Ray Dalio on why capitalism must be reformed

Credit: Ray Dalio

Dalio’s chronicle of capitalism’s ills

Ray Dalio, the founder of the highly successful hedge fund Bridgewater Associates, has written a detailed paper on why present-day capitalism, especially as it exists in the U.S., is in serious trouble and must be reformed, or else society risks increasingly serious social discord and economic dysfunction.

Dalio’s essay contains a treasure-trove of data, statistics and charts documenting the difficulties U.S. society in particular faces in the wake of increasing economic inequality, especially the manifold stresses faced by the less-well-off, and likely outcomes if nothing is done.

Here are some of the highlights from his paper:

  1. While those with household income in the top 40% have seen a roughly 50% increase, on average, in inflation-adjusted income since 1970, those in the lower 60% have seen virtually no increase. Further, incomes in the top 10% have doubled over this time period, and those in the top 1% have tripled.
  2. The percentage of younger people who earn more than their parents has decreased from 90% in 1970 to only about 50% today.
  3. Today, the total wealth of the top 1% is more than that of the bottom 90% combined, a wealth gap similar to that of the 1935-1940 period, a time of great economic and political unrest.
  4. While most Americans consider the U.S. to be a land of economic mobility and opportunity, the nation now ranks rather low in this regard. The percentage of those born to bottom-quartile-income fathers who end up in the top quartile is only about 5%, a lower percentage than nearly every other major nation (see figure above).
  5. In 2017, 17% of U.S. children resided in homes where at least one family member was unable to acquire adequate food due to insufficient resources. The U.S. is even worse in this statistic than economically-challenged nations such as Greece and Chile.
  6. On the Programme for International Student Assessment (PISA) tests, the U.S. ranks lower than all major developed nations except Italy and Greece.
  7. Within the U.S., educational performance is strongly correlated with economic level: Students at high-poverty schools averaged 440 on PISA, compared with 535 at schools with low poverty rates.
  8. Among developed nations, the U.S. has the third-most-extreme difference in staff shortages between advantaged and disadvantaged schools.
  9. Disadvantaged students are significantly more likely to experience social or emotional problems than those in most other developed nations.
  10. Students from U.S. families earning $20,000 or less who try to enter college score 260 points lower on average on the SAT than students from families earning $200,000 or more, and the gap is increasing (estimated as 75% higher today than in the early 1940s).
  11. Schools in poorer neighborhoods receive on average $1000 less in per-pupil state funding than those in wealthier neighborhoods.
  12. The U.S. is virtually the only major nation with flat or slightly rising premature death rates. The largest cause here is an increase in suicides and opioid usage, much of it focused in poor and declining areas.
  13. 20% of those unemployed or earning less than $35,000 report poor health, a figure that is roughly three times the rate for the population at large.

After reviewing these statistics, Dalio quips, “The problem is that capitalists typically don’t know how to divide the pie well and socialists typically don’t know how to grow it well.”

Dalio’s recommendations

Dalio emphasizes that the above ills are unacceptable, but argues that contrary to what populists of the left and right have said, they are not due to “evil rich people” or “lazy poor people.” Instead, the capitalist system is simply not working well. He adds,

I believe that all good things taken to an extreme become self-destructive and everything must evolve or die, and that these principles now apply to capitalism. While the pursuit of profit is usually an effective motivator and resource allocator for creating productivity and for providing those who are productive with buying power, it is now producing a self-reinforcing feedback loop that widens the income/wealth/opportunity gap to the point that capitalism and the American Dream are in jeopardy.

Dalio then lists some specific actions to address these problems, among them:

  • Instituting bipartisan leadership to “reengineer the system to simultaneously divide and increase the economic pie better.”
  • Redistributing resources to improve both the well-being and productivity of most people.
  • Creating private-public partnerships involving governments, philanthropists and private industry to vet and invest in projects judged on their social and economic performance relative to clear metrics.
  • Raising more from the top via taxes earmarked to help those in the middle and bottom primarily in ways to improve the overall level of productivity.

Did Dalio go far enough?

After reading Dalio’s essay, the present author is struck that his recommendations were very modest and unspecific, given the gravity of the issues he had just finished documenting.

For example, the U.S. political scene is now facing numerous specific proposals for changes to the system, among them:

Which of these proposals has merit worthy of at least being pursued further? It was disappointing that Dalio, in this essay, did not directly comment on any these specific proposals (although he briefly mentioned a carbon tax and higher taxes at the top).


Ray Dalio has collected an impressive array of data and statistics on the yawning economic inequality that afflicts major economic powers, particularly the U.S. To the extent that he is successful in focusing national and international attention on these problems, he has made a significant contribution.

But if anything the overall challenges currently faced by society are even greater than what Dalio outlined. Among other things, the threat of climate change is emerging as a premier global issue of our time. As a recent report by the Intergovernmental Panel on Climate Change (IPCC) grimly warns, even a 1.5 degree C (2.7 degree F) rise in global temperatures would have “substantial” consequences. But limiting the increase to 1.5 degree C will still require a wrenching change away from fossil fuels and an equally wrenching realignment of global economies, all over the next decade or as soon as humanly possible.

When the economic and social challenges highlighted by Dalio are added to the looming challenge of converting worldwide economies, including the U.S., to carbon-free energy, the overall level of challenge is exceedingly high.

Thus Dalio’s recommendations appear, if anything, to be far too modest, given the gravity of the challenges that he ably documents, and especially in light of other challenges such as global warming now faced by nations worldwide. These challenges require much bolder action, both to better grow the pie and better distribute the pie.

Will the business, scientific and political establishments of the U.S. and other major nations rise to the challenge? Given the discord that has resulted from addressing much less serious issues in past few years, the outlook is not very encouraging.

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