What Went Wrong with Capitalism

Since 1930, spending by government—including state and local—has quadrupled on average to 48 percent of GDP in the LCEs, but within a broad range, rising from 4 percent to 36 percent in the United States and from 19 percent to 58 percent in France.

Since 1930, spending by government—including state and local—has quadrupled on average to 48 percent of GDP in the LCEs, but within a broad range, rising from 4 percent to 36 percent in the United States and from 19 percent to 58 percent in France. The growth of government has been a consistent trend across developed economies since the Great Depression. This expansion encompasses various aspects: Welfare state: Social spending, healthcare, and pension systems Regulatory state: Increasing rules and oversight across industries National security state: Expansion of defense and intelligence agencies The pace and scale of this growth have varied among countries, but the direction has been uniform. Even in the United States, often perceived as more market-oriented, government spending as a percentage of GDP has increased significantly. This trend challenges the notion that there has been any meaningful reduction in government's economic role in recent decades.

There was no golden age of capitalism, when government got its role just right. Misinterpretation of history has led to a widespread belief in a recent era of small government, particularly associated with leaders like Ronald Reagan and Margaret Thatcher. However, this narrative is largely inaccurate: Reagan's presidency saw continued growth in government spending and debt Deregulation efforts often resulted in more complex, not fewer, regulations The welfare state continued to expand, albeit at a slower pace The perception of small government was fueled by: Rhetoric emphasizing free markets and individual responsibility Privatization of some state-owned enterprises Globalization and technological changes that appeared to reduce state power In reality, government's economic influence continued to grow, albeit in less visible ways, such as through monetary policy and financial market interventions.

When government becomes the dominant buyer and seller in the market—as it has in recent decades—it distorts the price signals that normally guide capital. Central bank interventions have fundamentally altered the functioning of capitalist economies. The era of easy money, characterized by low interest rates and quantitative easing, has had far-reaching consequences: Encouraged excessive risk-taking and speculative behavior Inflated asset bubbles in stocks, bonds, and real estate Enabled unsustainable levels of corporate and government debt This environment has created a "bailout culture" where market participants expect government intervention during crises, leading to: Moral hazard in financial decision-making Misallocation of capital to less productive sectors Suppression of the natural business cycle's cleansing effects The result is a capitalism that no longer efficiently allocates resources based on market signals, but instead responds to…