Why and How Capitalism Needs to Be Reformed (Parts 1 & 2) – Ray Dalio – what’s missing?

The Dalio Critique of Capitalism

– Part One

Ray Dalio, number 79 on Bloomberg’s list of the  100 wealthiest people on the planet with a net worth of 18+ billion $s, published an essay on LinkedIn, “Why and How Capitalism Needs to Be Reformed (Parts 1 & 2)” is US centric and its critique of capitalism focuses on:

  • income and wealth inequality
  • lack of income growth for the majority of Americans since the early 1980s
  • lack of social mobility or worse
  • poor outcomes in a very unequal education system
  • disrupted family lives
  • high incarceration rates
  • poor health outcomes especially for the poor and middle class

If you are surprised by any of  these points read his essay. There are lots of useful charts and graphics that illustrate his good discussion.

Dalio sums things up:

These conditions pose an existential risk for the US.

The previously described income/wealth/opportunity gap and its manifestations pose existential threats to the US because these conditions weaken the US economically, threaten to bring about painful and counterproductive domestic conflict, and undermine the United States’ strength relative to that of its global competitors.



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.

We won’t dwell on his political analysis of the so-called right-left polarization in American politics and the rise of various “populisms”. Rather lets consider what Dalio left out in his critique of capitalism.

First, though, a note about these terms “capitalism” and “capitalists” in the Dalio essay. It is clear that he is not speaking of the capitalism in the narrow sense that one frequently hears from economists and other ideologues. Dalio sees that the capitalist economy is embedded, integral, and interdependent with the larger society. What is not clear is the role of “capitalists” in creating these conditions along the way to their self-enrichment.

– Part 2

“…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.” This part of the critique focuses on four factors:

  • new technologies that replace people and reward those who invented the technologies
  • the replacement of American workers through globalization
  • “there is a glut of investment money chasing investments at the same time as there is an extreme shortage of money among most people”
  • “The budget hawk conservatives and the pro-spending/borrowing liberals have trouble focusing on, working together for, and achieving good “double bottom line” return on investments (i.e., investments that produce both good social returns and good economic returns).”

Dalio’s Recommendations for What Should Be Done

(excerpted here from the essay)

  1. Leadership from the top
  2. Bipartisan and skilled shapers of policy working together to redesign the system so it works better.
  3. Clear metrics that can be used to judge success and hold the people in charge accountable for achieving it.
  4. Redistribution of resources that will improve both the well-beings and the productivities of the vast majority of people.
    1. Create private-public partnerships …. that would jointly vet and invest in double bottom line projects that would be judged on the basis of their social and economic performance results relative to clear metrics.
    2. Raise money in ways that both improve conditions and improve the economy’s productivity by taking into consideration the all-in costs for the society (e.g., I’d tax pollution and various causes of bad health that have sizable economic costs for the society).
    3. Raise more from the top via taxes that would be engineered to not have disruptive effects on productivity and that would be earmarked to help those in the middle and the bottom primarily in ways that also improve the economy’s overall level of productivity, so that the spending on these programs is largely paid for by the cost savings and income improvements that they create.
  5. Coordination of monetary and fiscal policies.  Because money is clogged at the top and because the capacity of central banks to ease enough to reverse the next economic downturn is limited, fiscal policy will have to be more coordinated with monetary policy…..

Dalio concludes his essay with an appendix on the benefits of double bottom line investing – that is investing in projects that return the traditional capitalist profits while doing good for society.

What Did Dalio Leave Out or Just Plain Miss?

The Ruling Class Is Ruling

The most obvious and important flaw in Dalio’s analysis is the almost complete lack of any sense of the political forces at work and the need to change who is in charge and how the country is ruled. As a well-known billionaire who is active in supporting the existing system of politics (both Republicans and Democrats) and engaged in various philanthropies common to billionaire do-gooders, he knows full well how the political system works. Dalio is one of the Lesters in Lawrence Lessig’s Lesterland – see “The Corruption at the Center of American Politics and Government

Calling for “leadership from the top” and “bipartisan and skilled shapers of policy” without addressing how these people are actually placed in their positions of authority is a meaningless. We have a ruling class largely hand selected by the wealthy and corporations. Over the last 40 years they put the policies and practices in place that has produced the political-economic system we presently live under. Why are they suddenly going to become good stewards of Dalio’s double bottom line strategies? The obvious step required is to change those who are in charge. We need politicians who are attuned to the needs of the vast majority of Americans and beholden to them, not the wealthy and corporations.

External Costs

At the center of every capitalist enterprise are its external costs1 – all the stuff they get other people to pay for. Polluting the environment is an obvious example. If you can dump the waste products of your company on the ground or in the air it becomes an external cost.  Or create markets and products that generate an ever increasing stream of refuse – see the earlier post here – “Plastics and Run Amuck Capitalism“. Or main and kill workers without consequences. The external cost that is looming over the whole planet is waste product CO2 that is now warming the environment and posing immediate dangers. External costs are not the result of moral failings of individual capitalists. They are an important method for maximizing profits and creating and maintaining a competitive advantage over competitors.

Incessant Viral Amoral Growth

Capitalism is a very unstable system. Lots of booms, busts, recessions, and depressions. But overall it is its incessant, at times spectacular, growth that is one of its key features. To be sure, over the longer history of our species capitalism has made us all quite wealthy in the last 200 years or so. However, we are now entering a phase in which the earth can no longer support the appetites of capitalism to exploit natural resources nor absorb all of the pollution and refuse generated. Global warming is bringing this to the attention of everyone.

The question arises of whether capitalism can be reshaped to produce goods and services that meet the needs of all of the people, housing, food, health, education, family and community life, for example, while being sustainable within the ecology of the whole planet?  As a system with only profits and growth as success metrics, capitalism has never produced adequate housing, education, healthcare, nor cared about families or community life. Beyond this failing, with the rise of mass marketing’s capacities to manipulate human behavior capitalism is quite capable of re-configuring basic human activities like the foods we eat.2

Resource Allocation Efficiency…… for Private Benefit

Dalio claims, as do almost all economists, that capitalism “…is an effective allocator of resources because the creation of profit requires that the output created is more valuable than the resources that go into creating it.” This is one of the central justifications for capitalism and our hero worship of its titans. This claim only makes sense if we accept the external costs imposed on all of us and the value system in play. If you think that a central purpose of an economy is to provide for the central needs of people such as housing, food, healthcare, education, family and community life capitalist resource allocations are not going to make you happy. On the other hand if you think that the purpose of an economy is to enrich a small number of wealth owners while investing in products and services that not only don’t meet these needs but also may be injurious to many, then capitalism’s efficient resource allocation is just your tune.

Concentration, Concentration and more Concentration

One aspect of contemporary capitalism across the globe that makes resource allocation less efficient, that is,  less responsive to market forces, and more prone to reflect the interests of the wealthy and corporations is the intensification of monopoly power in almost every sector of the economy. We won’t demonstrate the facts behind this observation beyond the chart below:

Dominance of Corporate Behemoths - NYTimes - 11/25/2108
Dominance of Corporate Behemoths – NYTimes – 11/25/2108

From the very beginnings of capitalism supporters, including Adam Smith,  and critics noted the tendency towards concentration and most saw the deleterious effects and warned against them. We have written at some length on this topic earlier. Read here, “The Monopolization of America”,  “Recently Noted – Robert Reich video ”The Monopolization of America””, and “United Airlines, Monopoly/Oligopoly, The Natural Laws of Capitalism” among others.

The Real Crisis

So, when thinking about our current situation we need to take into account some of the very real systemic failings of the capitalist system. And we should understand clearly that just as Dalio sees the capitalist system as embedded in our larger society, we must examine how the wealthy and corporations are directing our politics and closing off questions and ideas that may be required to develop meaningful approaches to the very large problems we face.

Dalio closes his essay with this observation:

It doesn’t take a genius to know that when a system is producing outcomes that are so inconsistent with its goals, it needs to be reformed.

We look forward to Part Two.


  1. Apologies for this term. Economists created this one and then left it almost universally out of any of their calculations.
  2. for example see the post here “Ultra-Processed Foods, Conquest of New Markets, Capitalism In Action