A hundred years of capitalism has brought us here. What is here?
- High income and wealth inequality.
- Ageing populations. High dependency ratios.
- Disenchantment with governments. Perception that capitalism and liberal democracy have failed to increase standards of living.
- High and rising public debt.
- Slow economic growth.
- High asset growth.
- Falling interest rates.
- Rising global temperatures and climate volatility.
What capitalism and liberal democracy were supposed to do for us.
- Capitalism encourages economic efficiency and growth.
- Growth leads to the embracing of liberal democracy.
Side effects.
- Capitalism leads to wealth accumulation and concentration.
- Suppliers of labour lag owners of capital as the economy becomes increasingly driven by knowledge.
- Inequality results and accumulates.
- Inequality
- Results in over saving and insufficient velocity of circulation of money.
- Is disinflationary and leads to sub-par growth.
- Results in inefficient allocation of resources.
- Over-saving leads to lower interest rates which encourages over-borrowing.
Fragilities
Inequality can be tolerated until or unless:
- Inflation rises.
- Cost of living rises.
- States fail to provide public goods as promised.
- Social media enables and encourages comparisons.
- Populists leverage inequality to instigate political and social change.
Interest rates can remain low until or unless:
- Public debt levels rise above certain thresholds.
- Inflation rises and holds above certain thresholds.
- Central banks are unable to monetize public debt.
- Savings rates fall.
- There is a loss of confidence in the state.
Sovereign bond markets can remain well behaved until and unless:
- There is a loss of confidence in a government.
- Hyperinflation occurs, which is often a consequence of a loss of confidence.
- Inflation rises due to a supply shock.
- A small subset of countries’ national debt surges out of control. If large numbers of countries grow their national debt it may not trigger a run on their markets.
Where do we go from here?
- Stagnation and drift.
- Economy: Growth remains low, productivity improvements are incremental, and debt ratios rise gradually. Asset prices stay elevated but fragile.
- Society: Inequality persists; social tensions simmer but don’t break the system. Governments provide just enough support (subsidies, transfers) to prevent collapse but not enough to renew prosperity.
- Politics: Populism and polarization remain chronic but contained, with alternating swings in policy but no systemic overhaul.
- Risk: The system doesn’t “fail” outright, but the long malaise breeds cynicism and erodes confidence in institutions over decades.
- This environment is not sustainable and is more of a transitory phase.
- Populist disruption
- Economy: Protectionism, trade wars, and industrial policy dominate. This raises costs and inflation but creates short-term jobs in “reshored” sectors.
- Society: Populist leaders exploit inequality and cultural divides. Redistribution schemes or national projects (infrastructure, military) become more common.
- Politics: Liberal democracy weakens as strongmen centralize power, claiming to represent “the people.”
- Risk: Institutions erode, capital flees, sovereign debt markets destabilize. Long-term prosperity suffers, though some groups may feel temporarily empowered.
- This state of the world is unlikely to be sustainable and likely deteriorates into anarchy as populist governments become another failed promise.
- Crisis-Driven Reset
- Trigger: A major event—climate disaster, financial crash, sovereign debt crisis, or prolonged inflation shock.
- Response: The crisis forces radical policy shifts: debt restructuring, aggressive wealth taxes, universal basic income, or large-scale climate transition spending.
- Economy: Painful adjustment initially, but if reform is well-designed, could lay foundations for a more balanced system.
- Politics: Higher risk of instability in the short run; potential renewal of democratic legitimacy if reforms succeed.
- Risk: Poorly managed resets can spiral into authoritarianism or depression.
- This stage usually precedes a more stable equilibrium. It can, however, be protracted, but in the optimistic case, the acute hardship experienced during this phase seeds the beginnings of a new and sustainable system.
- Technological and Green Renewal
- Economy: AI, biotech, clean energy, and climate adaptation spark a new productivity wave, lowering costs and creating new industries.
- Society: If gains are shared broadly (through taxation, public investment, or stronger labor bargaining), inequality narrows and living standards improve.
- Politics: Liberal democracy regains legitimacy as it demonstrates the ability to deliver rising prosperity and tackle climate risks.
- Risk: If gains concentrate (as with past tech waves), this path collapses back into scenario 1 or 2.
- Systemic Breakdown
- Economy: Debt crises, runaway inflation, or climate collapse overwhelm existing institutions.
- Society: Mass unrest, migration crises, and breakdown of social order in vulnerable regions.
- Politics: Liberal democracy retreats sharply, replaced by authoritarianism, fragmented blocs, or even failed states.
- Risk: Global cooperation collapses, amplifying climate and security risks. This is the darkest path, but history shows it cannot be ruled out.
- This stage usually precedes a more stable equilibrium. It can, however, be protracted, but in the optimistic case, the acute hardship experienced during this phase seeds the beginnings of a new and sustainable system.
Prescriptions:
- Immediate policy actions:
- Inflation and cost of living are major pain points and deserve vigilance.
- Maintain the independence of central banks.
- Improve policy models to address efficacy of rates or FX policy tools.
- Go beyond inflation targeting to managing cost of living; this requires central banks not only to manage price rates of change but price levels as well.
- Social welfare programs to mitigate the rising costs of living. This will likely be expensive.
- Public debt has far-reaching implications and deserves active management.
- Re-specify the mandate of treasuries to include not just funding government but managing lifetime funding costs. This is the easy bit.
- Maintain a realistic and practical budget. This is wide ranging and includes defence, social security and welfare, education, and healthcare. The provision of public goods needs redefinition and reform as the basis of reviewing funding systems and levels.
- The financial system is a source for policy transmission as well as contagion and needs careful management.
- Bolster bank capital rules and not roll them back.
- Extend regulation beyond banks to include all systemic financial intermediaries (and possibly principals) such as private equity and private credit, securitisation markets, structured credit markets and the insurance industry.
- Politics.
- This is possibly the most intractable of all the pillars that need reform. How does a country remain true to the ideals of liberal democracy as the far right gains the popular vote?
- Balance between freedom and control. Without appropriate controls, the agents of freedom such as the press, the courts, and social media can be co-opted by interest groups to the detriment of freedom. Freedom needs tending to. Freedom, ironically, requires some control.
- Back to basics. Foundational principles of morality and justice need to be upheld.
- Good governance. This requires: no concentration of power, checks and balances, term limits, accountability, transparency and rule of law.
- Reforming the Economy and Society
- Changing mindsets: Self interest is ingrained in human instinct. To balance instinct, humans need to be guided by a set of principles to harness those instincts and to manage them when they are unleashed.
- Education. Changing mindsets has to happen at an early age as part of the early education curriculum.
- Diversity, Inclusion and Tolerance.
- Analysis likes diversity of data, information, interpretations and opinions.
- Scientific method, logic and rationality. Superstition impedes rational thought, development and progress. Rationality and scientific method help with analysis, information processing and decision making in the resource allocation process.
- Can and should morality be taught? Unsure.
- Policy principles:
- General liberty clause
All acts are permitted unless they wrongfully impair another’s equal authority or impose significant, non-consensual risk thereof. Restrictions must be necessary and least-restrictive.
- Risk threshold clause
Regulators shall set and publish domain-specific thresholds T for expected harm or credible worst-case; under deep uncertainty, choose conservative T, review at fixed intervals.
- Aggregation clause
Otherwise-harmless acts may be limited when a predictable aggregation breaches T; interventions shall target the aggregate (caps, prices) rather than prescribe individual behaviour, where feasible.
- Consent quality clause
Consent is valid only if informed, uncoerced, and reasonably avoidable; where asymmetries preclude this, processors owe fiduciary duties and purpose limits.
- Scarcity allocation clause
Scarce commons shall be allocated by auction/lottery with equal per-capita distribution of proceeds; targeted, time-bounded rectification applies where prior violations are identified.
- Sunset & audit clause
Any rule that restricts baseline authority expires after N years unless re-justified against T with a published necessity review and independent audit.
- Politics
The government systems most compatible with the above system of principles is, in order of compatibility:
- Constitutional parliamentary democracy.
- Constitutional federal democracy.
- Constitutional presidential majoritarian.
Other systems such as Technocracy, Theocracy, Monarchy, and Command Economies do not fit the above principles well.
Government shall provide public goods, of which the system above is an example. This principle will guide the scope of government authority.