Ray Dalio: Why and How Capitalism Needs to Be Reformed


I was fortunate enough to be raised in a middle-class family by parents who took good care of me, to go to good public schools, and to come into a job market that offered me equal opportunity. I was raised with the belief that having equal opportunity to have basic care, good education, and employment is what is fair and best for our collective well-being. To have these things and use them to build a great life is what was meant by living the American Dream. 

At age 12 one might say that I became a capitalist because that’s when I took the money I earned doing various jobs, like delivering newspapers, mowing lawns, and caddying and put it in the stock market when the stock market was hot. That got me hooked on the economic investing game which I’ve played for most of the last 50 years. To succeed at this game I needed to gain a practical understanding of how economies and markets work. My exposure to most economic systems in most countries over many years taught me that the ability to make money, save it, and put it into capital (i.e., capitalism) is the most effective motivator of people and allocator of resources to raise people’s living standards. Over these many years I have also seen capitalism evolve in a way that it is not working well for the majority of Americans because it’s producing self-reinforcing spirals up for the haves and down for the have-nots. This is creating widening income/wealth/opportunity gaps that pose existential threats to the United States because these gaps are bringing about damaging domestic and international conflicts and weakening America’s condition. 

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, yet we are now at a juncture in which either a) people of different ideological inclinations will work together to skillfully re-engineer the system so that the pie is both divided and grown well or b) we will have great conflict and some form of revolution that will hurt most everyone and will shrink the pie. 

I believe that all good things taken to an extreme can be self-destructive and that everything must evolve or die. This is now true for capitalism. In this report I show why I believe that capitalism is now not working for the majority of Americans, I diagnose why it is producing these inadequate results, and I offer some suggestions for what can be done to reform it. Because this report is rather long, I will present it in two parts: part one outlining the problem and part two offering my diagnosis of it and some suggestions for reform. 

Why and How Capitalism Needs to Be Reformed

Before I explain why I believe that capitalism needs to be reformed, I will explain where I’m coming from, which has shaped my perspective. I will then show the indicators that make it clear to me that the outcomes capitalism is producing are inconsistent with what I believe our goals are. Then I will give my diagnosis of why capitalism is producing these inadequate outcomes and conclude by offering some thoughts about how it can be reformed to produce better outcomes.

Part 1

Where I’m Coming From

I was lucky enough to grow up in a middle-class family raised by parents who cared for me, to be educated in a good public school, and to be able to go into a job market that offered me equal opportunity. One might say that I lived the American Dream. At the time, I and most everyone around me believed that we as a society had to strive to provide these basic things (especially equal education and equal job opportunity) to everyone. That was the concept of equal opportunity, which most people believed to be both fair and productive. 

I suppose I became a capitalist at age 12 because that’s when I took the money I earned from doing various jobs like delivering newspapers, mowing lawns, and caddying, and put it in the stock market when the stock market was hot in the 1960s. That got me hooked on the investing game. I went to college and graduate school even though I didn’t have enough money to pay the tuitions because I could borrow the money from a government student loan program. Then I entered a job market that provided me equal opportunity, and I was on my way.

Because I loved playing the markets I chose to be a global macro investor, which is what I’ve been for about 50 years. That required me to gain a practical understanding of how economies and markets work. Over those years, I’ve had exposure to all sorts of economic systems in most countries and have come to understand why the ability to make money, save it, and put it into capital (i.e., capitalism) is an effective motivator of people and allocator of resources that raises people’s living standards. It is an effective motivator of people because it rewards people for their productive activities with money that can be used to get all that money can buy. And it 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. Being productive leads people to make money, which leads them to acquire capital (which is their savings in investment vehicles), which both protects the saver by providing money when it is later needed and provides capital resources to those who can combine them with their ideas and convert them into the profits and productivities that raise our living standards. That is the capitalist system.

Over those many years, I have seen communism come and go and have seen that all countries that made their economies work well, including “communist China,” have made capitalism an integral part of their systems for these reasons. Communism’s philosophy of “from each according to his ability, to each according to his needs” turned out to be naïve because people were not motivated to work hard if they didn’t get commensurately rewarded, so prosperity suffered. Capitalism, which connects pay to productivity and creates efficient capital markets that facilitate savings and the availability of buying power to fuel people’s productivity, worked much better.  

I’ve also studied what makes countries succeed and fail by taking a mechanistic perspective rather than an ideological one because my ability to deal with economies and markets in a practical way is what I have been scored on.  If you’d like to see a summary of my research that shows what makes countries succeed and fail, it’s here (link). In a nutshell, poor education, a poor culture (one that impedes people from operating effectively together), poor infrastructure, and too much debt cause bad economic results. The best results come when there is more rather than less of: a) equal opportunity in education and in work, b) good family or family-like upbringing through the high school years, c) civilized behavior within a system that most people believe is fair, and d) free and well-regulated markets for goods, services, labor, and capital that provide incentives, savings, and financing opportunities to most people. 

Naturally, I have watched these things closely over the years in all countries, especially in the US. I will now show the results that our system is producing that have led me to believe capitalism isn’t working well for most Americans.    

Why I Believe That Capitalism Is Not Working Well for Most Americans

In this section, I will show you a large batch of stats and charts that paint the picture. Perhaps there are too many for your taste. If you feel that you’re getting past the point of diminishing returns, I suggest that you either quickly scan the rest by just reading the sentences in bold or skip ahead to the next section which explains why I think that not reforming capitalism would be an existential threat to the US.

To begin, I’d like to show you the differences that exist between the haves and the have-nots. Because these differences are hidden in the averages, I broke the economy into the top 40% and the bottom 60% of income earners.[1] That way we could see what the lives of the bottom 60% (i.e., the majority) look like and could compare them with those of the top 40%. What I found is shown in this study. While I suggest that you read it, I will quickly give you a bunch of stats that paint the picture here.

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