Goldman Sachs Wonders if It’s Time to Question “The Efficacy of Capitalism”

By Nicole Dieker February 5, 2016

Photo credit: Arturo Pardavila III, CC BY 2.0.

It’s not every day you visit BloombergBusiness and see a headline like this:

Goldman Sachs Says It May Be Forced to Fundamentally Question How Capitalism Is Working

We all know internet headlines, though—so my first response was “no way, this has to be an exaggeration.”

It’s not. BloombergBusiness quotes a recent note from Goldman Sachs Group Inc. analysts:

Goldman wrote: “We are always wary of guiding for mean reversion. But, if we are wrong and high margins manage to endure for the next few years (particularly when global demand growth is below trend), there are broader questions to be asked about the efficacy of capitalism.”

In case you got lost around “guiding for mean reversion,” BloombergBusiness explains:

In other words, profit margins should naturally mean-revert and oscillate. The existence of fat margins should encourage new competitors and pricing cycles that cause those margins to erode; conversely, at the bottom of the cycle, low margins should lead to weaker players exiting the business and giving stronger companies more breathing space. If that cycle doesn’t continue, something strange is taking place.

A lot of us have wondered if “something strange is taking place” for a while now. Our own profit margins, after all, have remained low even though our working hours and productivity has increased, thanks to the rising costs of rent, childcare, tuition, healthcare, and more:

But enough about our problems: what’s Goldman Sachs’ problem? They’re the ones with the high profit margins, right?

Well, it hinges on that word “efficacy,” which literally means “to produce a desired result.” If capitalism doesn’t produce bull-and-bear cycles, it’s started to produce something else—and we don’t know what that is yet.

It could be what the Harvard Business Review has suggested: specifically, “profits without prosperity.”

It could be what the Washington Monthly asks, which is “what is Corporate America going to do after it has squeezed every profit out of the marketplace?”

It could be what I read on Groopspeak, which—despite the name—seems to give the most thoughtful response of all:

It’s unsustainable, and that’s likely what Goldman Sachs is seeing now. If capitalism is driving these trends, and these trends don’t follow historical averages, then there’s a problem with capitalism that could land us in even deeper economic trouble than the sub-prime market did.

What do you think is going on here? Do you agree with Goldman Sachs that, if profit margins don’t start coming down, it’s time to question whether capitalism is working?

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