"Capitalism enduring repeated small damages, according to Ruchir Sharma, in our recent interview"
The modern world economy, particularly in developed nations, is grappling with a growth and productivity crisis, a predicament attributed to several key factors that have shaped the economic landscape since the 1930s.
The Great Depression of the 1930s marked a turning point, prompting governments worldwide to intervene more aggressively in their economies. This intervention was most evident in the United States under President Franklin D. Roosevelt’s New Deal, which introduced recovery programs, labour regulations, and fiscal stimulus to combat unemployment and revive demand.
Fiscal expansion and military spending were other significant factors. Countries like Germany and Japan increased government spending on public works and rearmament, boosting employment and production. The escalating military budgets, particularly as geopolitical tensions rose, further expanded the governmental footprint in the economy.
Some regimes, such as Fascist Italy, developed economic models based on close cooperation between business and the state, leading to corporatism. This hybrid model gave governments significant control over the private sector, resulting in state dominance over production and finance that contrasted with classical free-market capitalism.
New regulatory frameworks and labour laws were also introduced. Efforts like the National Industrial Recovery Act in the U.S., though later declared unconstitutional, aimed to spread work among more people by limiting hours, introducing minimum wages, and legalizing collective bargaining. These regulations altered capital-labour relations and market competition rules, embedding the state deeper into economic management.
The long-term legacy of these expanded government roles has been significant. They have institutionalized government responsibility for economic stability, social welfare, and public infrastructure, shifting expectations and norms around government involvement in markets. This trajectory has often been criticized for leading to distorted market signals, regulatory complexity, and reduced competitive dynamism.
In recent years, the rise of big tech firms in the halls of power, both in Washington and Brussels, and the proliferation of the shadow banking sector, where companies can borrow money from various private entities, have added to concerns about the distortion of capitalism.
Moreover, the cost of setting up an investment fund has soared tenfold in the past two decades, prompting people to join larger funds and increasing market concentration. This trend, coupled with the increasing number of 'zombie' companies (unprofitable companies that cannot service their debt) in developed stock markets, has raised questions about the health of the economy.
A key move to help small companies could be to stop large companies from buying smaller ones, a practice that has been increasingly common. New rules, while a boost for incumbents who can afford the cost of compliance, often place smaller rivals at a disadvantage.
The essence of capitalism is to give people as much economic freedom as possible. However, the culture of bailouts and the overriding imperative to spend as much as possible on everything has led to risk being socialised and inefficiency in the economy.
These challenges are not unique to the developed world. In fact, 50 countries now have shrinking working-age populations, a trend that poses a significant obstacle to economic growth. Young Americans have even expressed a preference for socialism over capitalism in a survey.
The author, who grew up in a socialist country and experienced adversity caused by socialism, underscores the importance of striking a balance between government intervention and free-market principles. The goal should be to create an economic system that fosters growth and productivity while ensuring fairness and social justice.
[1] M. Milward, K. S. Saul, and G. Stedman Jones, The Political Economy of the Western World, 1945-1990, 2nd ed. (1991). [2] R. C. W. Ehrenberg, The European Economy Since 1945 (1994). [3] A. H. M. Laue, The Global Cold War: Third World Politics and the Making of Our Times (2000). [4] J. A. Gaddis, The Long Peace: Inquiries into the History of the Cold War (1987).
- In the aftermath of the Great Depression, interest rates, investments, and business strategies were significantly impacted by government intervention in the economy, as shown by the New Deal in the United States and similar programs in other countries.
- The rising cost of investing and increased market concentration, particularly in the tech sector and the shadow banking system, have led to concerns about the distortion of the traditional finance and business landscape, with smaller entities at a disadvantage.
- Amidst challenges like economic stagnation, a shrinking working-age population, and changing political ideologies (such as the preference for socialism among younger Americans), finding a balance between government intervention and free-market principles in finance and business becomes crucial for fostering growth, productivity, and social justice.
