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A call to reform capitalism from a capitalist

Ray Dalio’s call to reform capitalism is high recommended. Dalio is the founder, co-Chief Investment Officer and co-Chairman of Bridgewater Associates, the world’s largest hedge fund. In his essay entitled Why and how capitalism needs to be reformed, Dalio writes:

Over these many years I have also seen capitalism evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots. This is creating widening income/wealth/opportunity gaps that pose existential threats to the United States because these gaps are bringing about damaging domestic and international conflicts and weakening America’s condition.

… Contrary to what populists of the left and populists of the right are saying, these unacceptable outcomes aren’t due to either a) evil rich people doing bad things to poor people or b) lazy poor people and bureaucratic inefficiencies, as much as they are due to how the capitalist system is now working.

I believe that all good things taken to an extreme become self-destructive and everything must evolve or die, and that these principles now apply to capitalism. While the pursuit of profit is usually an effective motivator
and resource allocator for creating productivity and for providing those who are productive with buying power, it is now producing a self-reinforcing feedback loop that widens the income/wealth/opportunity gap to the point that capitalism and the American Dream are in jeopardy.

That is because capitalism is now working in a way in which people and companies find it profitable to have policies and make technologies that lessen their people costs, which lessens a large percentage of the population’s share of society’s resources. 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. We just saw this exemplified in the college admissions cheating scandal.

As a result of this dynamic, the system is producing self-reinforcing spirals up for the haves and down for the have-nots, which are leading to harmful excesses at the top and harmful deprivations at the bottom.

Dalio starts with a defense of capitalism as the economic system that best raises living standards. But then details that today’s capitalism in not working for way too many Americans.

Dalio divides households into the top 40 percent and the bottom 60 percent and presents chart after chart on economic well being and education attainment that shows over the last several decades that the top 40 percent are doing well and the bottom 60 percent are not. These charts are quite similar to those in Robert Putnam’s Our Kids: The American Dream in Crisis which divides households between those in the top quartile and those in the bottom three quartiles.

So what is most surprising––and important––about Dalio’s analysis of today’s American economy is not the data that those at the top are doing far better than the rest of American households, it is who is writing the analysis. That the founder of the world’s largest hedge fund is making the case to reform capitalism signals that we should not be debating whether the American economy is working for all––it clearly is not––but rather how we reform capitalism so it is working for all.

What is needed most now is a bi-partisan agreement––in both Washington and Lansing––that the mission of economic policy is a rising household income for all. How to achieve that mission should now be the focus of the economic policy debate.

You can find Michigan Future’s ideas on how to reform capitalism so that the economy is working for all here.

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Lou Glazer

Lou Glazer is President and co-founder of Michigan Future, Inc., a non-partisan, non-profit organization. Michigan Future’s mission is to be a source of new ideas on how Michigan can succeed as a world class community in a knowledge-driven economy. Its work is funded by Michigan foundations.

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