Ray Dalio on Capitalism Gone Wrong: America May See Dire Consequences

Capitalism in America "is producing self-reinforcing spirals up for the haves and down for the have-nots," the hedge fund titan wrote.

Ray Dalio warns that capitalism is in urgent need of reform.
Ray Dalio warns that capitalism is in urgent need of reform. Roy Rochlin/Getty Images

Hedge fund billionaire Ray Dalio became a capitalist by definition at the age of 12 (when he started putting money earned from odd jobs into the stock market) and has since been a firm believer in capitalism. The system evidently served him well—over the course of 50 years, he went from being a middle-class boy living in Queens, New York to heading the world’s largest hedge fund firm with an enviable personal net worth of $18 billion.

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But in recent years, the 69-year-old investing guru has increasingly felt that his success story is irreplicable for the young people of today. And the reason, he figured, lies in the current system of capitalism itself.

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Instead of creating a society promoting equal opportunity and economic mobility, capitalism in America today “is producing self-reinforcing spirals up for the haves and down for the have-nots,” Dalio recently wrote in a lengthy essay.

The commentary, shared on Dalio’s LinkedIn page on Thursday, was part one of a bigger discussion about why he believes that capitalism needs to be reformed in order to live on and how it should be done.

To most readers who regularly follow economic news, it’s probably no surprise that the wealth gap in the U.S. is widening between the country’s richest and its poorest. However, in his essay, Dalio underscored a less headline-grabbing, but more important fact, about our economy—that widening wealth gap does not only concern people on the two extremes of the income spectrum, but actually affects everyone in the middle as well.

To illustrate this point, Dalio laid out a series of charts derived from studying America’s richest top 40 percent and the remaining (or the bottom) 60 percent. The finding was astonishing: Since 1980, real income hasn’t grown at all for the bottom 60 percent, while income for the top 40 percent has doubled—and tripled for the top one percent.

As a result, “the income gap is about as high as ever and the wealth gap is the highest since the late 1930s,” Dalio wrote. “Those in the top 40 percent now have on average more than 10 times as much wealth as those in the bottom 60 percent. That is up from six times in 1980.”

He argued that this increasing economic inequality is limiting the resources for children from poor families to get good educations, which hampers their opportunities to get well-paying jobs, which prevents their children from getting a good education again—hence a negative cycle of reinforcement for the poor to be stuck in poverty perpetually.

And if the economic trend continues, there could be serious dangers to social stability and even risks of a total collapse of the government, Dalio warned.

“I believe that, as a principle, if there is a very big gap in the economic conditions of people who share a budget and there is an economic downturn, there is a high risk of bad conflict,” he explained. “Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of populism of the left and populism of the right and often in revolutions of one sort or another.”

That is not to say that socialism will be a possible solution, Dalio clarified, for its inherent lack of an incentive system. “I think that most capitalists don’t know how to divide the economic pie well and most socialists don’t know how to grow it well.”

So what’s the fix? We’ll have to wait for part two of the discussion. You can follow the updates here.

Ray Dalio on Capitalism Gone Wrong: America May See Dire Consequences