Why and How Capitalism Needs to Be Reformed (Parts 1 & 2)
- Published on April 5, 2019
- Complete Article:
https://www.linkedin.com/pulse/why-how-capitalism-needs-reformed-parts-1-2-ray-dalio/?utm_source=Twitter&utm_medium=Arianna
Authored by:
Ray Dalio, Influencer
Co-Chief Investment Officer & Co-Chairman of Bridgewater Associates, L.P.
Why and How Capitalism Needs to Be Reformed
“Before I explain why I believe that capitalism needs to be reformed, I will explain where I’m coming from, which has shaped my perspective. I will then show the indicators that make it clear to me that the outcomes capitalism is producing are inconsistent with what I believe our goals are. Then I will give my diagnosis of why capitalism is producing these inadequate outcomes and conclude by offering some thoughts about how it can be reformed to produce better outcomes.” (continued)
Part 1
Where I’m Coming From
Highlights:
“Naturally, I have watched these things closely over the years in all countries, especially in the US. I will now show the results that our system is producing that have led me to believe capitalism isn’t working well for most Americans.”
Why I Believe That Capitalism Is Not Working Well for Most Americans
“To begin, I’d like to show you the differences that exist between the haves and the have-nots. Because these differences are hidden in the averages, I broke the economy into the top 40% and the bottom 60% of income earners.[1] That way we could see what the lives of the bottom 60% (i.e., the majority) look like and could compare them with those of the top 40%. What I found is shown in this study. While I suggest that you read it, I will quickly give you a bunch of stats that paint the picture here.”
” There has been little or no real income growth for most people for decades. As shown in the chart below on the left, prime-age workers in the bottom 60% have had no real (i.e., inflation-adjusted) income growth since 1980.”
“As shown below, the income gap is about as high as ever and the wealth gap is the highest since the late 1930s. Today, the wealth of the top 1% of the population is more than that of the bottom 90% of the population combined, which is the same sort of wealth gap that existed during the 1935-40 period (a period that brought in an era of great internal and external conflicts for most countries). Those in the top 40% now have on average more than 10 times as much wealth as those in the bottom 60%.[iv] That is up from six times in 1980.”
“Most people in the bottom 60% are poor. For example, only about a third of the bottom 60% save any of their income in cash or financial assets.[vii] According to a recent Federal Reserve study, 40% of all Americans would struggle to raise $400 in the event of an emergency.[viii]”
“And they are increasingly getting stuck being poor. The following chart shows the odds of someone in the bottom quintile moving up to the middle quintile or higher in a 10-year period. Those odds declined from about 23% in 1990 to only 14% as of 2011.”
“One’s income growth results from one’s productivity growth, which results from one’s personal development. So let’s look at how we are developing people. Let’s start with children.“
“To me, the most intolerable situation is how our system fails to take good care of so many of our children. As I will show, a large number of them are poor, malnourished (physically and mentally), and poorly educated. More specifically: “
“The domino effects of these conditions are costly. Low incomes, poorly funded schools, and weak family support for children lead to poor academic achievement, which leads to low productivity and low incomes of people who become economic burdens on the society.“
- “Looking at the most respected (PISA) (*) test scores, the US is currently around the bottom 15th percentile of the developed world. As shown below, the US scores lower than virtually all developed countries other than Italy and Greece. That stands in the way of many people having adequate living standards and of US competitiveness.”
“These poor educational results lead to a high percentage of students being inadequately prepared for work and having emotional problems that become manifest in damaging behaviors. Disadvantaged students in the US are far more likely to report social and/or emotional issues than in most other developed countries, including not being socially integrated at school, severe test anxiety, and low satisfaction with life.”
” Bad childcare and bad education lead to badly behaved adults hence higher crime rates that inflict terrible costs on the society: “
- “The United States’ incarceration rate is nearly five times the average of other developed countries and three times that of emerging countries.[xlii] The direct cost of keeping people incarcerated is staggering and has grown rapidly: state correctional costs quadrupled over the past two decades and now top $50 billion a year, consuming 1 in every 15 general fund dollars.[xliii]”
” In addition to social and economic bad consequences, the income/wealth/opportunity gap is leading to dangerous social and political divisions that threaten our cohesive fabric and capitalism itself.”
“ I believe that, as a principle, if there is a very big gap in the economic conditions of people who share a budget and there is an economic downturn, there is a high risk of bad conflict. Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of populism of the left and populism of the right and often in revolutions of one sort or another. For that reason, I am worried what the next economic downturn will be like, especially as central banks have limited ability to reverse it and we have so much political polarity and populism.”
Please notice that the complete article can be found here: (continued)
Part 2
My Diagnosis of Why Capitalism Is Now Not Working Well for the Majority of People
“I believe that reality works like a machine with cause/effect relationships that produce outcomes, and that when the outcomes fall short of the goals one needs to diagnose why the machine is working inadequately and then reform it. I also believe that most everything happens over and over again through history, and by observing and thinking through these patterns one can better understand how reality works and acquire timeless and universal principles for dealing with it better. I believe that the previously shown outcomes are unacceptable, so that we first need to look at how the economic machine is producing these outcomes and then think about how to reform it.”
“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.“
“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. More specifically, I believe that: “
- “The pursuit of profit and greater efficiencies has led to the invention of new technologies that replace people, which has made companies run more efficiently, rewarded those who invented these technologies, and hurt those who were replaced by them. This force will accelerate over the next several years, and there is no plan to deal with it well.”
- “The pursuit of greater profits and greater company efficiencies has also led companies to produce in other countries and to replace American workers with cost-effective foreign workers, which was good for these companies’ profits and efficiencies but bad for the American workers’ incomes. Of course, this globalization also allowed less expensive and perhaps better quality foreign goods to come into the US, which has been good for both the foreign sellers and the American buyers of them and bad for the American companies and workers who compete with them.” (continued)
What I Think Should Be Done
“For the previously explained reasons, I believe that capitalism is a fundamentally sound system that is now not working well for the majority of people, so it must be reformed to provide many more equal opportunities and to be more productive. To make the changes, I believe something like the following is needed.”
- Leadership from the top.
- Bipartisan and skilled shapers of policy working together to redesign the system so it works better.
- Clear metrics that can be used to judge success and hold the people in charge accountable for achieving it.
- Redistribution of resources that will improve both the well-beings and the productivities of the vast majority of people.
- Coordination of monetary and fiscal policies.
(continued)
Looking Ahead
“In assessing the position we are in, we can look at both cause-effect relationships and historical comparisons. The most relevant causes that are leading to the effects we are seeing are: ” (continued)
Appendix: My Perspective On Double Bottom Line Investing
I felt that I should give some examples of good double bottom line investing so that’s what this appendix is about. From doing my philanthropic work, I see great double bottom line investments all the time, and I only see a small percentage of them so I know that there are vastly more. Since my wife and I focus especially in education and microfinance, my window is more in these areas than elsewhere though we have been exposed to many in other areas such as healthcare, the reform of the criminal justice system, environmental protection, etc. For example, a few of the good double bottom line investments that I came across are:
“Since these areas are great double bottom line investments for the country, it would be great if they were brought to scale with government support. I believe that partnerships between philanthropy, government, and business for these types of investments are powerful becausetheywould both increase the amount of funding and result in better vetting of the projects and programs. I know that I see plenty of good deals that I’d love to maximize the funding for that would be cost-effective for governments, other philanthropists, and businesses to support.”
(continued)
Background study:
Our Biggest Economic, Social, and Political Issue
Published on October 23, 2017
https://www.linkedin.com/pulse/our-biggest-economic-social-political-issue-two-economies-ray-dalio/
About the Background Study:
Comment by Daniel Pinchbeck via LinkedIn
Executive Director, Center for Planetary Culture
“What astonishes me most about this essay is that Diallo largely ignores the finite resources of the planet and the ecological mega-crisis as the primary issue facing humanity today. As many have realized, the ecological crisis means that we can no longer continue an economic system based on endless or infinite growth and exploitation of natural resources. I would suggest that the diminishing finite resources of the planet are a major driver for the negative trends he finds through his analysis. Further economic development comes at an ever-deeper cost both to the natural and the social environment. For instance, GDP equals total economic exchanges: A forest standing untouched does not grow GDP, but remove the trees and sell them, them turn the land into a toxic waste dump, cover it with cement and build a shopping mall, and you have created many transactions that support the GDP. Similarly, an individual who has cancer and is in a messy divorce is producing many economic transactions that add to GDP. According to the most honest climate scientists, we have already passed the point of inescapable disruption and need to be moving into a model of “deep adaptation.” This is going to require a totally different approach to economics and something like a WW2-level climate mobilization on a global scale. If anyone reading this wants more info and references, please message me and I will provide. My last book, www.howsoonisnow.info made an attempt to offer a system design approach to the emergency confronting us. Drawdown by Paul Hawken is also good.”
BONUS (1) : What´s PISA (*) ?
Excellence and Equity in Education
The OECD Programme for International Student Assessment (PISA) examines not just what students know in science, reading and mathematics, but what they can do with what they know. Results from PISA show educators and policy makers the quality and equity of learning outcomes achieved elsewhere, and allow them to learn from the policies and practices applied in other countries. PISA 2015 Results (Volume I): Excellence and Equity in Education, is one of five volumes that present the results of the PISA 2015 survey, the sixth round of the triennial assessment. It summarises student performance in science, reading and mathematics, and defines and measures equity in education. It focuses on students’ attitudes towards learning science, including their expectations of working in science-related careers. The volume also discusses how performance and equity have evolved across PISA-participating countries and economies over recent years.
https://www.oecd-ilibrary.org/education/pisa-2015-results-volume-i_9789264266490-en
Reporting PISA 2015 Results
This web report presents student performance on the PISA 2015 assessments in science, reading, and mathematics literacy from a U.S. perspective. Results are presented for the 70 education systems, including the United States, that participated in PISA 2015 and for Massachusetts, North Carolina, and Puerto Rico which participated as separate education systems. These three education systems opted to have separate samples of public-school schools for North Carolina and Massachusetts and both public and private students for Puerto Rico in order to obtain results separately from the nation.
https://nces.ed.gov/surveys/pisa/pisa2015/pisa2015highlights_2d.asp
BONUS (2) : What about PISA (*) results for Brazil ?
Brasil cai em ranking mundial de educação em ciências, leitura e matemática
Dados do Pisa, prova feita em 70 países, foram divulgados nesta terça; Brasil ficou na 63ª posição em ciências, na 59ª em leitura e na 66ª colocação em matemática.
Por Ana Carolina Moreno, G1
06/12/2016 08h00 Atualizado há 2 anos
Apesar de gostar de ciências, estudante vai mal no Pisa
O Ministério da Educação divulgou nesta terça-feira, 6, os resultados do Programa Internacional de Avaliação de Estudantes (Pisa) — Programme for International Student Assessment —, da Organização para a Cooperação e Desenvolvimento Econômico (OCDE). Embora a maioria dos estudantes avaliados tenha interesse nas disciplinas relacionadas à ciência (mais da metade relata ter interesse ou se divertir ao aprender sobre ciências), o desempenho foi bem abaixo da média da OCDE.
AVALIAÇÃO INTERNACIONAL
Resultado do Pisa de 2015 é tragédia para o futuro dos jovens brasileiros, afirma ministro
- Terça-feira, 06 de dezembro de 2016, 17h42
- Artigo completo:
http://portal.mec.gov.br/component/content/article?id=42741 - Sumário executivo:
http://download.inep.gov.br/acoes_internacionais/pisa/documentos/2016/pisa_brasil_2015_sumario_executivo.pdf
O Programa Internacional de Avaliação de Estudantes (Pisa), com base nos resultados da avaliação de 2015, divulgados nesta terça-feira, 6, pela Organização para a Cooperação e Desenvolvimento Econômico (OCDE), constatou que o Brasil está estacionado há dez anos entre os países com pior desempenho. O Pisa mediu o conhecimento dos estudantes de 72 países em leitura, ciências e matemática. Nas três áreas, a média dos estudantes brasileiros ficou abaixo da obtida pelos demais países.
Em matemática, o país apresentou a primeira queda desde 2003, início da série histórica da avaliação, e constatou que sete em cada dez alunos brasileiros, com idade entre 15 e 16 anos, estão abaixo do nível básico de conhecimento.
O ministro da Educação, Mendonça Filho, lamentou os números. “Esse resultado é uma tragédia”, afirmou. “E confirma exatamente o diagnóstico que fizemos, desde o início da nossa gestão, de que, apesar de termos multiplicado por três o orçamento do Ministério da Educação, em termos reais, o desempenho ficou estagnado ou até retrocedeu, como é o caso específico de matemática.”
O ministro apontou quatro pontos que precisam ter prioridade para reverter esse quadro no país: alfabetização, formação de professor, Base Nacional Comum Curricular e reforma do ensino médio.
Luiz Botelho | Coaching | T&D | #PlantASEED 