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Robert McGarveyIs it just me, or does the fabric of global capitalism seems to be unraveling?

It seems the sovereign debt dragon was just sleeping and has now roared out of it’s den once again and is starting to snort fire all the way from Greece in the Euro zone, through the U.S. budget debates, to Argentina. A return to growth, which was supposed to lift the global economy out of the doldrums, has been stubbornly absent, while growing inequality continues to plague the system.

Is all this just a coincidence, or does modern capitalism have serious flaws?

One of the cornerstones of modern economics is the so-called ‘trickle-down’ effect. This is a belief that economic growth is like a rising tide that lifts all boats. According to economists, left to its own devices the capitalist system will trend toward greater general prosperity and justice in the world. There is, not surprisingly, a giant qualification to this idea – wealth only ‘trickles-down’ if politicians don’t interfere with the free market.

But, let’s investigate that claim. If it were always true that a free market economy trends toward greater general prosperity, we’d all be living in luxury today. The widespread implementation of monetarist ‘free market’ policies – the promise and the purpose of the Thatcher and Reagan revolutions of the 1980s – and the liberalization of markets that followed have been a testing ground for this principle ever since.

Thirty year later, it must be admitted, corporate profits have never been higher, but that’s just about where the good news ends; middle class wages and lifestyles are under threat and most major economies are stagnating, not flourishing.

How about the idea that a ‘rising tide lifts all boats’. The problem with this popular notion is it’s both true and false. While it seemed to work well enough in the 50s and 60s, it’s not working in the 21st century. In fact, a case could be made for a ‘trickle-up’ effect as wealth concentrates upward rapidly into the pockets of the one per-centers.

So, what was happening in the 50s and 60s that created the conditions for a successful ‘trickle-down’ capitalism?

The answer, according to celebrated economist Milton Friedman, was unadulterated socialism. In a landmark editorial he wrote back in 1970, Friedman made the case for ‘free market’ capitalism, argued against Keynesian style government intervention and chastised misguided businessmen who “disclaim that a business is not “merely” concerned with profit but also with promoting desirable “social ends . . .”

Ironically the capitalist system Friedman railed against created the modern middle class, and was arguably the most egalitarian and prosperous in history.

Perhaps there is no flaw in capitalism, per se, but a basic flaw in monetarism’s assumptions about market purism. While you could make the case that truly ‘free’ markets have never really been tried, for most of us economics operates in the real world and in that world, under monetarist ideas, wealth does not ‘trickle-down’ it ‘trickles-up’.

But that does not explain the most obvious flaw in capitalism today, the fact that the most successful economies are also the most indebted. In fact, the more successful the economy the more indebted it becomes.

That doesn’t make any sense. What’s up?

Few people today can imagine a world without Federal Reserves, vastly profitable private banks and highly-leveraged Wall Street trading houses. These are, after all, the infrastructure of capitalism surely. But this isn’t necessarily so.

These are the infrastructure of a privatized debt-money regime that has entrenched itself inside modern capitalism. The problem with this system is that a successful economy needs an expanding money supply to facilitate growth and exchange of its newly-developed goods and services.

Today, unlike in the past, private bankers monopolize this expansion in the nation’s money supply. Banks create 97 percent of all new money in our economy effortlessly on their computer screens as debt. The new dollar, euro or yen they’ve created must then be repaid to the bank with compounding interest. The tragedy of this debt burden is it’s both unnecessary and unstoppable; regrettably it grows exponentially like algae on a lake.

Capitalism is not some divinely inspired perfection; it’s a very human construct subject to all kinds of abuse. The modern version of capitalism has been assembled over many centuries in an ad hoc fashion – largely by trial and error. It’s now time to admit our mistakes, reform the system and save the future.

Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.

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