The Limits of Capitalism

‘The world has gone mad and the system is broken’. Ray Dalio, founder of the world’s largest hedge fund Bridgewater, once wrote in his late-2019 blog post. Just how mad have we gone? 

With the continued growth of global GDP, our rational minds tell us that capitalism is a good thing. Yet, somehow it doesn’t feel right. Red flags which have come up in recent years cannot simply be brushed away:

  • Growing disparity between real GDP and real wage growth
    • While real GDP has been steadily increasing since the 90s, real wage growth is stagnating.
  • Rising inequality and increasing anti-capitalist sentiments
    •  As Piketty showed in his bestseller “Capital in the 21st century”, the share of overall income going to the top 1% has risen sharply since the ‘80s.
Source: Piketty, Capital in the 21st Century
  • No correlation between GDP and happiness
    • Having a larger pie helps, but data has clearly shown that the richest countries are not always the best or most comfortable countries to live in judging from how happy people are.
  • Unsustainable global debt levels
    • Are we near or already at the peak of global debt before our impending decline?
Source: Ray Dalio, The Changing World Order

A (short) history of capitalism and revisiting fundamentals 

But before we critique the system further, it is worthwhile to review our current understanding of capitalism, and how we got to where we are today. Economic thinking has evolved greatly since the first World War. Today, when the term ‘capitalism’ is mentioned, many of us would think of this  – a pure, uncontrolled, unregulated laissez-faire capitalism with minimal government intervention, where the market knows best and will allocate resources efficiently based on the forces of demand and supply. This is the main tenet of what is commonly known as neo-classical economics (or Chicago School of Economics).

However, capitalism wasn’t always understood as such. If we look back at the last 70 years, we can see two main blocks of time with two very different approaches of capitalism:

  1. The Golden Age of Capitalism (post WWII to 1980) with the following narrative: post-war state-led recovery via huge investments in public infrastructure which brought about trade and economic revival
  2. The Age of Market Capitalism (1980 to present) with a different narrative: free-market/laissez-faire system with a small state i.e. ‘lighter touch’ by governments involving greater privatization and limited government spending.

Proponents of the latter ‘market capitalism’ approach would tell us that the post-war period (in both US and UK) was a minor economic disaster culminating in the ‘dreadful’ 1970s, and these two countries were fortunately rescued by Thatcherism and Reaganomics which led to renewed growth and prosperity. But if we look closer at the data, we can see that the Golden Age trumped the Age of Market Capitalism in almost all aspects, including GDP growth, income growth and unemployment.

While we cannot deny that real GDP has continued to increase through the 1980s till today1, we also cannot assume that larger pie means that everyone would automatically get a bigger slice. Evidently, what ‘market capitalism’ did well was to grow the pie, but not so much divide it equitably. The question we should be asking is not simply whether the economy is growing, but how it grows, and who gets to enjoy that growth.  After all, something that is good for the economy does not mean that it is good for the people in that economy.

Does it mean then that ‘market capitalism’ as we understand it today is a flawed system? Or have we butchered the principles laid out by the Father of Modern Economics Adam Smith by oversimplifying his ideas? In his defining book ‘The Wealth of Nations’ published in 1776, Adam Smith famously advocated for the ‘invisible hand’ of the market. But this ‘invisible hand’ is not only about free competition, open trade, and minimum level of government interference. It is certainly not unrestrained market freedom that leads us to undervalue fundamental food and resource commodities and breed a mania of consumption that is exploited for our convenience. Rather, it is underpinned by ideas of efficiency, balance, and justice. Economic activities cannot thrive without fairness. While people are guided by the invisible hand, their actions should also be in the interests of social harmony. This is the missing piece that is often overlooked today, as we witness the growing divide between the haves and have-nots.

Reimagine capitalism, or do away with it completely?

Given this, we could either trash the idea of capitalism altogether, or seek to reform it. Winston Churchill has a saying that ‘Democracy is the worst form of government except for all the others.’ Similarly, capitalism is in the same boat. It has many flaws, yet we might not be able to do without it completely. Joseph Stiglitz, Nobel Laureate in Economics 2019 and former chief economist of the World Bank, predicts that “Capitalism will be part of the story, but it can’t be the kind of capitalism that we’ve had for the last 40 years. It can’t be the kind of selfish, unfettered capitalism where firms just maximize shareholder value regardless of the social consequences.”

Perhaps the remedy we need is an exploration of different flavours of capitalism suited for varying contexts, and not a dogma that subscribes to a monoculture version of capitalism. More importantly, we need to remind ourselves who the system is serving and be clear about its end goal. A more purposeful and enlightened version of capitalism should not enable the upper echelons of society to become richer, but instead governed by notions of fairness and equality through which gains will be evenly shared. (Alternative systems such as New Zealand’s well-being economy, Amsterdam’s donut model and Christian Felber’s Economy of the Common Good and Klaus Schwab’s Stakeholder Capitalism offer some glimpses of hope.)

With COVID-19 revealing deep-seated cracks in our system, we cannot overstate how the status quo is no longer tenable. Society needs to port over to a new ‘operating system’. One in which capitalism might or might not be a part of (or perhaps, varying shades of it). Regardless, the mission is clear: for the sake of future generations, we need to rebuild better and greener to develop an economy which is more just, inclusive, and sustainable for our society and our planet.

Tan Yang En & Jeremy Sim

May 12, 2021


  1. Adam Smith, ‘Wealth of Nations and Theory of Moral Sentiments’
  2. Thomas Piketty,‘Capital in the 21st century’, ‘Capital and Ideology’
  3. Mark E Thomas, ‘99%’
  4. Graeme Maxton, ‘The End of Progress: How Modern Economics is failing us’

[1] World Bank data, 2021

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