What went wrong with Capitalism, asks Ruchir Sharma in his brilliant new book. Quite a lot, but also not much. How can both these positions be true at the same time? It all comes down to what do we mean by ‘wrong’ and by ‘capitalism’. The title may be misleading, in fact, as it could suggest that Sharma sees something wrong with capitalism as a ‘system’, but the opposite is true: he thinks capitalism is the best system to deliver prosperity and flourishing. However, he argues that what we have now is a deeply flawed version of capitalism, one that has been corrupted by easy money and government interference. The book, which is well written, well researched, and well argued (though surprisingly it lacks charts and tables, which would help better understand the data), takes readers on a journey through decades of government intervention in the market – whether by monetary, fiscal, or regulatory authority. It explores in detail, though without being too technical, the various ways in which capitalism and free markets have been burdened or misshaped over the years, starting in the 19th century and ending with the responses to the Great Financial Crisis in 2008 and the COVID-19 pandemic.

The basic premise is that “there never was a golden age,” and so there never was a perfect capitalism or fully free market, but only various gradations. As a general statement, this seems pretty obvious, but Sharma takes us through the various degrees of “imperfect” capitalism, showing how over time, the role of government authorities has pretty much gone only in one direction: more of it, sometimes faster, as during the New Deal period, and sometimes slowly, as during the Reagan/Thatcher era.

In fact, Sharma makes an extremely important point that even under Ronald Reagan, the state was not in full retreat: Reagan borrowed massively to fund a defence spending boom, which would eventually hasten the collapse of the Soviet Union. Whilst Reagan remains the president who added less regulation and increased the size of government to a lesser extent than any of his successors (or most of his predecessors), Reagan’s administration also departed from the small government agenda in the role that government and central banks began to take in the 1980s, particularly with regard to the ‘bailout culture’. What started in the 1970s accelerated in the 1980s and never slowed down, even when productivity and growth were high in the heyday of liberalization in the 1990s. And after 2008, the floodgates properly opened.

The impacts of intervention and market distortion are widespread and manifest themselves in three main areas: the nature of competition – for example through the rise of ‘zombie’ companies [essentially unprofitable enterprises sustained by either public money, subsidy, regulation or debt] and the emergence of oligopolies and monopolies; the dynamism of the economy – showed by the fall in productivity across most of the advanced economies (because of misallocation of capital, resources, and the rewarding of ‘failure’); and the distribution of opportunities – through the increase in inequality. Whether we think inequality has been as significant as the most aggressive detractors say or only limited as the most recent evidence suggests, the cause of it, in his view, is less about technology or education (though those are clearly at play) and more related to the dynamics set in motion by easy money and easy debt, which tend to favour asset owners, incumbents, and large companies.

The book feels like reading a Greek tragedy at times: many of the players in the drama are well-intentioned and believe that what they are doing will benefit consumers, but since they operate with only limited information and often don’t fully see the unintended consequences of their actions, they end up hurting the people they are trying to help. The book is also a call for moderation and pragmatism. While the ‘deformation’ of capitalism may be guilty of some of the excesses we see in certain trends, Sharma argues, some level of inequality is necessary and healthy; some monopolies can be good sometimes; and dynamism and productivity are driven by cycles, technology, and sometimes differences in culture and consumer preferences. However, the current version of capitalism, which pushes towards concentration, oligopolies, and bad monopolies, has driven these trends to the extreme and generated a populist response that may not be the best cure. In fact, it may be in danger of using the same faulty medicine: more government intervention and thus more debt.

A culture of debt and bailouts is in fact probably the biggest villain in the book. On that, Sharma aligns with Edward Chancellor, author of another fascinating and insightful book ‘The Price of Time’, and Claudio Borio at the Bank for International Settlement. Low rates, quantitative easing, and banking and corporate bailouts have sapped dynamism, led to misallocation of capital and investment, and ultimately undermined the most powerful and positive aspect of capitalism and free markets: the flow of information delivered though the price mechanism which enables the allocation of resources where they are needed in response to constantly changing consumer needs, both material and immaterial. In this sense, we can detect a tinge of ‘Hayekianism’ and Austrian principles in Sharma’s critique.

Is there any light at the end of the tunnel? Sharma points to some good examples: Switzerland, Taiwan, Vietnam, and Sweden’s reaction to the early 1990s crisis. All these examples show efficiency in the use of the state and a degree of pragmatism, but most importantly, an understanding of what can help growth as the ultimate engine of prosperity. Ultimately, it seems that the main failure of “modern capitalists” is less about economic theory per se and more about its application and, more importantly, it is a “moral” failure. In Sharma’s own words: “American faith in the capacity of its citizens to endure any pain has given way to an impulse to grab for the public purse at the first sign of difficulty. A true capitalism of the twenty-first century would require leaders who acknowledge at least the main excesses of recent decades and aim to restore some sense of balance. They would rediscover humility and disavow the now oft-repeated claim that ‘we,’ the economic authorities, have learned how to control the ebb and flow of the business cycle. They are digging this hole deeper, magnifying the global economic slowdown by contributing mightily—through their constant interventions—to the collapse in productivity.” The solution, it seems, is to accept we cannot fully control the economy or society, be humble about what we can and cannot achieve, and resist the temptation to manipulate markets and twist the capitalist system further.