What Went Wrong With Capitalism?

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00:00Here at Wall Street Week, we bring you stories of capitalism every week.

00:03But this story is not just of capitalism, but about capitalism.

00:08Where it came from, where it's headed, and why so many people are questioning its future and its foundations.

00:14One of them is about to take over as mayor of Wall Street's home city at the end of the year.

00:20I am a democratic socialist.

00:24And if you listen to President Trump,

00:26it's not enough that Mr. Mamdani embraces democratic socialism.

00:30He insists on calling him an outright communist.

00:33And now let's see how a communist does in New York.

00:36We're going to see how that works out.

00:38Our Bloomberg colleague, John Authors, has taken a look through several recent books

00:43about capitalism's challenges written not by its opponents, but by its supporters.

00:48And he has some thoughts about why there's so much capitalist soul-searching these days.

00:53Thoughts that he shared with us.

00:54What is capitalism? How do you define it?

00:57Well, part of its strength, it's something that grew up naturally

01:00and has had the ability to morph and adapt in a way that none of its alternatives,

01:07socialism, communism, etc., have been able to do.

01:11I've been churning my way through this selection of enormous tomes,

01:16all of which have in common this belief that capitalism is in crisis.

01:20The point is that it adapts each time it has a crisis.

01:25There are more truly non-capitalist alternatives being considered at present than there have been.

01:32And arguably, the latest model of capitalism really fell in 2008.

01:38We work for Bloomberg.

01:40We're part of the citadels of capitalism.

01:42Everybody, I think, has to agree that the model that was in force until 2008 really perished with the crisis.

01:48You would normally expect them to be more clarity about what was coming next this long after the crisis.

01:56And I think the reason people are writing so much about capitalism now getting so worried

02:00is that we're not seeing that new model, that new narrative, taking shape with any clarity.

02:07Before we look at the new model, let's talk about the old models.

02:10What are the models that capitalism has evolved through?

02:14I'll give you the schema that Anatole Kolecki, who's sort of known these days for having set up the Gavkal.

02:21His book, Capitalism 4.0, is about what is Capitalism 4.0 going to be.

02:271.0 was laissez-faire.

02:30It gave us the growth of the British Empire, the Industrial Revolution, the Gilded Age here in the States.

02:37And it finally perishes after the Great Crash and the Great Depression.

02:42Capitalism 2.0 is basically Keynesianism.

02:47The New Deal, the Marshall Plan, the GI Bill.

02:50It gives you the great successes of the post-war economic miracles in Germany, in Japan,

02:57and founders, obviously, in stagflation in the 1970s.

03:02Capitalism 3.0, we generally think of with regard to Ronald Reagan and Margaret Thatcher,

03:07the great pioneers of it.

03:09Paul Volcker, with the way he took over the Fed and changed monetary policy, the rule of the dollar.

03:14Nobody thinks that capitalism of the Thatcher-Rager kind is going to come back anytime soon.

03:21We are going to have some transition on the scale of those ones I've just mentioned,

03:26the ones that came after 29 and after the 70s.

03:29The question is exactly what the Capitalism 4.0 will be.

03:35Although capitalism in markets and democracy in politics tend to occur together

03:40and have some things in common, they are not the same.

03:42In each case, it was the markets that signaled to the politicians that this model had ceased to work,

03:50with the great crash, with the great inflation of the 70s, and with the crisis of 2008.

03:57Democracy and capitalism have a symbiotic relationship.

04:01There's a wonderful line from Winston Churchill that democracy is the worst way of running society

04:06that anybody has come up with, apart from all the others that have ever been tried.

04:10Both have it in common that they're not perfect, but that they are more or less impossible to improve upon.

04:17They have internal checks.

04:19You don't want to get thrown out by the voters.

04:21If you're a politician, you don't, you greed and fear counter each other.

04:26And the two systems check each other.

04:28It's largely now up to governments to work out what to do next.

04:35Does capitalism work without growth?

04:37Yes, that is a critical problem.

04:39This is Sven Beckert, professor of history at Harvard.

04:44He spent 10 years writing this magnum opus on the history of capitalism.

04:49And one of the points he makes, it's like a shark, it has to keep moving.

04:54You could argue that it's capitalism 1.0, gilded age.

04:58Donald Trump is terribly excited by President McKinley, who went for very high tariffs.

05:03In the late 19th century, when America was expanding the way it was by building railroads,

05:08connecting up the West and the East Coast and all the rest of it,

05:10was a way of protecting this infant economy as it got ready to take over its hegemonic position in the world.

05:16However, most of the people I've been talking to would suggest that there's something a little more alarming going on,

05:23which you might call capitalism 0.0, or pre-capitalism, which is mercantilism, the idea that came before.

05:30You know, capitalism grows out of Britain's victory in the Napoleonic Wars,

05:36the growth of the British Empire and the Industrial Revolution.

05:40Different countries had their own spheres of influence and then tried to build empires to give them a place to sell their stuff to.

05:50One of the problems facing capitalism is the growing role of governments in intervening to minimize pain for markets and investors.

05:57Well, my point, David, in the book is not that capitalism has failed, but that it's been ruined.

06:04And it's been ruined by government over time.

06:07Author Rasheer Sharma is head of Rockefeller Capital Management's international business.

06:11His book is What Went Wrong With Capitalism.

06:15So then you began to expand the role of the state.

06:18The problem is that it has now expanded to such an extent.

06:22And it's not just about government spending, as I said.

06:24It's the culture of the bailouts.

06:27Who does it help?

06:27It's the regulations.

06:30Who does regulation really help?

06:32And what I say in the book is that all these things have systematically increased to undermine what capitalism is supposed to be.

06:39And the outcomes we're getting today is not what the founders had in mind.

06:44When the founders spoke about the architects of capitalism, they wanted more competition, churn to happen,

06:50that the incumbents are never entrenched, that they're always challenged by insurgents.

06:54Capitalism was supposed to create that freedom, let the insurgents come and challenge the incumbents.

06:59Instead, what we're seeing today is that the incumbents are getting more and more entrenched.

07:03The concentration of power, as you can see, the number of companies that dominate the S&P 500, how concentrated that is.

07:12And also the fact that you get this mismatch in risk, which is that you can capitalize the gains, but we are here to socialize the losses.

07:21I think it's this perversion of capitalism that we have seen today.

07:25And this is having real consequences.

07:28That concentration has only increased in recent years.

07:32Much of the growth in America's equity markets today is driven by the magnificent seven.

07:38Productivity growth around the world, and particularly like in America, has been falling off, right?

07:43At the end of the day, the key to long-term economic growth is productivity growth.

07:47So productivity growth is falling off.

07:49Why is it falling off?

07:51I argue it's because the dynamism that capitalism brought about getting new people to come, about taking out the dead wood,

08:00that dynamism is getting lost in this constant state support that we have for capitalism.

08:07And the other negative consequence is this concentration of power.

08:11And, you know, when you have so much regulation out there that helps the incumbents, they are big.

08:16They can afford to deal with those regulations, and they can even lobby in Washington to get the kind of regulations that they want.

08:24But small to mid-sized businesses, they find it increasingly difficult to survive, forget, even thrive, in this kind of environment.

08:33There's a deep unhappiness with the establishment, as most people are very unhappy with their own fortunes, right?

08:41Which is that in America today, for example, I think about 70% of Americans today say that they are unlikely to be better off than their parents.

08:49This is a violation of the American capitalist dream.

08:52The American capitalist dream from 40, 50 years ago was that most Americans thought they're going to be better off than their parents.

09:00You're supposed to be better off over time.

09:02Young people in America today, when you poll them, they tell you that they'd rather have socialism than they would have capitalism.

09:08You know, for me, that is possibly the one most important statistic that inspired me to write this book,

09:15that why are so many young people in this country disillusioned with capitalism?

09:20And the answer for me is the fact that they're disillusioned with the current form of system, which they think is capitalism.

09:26With all the challenges that capitalism faces today, perhaps the most ironic is that its biggest advantage,

09:34deep capital markets, may in the end itself turn out to be anti-capitalist.

09:39One of the things that surprised me, I've spent the last 20 years of my life covering this,

09:47it's fascinating how many actual capitalists, people involved in finance,

09:54now regard the degree of liquidity in the markets, the degree of financialization as having been a problem.

10:01One way to express this is a guy called Amar Bidet, who's currently at Columbia, a very interesting thinker,

10:08argues that to make a market as deep as they currently are, to be able to trade things,

10:15you actually need to homogenize them, you need to plan them.

10:20You rely on MSCI and S&P to create indexes, and then you trade indexes.

10:25You get the rating agencies to tell you, yes, this is AAA, you can split it around however you like.

10:30That you end up, in order to make markets that liquid, so that you can trade them,

10:36they can become as big and liquid as they are.

10:38You have to make such sweeping decisions about how you define companies, how you allocate them,

10:44that you're basically taking the role of a communist planner.

10:48So there is an argument in which the liquification, the financialization of the economy,

10:54basically did away with judgment, did away with the notion of trust in people's dealings with each other,

11:00and therefore led to a version of capitalism that frankly isn't any better than socialism or communism.

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