In 2022, philanthropic organizations the Hewlett Foundation and the Omidyar Network gave millions of dollars in grants to top universities to "reimagine capitalism." This reimagination is necessary, they said, because "for more than 40 years, neoliberalism has dominated economic and political debates, both in the U.S. and globally, with its free-market fundamentalism and growth-at-all-costs approach to economic and social policy."
In his book What Went Wrong with Capitalism, Ruchir Sharma essentially asks, "What in the world are you talking about?"
The past 40 years have not been characterized by small government, free markets, or pursuing economic growth at the expense of everything else. Since at least the 1930s, Sharma argues, government has only grown in one direction: bigger. And the consequences of that enlargement have been widespread discontent with a transmogrified low-growth capitalism that doesn’t permit the creative destruction that markets need to work well.
Sharma sounds like an Austrian-school economist when he talks about the business cycle, the expansions and recessions that chart the economy. Austrian-school theorists, such as F.A. Hayek, posited that easy money fuels malinvestment during expansions that crashes during recessions. The crashes, though unpleasant in many respects, have the positive effect of cleaning out the malinvestment and reallocating resources to better uses.
Sharma argues that the major economies of the world, the United States chief among them, have stopped permitting that cycle to play out. They have done so asymmetrically, by permitting the booms and forbidding the busts. Or at least, they protect people from facing consequences for malinvestment when the busts inevitably come.
Government steps in with bailouts for big firms and sometimes entire sectors that have failed. Government runs deficits in recessions and during expansions, always padding the economy with extra cash. Central banks held interest rates at historic lows for 15 years in the United States and the European Union and for 30 years in Japan, fueling asset-price inflation that supercharged the portfolios of the wealthiest and giving corporations an unlimited supply of cheap credit that could paper over just about any problem.
No part of that is free-market capitalism, and it is actually detrimental to capitalism. Sharma says that critics of capitalism such as Bernie Sanders are half-right, that the major economies of the world currently do have "socialism for the rich," but, Sharma writes, "My diagnosis of how it went wrong could not be more different." The problem was not shrinking government, but growing government.
During the purported 40 years of brutal neoliberalism, welfare spending has only increased. Government deficits, especially in this country, are largely caused by Social Security and health care programs. The COVID pandemic showed governments at their most interventionist, with left-wing and right-wing parties around the world showering residents with cash.
The regulatory burden has only increased. There have been specific instances of deregulation in certain industries (such as transportation in the United States) or privatization of public companies (such as British Steel, British Telecom, and Rolls-Royce in the U.K.). But the regulatory codes of all major economies have gotten longer and more nitpicky.
In many cases what is called "deregulation" is actually just different regulation. "In Margaret Thatcher’s ‘Big Bang’ reform of the British financial system in 1986, for example, the government opened the London Stock Exchange to outside owners and eliminated fixed commissions on stock sales, but also passed a new Financial Services Act creating a web of red tape," Sharma writes.
Decades of dirigisme has, predictably, resulted in slow economic growth throughout the developed world. Americans might not realize that since the United States is growing faster than other developed countries, and it has been for some time. Japan is the poster child for stagnation, but the U.K., France, Italy, and Spain have essentially been stagnant for 10 years or longer. Germany was in a recession before COVID hit and is in another one now.
Despite this long track record of bloated government and slow growth, academics have invented the field of "neoliberalism studies" to engage in the kind of reimagination that Hewlett and Omidyar are happy to fund. They think they are reimagining the future of capitalism, but they are really reimagining its history.
Every few years, left-wing economist Joseph Stiglitz declares the end of neoliberalism. He most recently did so in his book The Road to Freedom, self-righteously mocking Hayek with the title. As Phillip Magness pointed out in a 2019 article for the American Institute for Economic Research (which publishes my podcast, Econception), hegemonic neoliberalism is a fairytale.
The ideas of economists whose views are often described as "neoliberal," such as Ludwig von Mises and Milton Friedman, have been routinely ignored by governments, not implemented at scale. Mises viewed bureaucracy and markets as a binary choice; the proliferation of government agencies demonstrates that America has often chosen bureaucracy. Richard Nixon, the president with whom Friedman was closest, issued economy-wide wage-and-price controls, which, to put it lightly, is not what Chicago price theory would recommend.
"Their prescriptive approaches to economic policy—typically calling for a deeply constrained or rule-based form of economic intervention in Friedman’s case, and broad adherence to economic non-intervention in Mises’s framing—have been eschewed for politically entrenched alternatives that favor proactive government intrusions into most economic matters," Magness wrote.
Though this style of criticism of free markets and support for government intervention perhaps comes more naturally to the political left, some on the political right also believe in the fairytale of neoliberal hegemony. As Samuel Gregg wrote for National Review in 2022, the right looks to blame social isolation, the breakdown of the family, and "deaths of despair" on neoliberalism.
"At this point, you start to realize that neoliberalism operates as a catch-all phrase for the Left—and now parts of the Right—to describe everything that they think is wrong with the world in general and America in particular," Gregg wrote. Never mind that it never existed.
Sharma’s is one book striking back against this prevailing narrative, but it is heavily outnumbered. I have reviewed one of the books on the other side, Sohrab Ahmari’s Tyranny, Inc., which denounces the "neoliberal counterpunch" that followed the "three glorious decades" after World War II.
It would be one thing if "neoliberalism studies" was just one flavor in the Baskin-Robbins freezer of peer-reviewed frivolity universities crank out every day. But the fabricated history it projects influences politicians who promise to undo austerity that never happened and revolutionize politics by calling for more of the same.
In a 2023 speech at the Brookings Institution, national security adviser Jake Sullivan perfectly echoed the "neoliberalism" narrative: "The vision of public investment that had energized the American project in the postwar years—and indeed for much of our history—had faded. It had given way to a set of ideas that championed tax cutting and deregulation, privatization over public action, and trade liberalization as an end in itself."
Deluding itself into believing it was doing something fresh, the Biden administration has doubled down on the statist status quo. It has plunged trillions of dollars into infrastructure, green energy, and semiconductors. It saw the Obama administration’s record on regulation, which added over $300 billion in regulatory costs at this point in its first term, and has far exceeded it, adding $1.7 trillion in regulatory costs.
There are exceptions to the trend, but they are fleeting. The Trump administration had reduced regulatory burdens by about $100 billion at this point. The Reagan administration cut some of the bureaucracy. The Clinton administration and Republicans in Congress had a few years of budget surplus. None of these altered the overall trajectory of government growth going back 100 years.
Developed economies are already up against a wall when it comes to economic growth. In his book Fully Grown, economist Dietrich Vollrath outlines how economic growth consists of three components: physical capital growth, human capital growth, and productivity growth. Physical capital growth has never mattered that much, and it has remained relatively stable. Human capital growth—more humans, and better education, mostly—drove most of the economic growth in the 20th century.
As people become wealthier, they prefer smaller families on average (this is true basically everywhere in the world). Vollrath wrote that rising living standards and more effective and widespread use of contraception account for about two-thirds of the decline in the average growth rate in GDP per capita between the 20th and 21st century. That means basically all economic growth from here on out is going to have to come from productivity growth.
That’s all the more reason to get government out of the way of productivity growth. And yes, that is going to mean downturns might be more painful. Sharma’s book can, in part, be described as a defense of recessions. He argues economists and policymakers have become too confident that they have mastered the business cycle and made recessions a thing of the past. They haven’t, of course, and they shouldn’t want to. For creative destruction to work, destruction must be permitted to occur.
Destruction is basically impossible when money is free. Sharma argues that easy money is ruining capitalism by allowing everyone to get away with bad investments and poor business decisions. When money is cheap, companies can become heavily indebted and just keep borrowing without having to acknowledge mistakes or improve their productivity. Easy money is an economy-wide subsidy for failure.
Central bankers thought the years of easy money were fine because, until COVID, they did not cause consumer-price inflation. But they did cause asset-price inflation and massively grew the size of financial markets. Critics of "financialization" should look to Sharma’s diagnosis rather than vilifying banks and investors. The finance sector was simply following the lead of central banks. "Since Alan Greenspan promised Fed support after the 1987 crash, the stock market has grown from half the size of the U.S. economy to two times larger," Sharma writes.
"In 1980, before central banks had contained inflation and started lowering rates, global financial markets including stocks, bonds, and other debt products, such as packages of mortgages, were worth a total of $12 trillion, which was about the same size as the global economy," Sharma writes. Today, that same set is worth almost $400 trillion, about four times the size of the global economy. The world has not actually become over 30 times wealthier since 1980; this growth was the result of decades of easy money from central banks.
Sharma errs in calling for the resumption of an older way of doing antitrust enforcement, where government would place more weight on factors other than consumer welfare in deciding to break up companies. If governments listened to the rest of Sharma’s advice, the antitrust problems he is concerned with would likely resolve themselves. Without government shielding companies from their own mistakes, competition would increase as a matter of course.
Perpetual easy money, massive government deficits, omnipresent bailouts, all-encompassing regulation, and a generous welfare state are not evidence of "free-market fundamentalism." Yet they have characterized governments’ approach to economic policy around the developed world for decades. If you’re not satisfied with the slow growth that has resulted, maybe we should try capitalism instead of reimagining it.
What Went Wrong With Capitalism
by Ruchir Sharma
Simon & Schuster, 368 pp., $30
Dominic Pino is the Thomas L. Rhodes Journalism Fellow at the National Review Institute and the host of the American Institute for Economic Research podcast Econception.