Back in 2017, “late capitalism” was flourishing on Twitter. At the time, The Atlantic researched the origin and use of the phrase and found it was used to describe the excesses resulting from a free-market economy, like $1,200 margaritas, that suggest its downfall is at hand. It’s not that those throwing around the phrase were wrong, just perhaps a bit too early.
A contemporary example of late capitalism might be the GameStop Corp. saga and the idea that it’s reasonable for a stock price to become untethered from the underlying value of a business. Or the proliferation of SPACs, which are the latest version of “blank check” companies. Or non-fungible tokens (NFTs), where cryptocurrency millionaires recycle their gains into pieces of digital art.
I happen to like capitalism. I can get just about whatever I desire delivered to my door in 48 hours thanks to capitalism. A free-market economy means that when you go to the grocery store to buy a turkey for Thanksgiving dinner, there are hundreds to choose from. It also means you can spend less than $100 on a television that was manufactured overseas, boxed, shipped and placed on a shelf, or that millions of hours of entertainment are available at your fingertips for $14 a month—even free in some cases.
When capitalism functions properly money is allocated to its most productive uses, benefiting society as a whole. Sure, there have been points in history when capital was misallocated to unproductive uses. This usually happens at the tops of economic cycles, when every investment opportunity looks attractive, as well as at the bottom, when none do. Capitalism is a process of experimentation, with failures punished, successes rewarded and lessons learned. It works precisely because it is unplanned.
The problem now is that there are no failures to punish or learn from. Because of the actions taken by the federal government and the Federal Reserve to flood the economy with cash—one measure of the money supply rose by $3.82 trillion last year, or 25%, to $19.1 trillion—there have been no failures of consequence during the pandemic. The Fed’s corporate bond liquidity program meant that defaults slowed to a trickle, despite a collapse in demand in the broader economy and massive disruptions to supply chains. Consumer credit scores actually went up during the recession, and personal bankruptcies dropped.
The economic cycle has been virtually eliminated through prolonged periods of ultra-loose monetary policy and negative real interest rates. What was once a typical business cycle punctuated by rolling booms and busts has turned into a long, perpetual boom, interrupted by the occasional heart-stopping capital markets crisis. Gross domestic product cratered at an annual rate of 31.4% in the second quarter of last year as the pandemic took hold, but it rebounded to a rate of 33.4% in the third quarter.
We’re preventing the down part of the cycle from happening, and the natural cleansing of excesses that results. You can’t have capitalism without failure because no hard lessons will be learned. Instead, we’re fostering overinvestment, which leads to malinvestment. And examples of malinvestment in the current economy are rife.