The Problem with Capitalism

Ray Dalio

It is often said that the problem with socialism is socialism, while the problem with capitalism is capitalists. Ray Dalio, founder of Bridgewater Associates the world’s largest hedge fund, is only the latest to prove the case. Lately he has jumped on the income inequality bandwagon and has taken to suggesting public policies designed to make capitalism “work” for all.  The problem as he defines it in a recent paper posted online is that “capitalists typically don’t know how to divide the pie well and socialists typically don’t know how to grow it well”. 

Among his solutions are  (1) a bipartisan commission to design policies to grow the economic pie and divide it better; (2) clear metrics to measure progress and hold people accountable–whatever that means–and (3) redistribution of resources from the top of the income distribution to the middle and lower rungs. This last would be accomplished in part by taxing the top tier that “would be engineered to not have disruptive effects on productivity”  and that would be earmarked to help the middle and lower income tiers that would also improve the overall productivity of the economy. 

When pigs fly. 

It would appear that Mr. Dalio is blissfully unaware that politicians in general, and progressives in particular, have been selling this fantasy for the better part of 50 years. What they have to show for it is a polarized society that is teeming with class resentment, and a poverty rate that has barely budged since the “War in Poverty” began in the 1960s. Perhaps Mr. Dalio ought to mark his policy prescriptions to market and think about why they have been such an abject failure for so many years.

The answer is relatively straightforward. Policies that rely on command and control rather than human ingenuity inevitably produce suboptimal results—at best. And command and control is precisely what Mr. Dalio is suggesting. Consider the language he uses to describe the “problem”. “Capitalists typically don’t know how to divide the pie well”. 

Of course they don’t. Nobody does. That’s why we have markets to guide resource allocation through the price mechanism rather than self-interested politicians and bureaucrats. Calling for fictional disinterested experts to allocate resources wisely is simply a pipe dream, and a naive one at that. If it weren’t we would be looking at the Post Office as a model of efficiency. 

Which brings up the main point. The government of the United States was not designed to be efficient. Just the opposite. It was designed to make it difficult for the government to do things because government is dangerous. At the American Founding the raison d’être of the government was to secure liberty. Free people are more than able to take care of themselves, their families and communities once the rule of law, property rights and a culture political Liberalism — with a capital L — takes hold. With certain notable (and rare) exceptions like defense, when Government steps in to solve problems, the problems get worse. 

Mr. Dalio rightly decries that disastrous state of our public school system, especially in comparison to private schools. He mistakenly ascribes the outperformance of private schools to the fact that they spend more per pupil than public schools. If spending was the key determinant of outcomes, public schools would be improving over time, although perhaps at a lower rate of improvement compared to private schools. In fact, public school performance has been deteriorating for at least 5o years. 

There are many reasons for the failure of the public school system, especially in the cities, despite all the tax money that has been thrown at them over the years. But one feature of the public schools stands out that is germane to this discussion. They have adopted Mr. Dalio’s top-down command and control bureaucratic structure of governance.  Not surprisingly, they are run by the teachers unions for the benefit of the teachers. They are also protected public monopolies, largely immune from competition.

The monopoly power of public schools is most pronounced in poor neighborhoods. In affluent areas where the parents can afford to send their kids to private schools, the public schools do face some competition, and not surprisingly they achieve better results. Which is to say that the failure of the public schools is attributable in part to the rent-seeking behavior of self-interested politicians and bureaucrats, especially when parents lack the resources to exit to greener pastures. So much for disinterested experts.

The problem the United States faces is not too much capitalism. The problem is too much government and its attendant rent-seeking and bureaucracy.  The problem will not be solved until government is smaller, not larger, and local communities are able run their own affairs without having to answer to their political masters in Washington, DC.  

If Mr. Dalio would like a metric of success, how about this one: a decently functioning public high school. When Detroit or Newark or Bridgeport or St. Louis or Kansas City or New York or Milwaukee or any large city finally manages to establish a decently functioning public high school system that will be a sign that we are on the road to recovery. And that will not happen until the schools have to compete to attract and retain students by offering a quality service at a reasonable price. That requires a greater dependence on markets and consumer choice.

There are different paths to increasing consumer choice and establishing competitive markets in public education. These include school vouchers and charter schools. It does not include doubling down on command and control, rent seeking and reliance on the bureaucratic “experts” who have already made such hash of it.

JFB

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Joe Benning