma was employed with a “leading financial paper” Manmohan Singh and his “Oxbridge and Ivy League team” became his heroes.
Evidently, history agnostic Sharma is unaware that for over half a century Dr. Singh was an architect of socialist licence-permit-quota raj which had reduced India to its “darkest hour”. Nor or does he remember that Business India and BusinessWorld edited by this reviewer prepared the ground for liberalisation by routinely trashing licence-permit raj long before Dr. Manmohan’s awakening.
Be that as it may, this volume is an informed narrative of how far America has strayed from the basic principles of capitalism, the prime cause of its current problems and downward glide.
According to Sharma, America has been debilitated by too much government spending, easy money policies and welfarism financed by massive fiscal deficits which have become the rule in American politics and governance. With the Central Bank (Federal Reserve) lending to other banks at rock bottom interest rates, business, industry and investors, including private equity companies are on reckless spending sprees.
While the upside is that easy money and amazing risk-taking entrepreneurs have powered the rise of America’s globally-dominant, super-innovative megacorps such as Microsoft, Google and Facebook, soft capitalism has stalled “creative destruction” of outdated, unprofitable “zombie companies” kept alive by continuous debt rollovers. As a result, huge amounts of capital are locked up in zombie companies instead of being available for funding new innovative enterprises that would add to national wealth. Moreover, easy money prompts speculative investment in complex derivatives that triggered the sub-prime mortgages crisis of 2008, as also reckless speculation in stock markets.
Foolishly, despite being blessed with several millennia of private enterprise and banking traditions, after independence free India opted to take the socialist road to prosperity which has proved to be an arid dead-end, plunging the country into deep illiteracy and poverty.
The Central government’s 258 public sector enterprises (PSEs) and an equal number in the states, have proved to be a collective disaster, returning barely 1-2 percent on vast capital poured into them. Worse, in 1969, all major banks were nationalized. Managed by over-promoted, risk-averse clerks innocent of project and entrepreneur appraisal skills, they dried up credit to private MSMEs (micro, small and medium enterprises), opting to fund PSEs instead. The outcome was disastrous. Annual GDP growth rate stagnated at 3.5 percent for over 40 years and hundreds of millions of free India’s citizens were plunged into poverty.
Paradoxically, as Sharma recounts in this engaging book, communist countries have emerged as the best practitioners of capitalism. In 1978, Secretary-General Deng Xiaoping abandoned state control of private enterprises in China. For the next 30 years China’s GDP growth averaged 10 percent per year (cf. India’s 3.5 percent). Today China boasts the world’s second highest GDP ($18.5 trillion) and has transformed into the world’s manufacturing hub.
Another communist country that successfully practices intelligent capitalism is Vietnam which has quickly bounced backed from the devastation visited upon it by the US during a long war (1965-74). Between 1989 and 2016 it privatized 11,400 government enterprises, steadily reduced its fiscal deficit, invested heavily in logistics and education, and is poised to emerge as the new miracle economy of East Asia, prophesies Sharma.
Thankfully, Sharma also takes on the usual cop-out argument that China and Vietnam are communist dictatorships, therefore successful. In Europe he identifies supra democratic Switzerland as a country which has practiced classic capitalism to emerge as the wealthiest nation worldwide. Ditto democratic Taiwan in Asia.
With What Went Wrong with Capitalism, Ruchir Sharma enhances his growing reputation as a popular economist, and makes a strong case for developing countries to reduce government spending to control inflation and take the capitalist road to fulfill the material and moral aspirations of their suffering publics.
Dilip Thakore
