Ray Dalio, the owner of the world’s largest hedge fund, is a capitalist if there ever was one. When he says that capitalism is broken and is in need of a fix, that may say something.
Ray Dalio isn’t just an expert on macroeconomics, he made his fortune directly from this knowledge, all $18.4 billion of it. While being on the extreme end of the personal economic scale, he firmly maintains his views of fairness, a principal that his company, Bridgewater Associates, continues to strongly embody.
Dalio, like so many others, is disturbed by the level of wealth inequality in the United States, where the top 1% of people have more wealth than the bottom 90%. Dalio’s concerns are not just about a lack of fairness though, but involve what he sees as real risks of discontent that may arise if we do get into economic trouble enough generally.
He tells us that capitalism itself is what needs reform, in an effort to see the economic growth that we get shared more with the people. His prescriptions are far more modest than we would see from a socialist, and Dalio is by no means that, he’s a capitalist that simply believes that the wealth it creates should be distributed a little more equitably than it is now.
Dalio believes that neither capitalism nor socialism has all the answers, and puts this problem as capitalism knowing how to grow things but needing help in distributing them, where socialism knows how to distribute things but has a problem growing them. We live in a world which is considerably influenced by capitalism though, although it is still governed by socialistic principles, which starts by the way we tax people and involves a great deal of money spent on what is at least held to be the greater good, including all government spending.
According to Dalio, we need to tweak capitalism and encourage it to not only pad the wallets of the small percentage of people where most of the capital is concentrated, but to allow for a wider participation of the masses, something he sees seriously lacking.
Those Without Capital Don’t Have the Means to Create Much Wealth
While the U.S. prides itself in its equality of opportunity, this opportunity is indeed based upon having capital to have some real skin in this game. Our economy grows year after year because our capital is growing, our wealth, but you need capital to grow capital.
We should not be surprised that, as Dalio points out, the real standard of living of Americans net of inflation is not growing in spite of the economy growing as a whole, but we need to realize that this economy isn’t really growing that fast net of inflation anyway. It is true though that people’s earnings from employment are just barely keeping up with inflation lately, and he finds this troublesome.
While labor is indeed a source of capital, it’s not a source that tends to appreciate that much over time, in most cases anyway. At the higher levels of capabilities, the supply of this labor may be in such short supply that its price may rise considerably, but most tasks function more like a commodity, and you won’t get rich very often from being able to do them proficiently.
The capital that matters is the kind that can be much better leveraged, where we put it to work and its growth builds more wealth. Capitalism actually works very well in economic environments such as the one we have, but only if you have capital to grow.
In spite of all the investing we do, most Americans have little or no capital to grow. The trickle- down effect does help, but this generally just trickles down enough to maintain the status quo, to be able to maintain wages at market levels, to keep paying us to work on the machine, and the efficiency of the labor market itself will prevent much more than this being handed down.
If this did happen, if wages started to accelerate too much, this would just be inflationary, and the higher wages would just be offset by inflation, as we’d get paid more but this would result in things costing more. This would also cause the central bank to step in and do what they could to put the reins on this, and the net effect may even be to deprive further instead of empowering more.
To Fix This, We Need More People Becoming Capitalists
Given that so much wealth is in the hands of so few people, it is only natural that these people will enjoy the growth that a capitalistic society, with those of little or no capital being left on the side of the road to just watch the parade of wealthy people pass. If we want to get more people included in the parade, they will need a stake in all this, which is capital.
It is not required at all, nor realistic, that very many of this bottom 90% will join the top 1%, but even modest improvements in wealth building with the majority will help them join in on all the fun. This equation is based upon wealth after all, and if you don’t have any and have no plans on ever getting any, and expect things to change, you will certainly end up disappointed.
A lot is made about this disparity as being a matter of the top echelon having too much, but the real problem is that the lower group has so little. The question then must become why they do have so little, and it’s not because Ray Dalio and his cohorts aren’t driving around neighborhoods handing money out of their car windows.
Dalio does have some ideas of his own though, and he sees education as a cornerstone to addressing these inequalities. Spending money on education may raise people’s standard of living overall, but it does come at a cost, at a time where we already are choking with too much government debt. This is something that Dalio is aware of more than most, given how outspoken is on the issue.
This also doesn’t in itself build any wealth, and the likely outcome would just be to allow people to simply spend more. That will drive GDP a bit, but will probably do little or nothing to address inequality of wealth, which is really inequality of capital.
Dalio also understands the practical considerations of taxing the wealthy too much, and has spoken out against such ideas lately, but he still does feel that we could be doing more along these lines. This does take away some wealth from the elite but does nothing to promote more wealth among the population. This additional tax revenue would probably trickle down less than if the wealthy were permitted to keep this money in play.
Governments simply do this less efficiently, and the fact that capitalism does this better is its main benefit. We don’t have to look any further than how China has changed economically to get a feel for the difference.
Perhaps we can raise tax rates modestly enough on high income earners such that we won’t drive too many of them away or otherwise reduce the total amount collected from them, but the more important piece to this would be to use this to offset the amount of tax that ordinary people pay, if we actually do want to put more money in their pockets, which is presumably the goal here.
Once again though, if we do this, then the likely outcome would be that we would affect the level of wealth pretty minimally, with most of this extra money just being spent, because that’s what people do generally when they have more money, spend more. That may be a worthy goal in itself but leaves the wealth distribution problem unaddressed.
There are also some real limitations of this to be able to decrease the tax burden on the masses, as you can only take so much from the rich and there are so many poor to spread it around with.
In the end, we’re probably not even talking any sort of meaningful change in wealth distribution here at all through taxation, improving education, or even Dalio’s idea of hybrid investment strategies involving both the private and public sector.
The real problem is that so few people are doing so much of the investing, and if we want more people to enjoy the fruits of capitalism, they need to spend less and invest more.
This is much easier said than done, and if we put on our economist hat, we might even want to say that we’re assuming that these people are acting rationally and are happy to forego wealth building in favor of consumption because that’s what makes them happy. Rational or not, these are the choices that people make, for better or worse, and there’s not much we can do about it.
It may not seem fair that so few people control so much of our wealth, but it’s not something that we can do very much about. If we are serious about addressing this better, we need to focus on things that at least have the potential for more wealth building, such as providing more tax incentives for the lower 90% so that they can be more motivated to invest more.
We will always see a wide distribution of wealth, because those who have the most capital will always benefit the most, but if we want to get more people involved in capitalism, and most people are not very involved at all, we need to figure out how they can get more capital.