New research confirms what many of us already knew: rich men are way overconfident in their own knowledge and ability, even in subjects on which they have little expertise.

Big shot hedge-fund investor Ray Dalio’s latest effort to save capitalism from itself offers a perfect illustration.

In April, Dalio penned a two-part missive bordering on a manifesto entitled “Why and How Capitalism Needs To Be Reformed.”

To his credit, Dalio nails the why: “I have 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.”

So far, so good.

Lack of expertise

However, in the spirit of the above-cited study, Dalio chooses to offer his own diagnosis of the causes and solutions of the problem, despite his absolute lack of expertise in the study of inequality. That’s where his argument goes off the rails — it merely parrots false arguments about purported technology, education and skill “gaps” rather than addressing the actual policies that truly drive inequality.

This is just the problem that author and Time editor-at-large Anand Giridharadas has been warning about with his book “Winners Take All: The Elite Charade of Changing the World.”

His message is clear: When a billionaire whose life is an emblem of the very extreme inequality we are trying to address offers a grand solution to that problem, be very suspicious.

Which brings us back to Dalio. Rather than relying on—or even consulting—the extensive economic research conducted in the last two decades on the causes and solutions for surging inequities in wealth and income, Dalio falls back on tropes of conventional wisdom. While these appear convincing on the surface, the data show they are plainly wrong.

First, he argues that the speed of technological change has led to a rapid replacement of workers.

“The pursuit of profit and greater efficiencies has led to the invention of new technologies that replace people, which has made companies run more efficiently, rewarded those who invented these technologies, and hurt those who were replaced by them,” Dalio writes. “This force will accelerate over the next several years, and there is no plan to deal with it well.”

However the facts do not bear this out. If technology were really supercharging the economy to such an extent, productivity should be skyrocketing too. Yet if anything economists have been befuddled in recent years by an utter lack of productivity growth.

Another misleading notion

Dalio then falls back on another misleading notion: “One’s income growth results from one’s productivity growth, which results from one’s personal development.”

However, the chart below shows the large chasm between productivity and workers’ wages starting in the 970s and extending through today.

Since the 1970s, workers' wages have grown much less than productivity in the economy. Economic Policy Institute

The hedge-fund manager also resorts to the old, widely disproven “skills gap” myth: That there are plenty of good jobs but workers just lack the qualifications to fill them. This argument is easily disproved by data showing widening income gaps among individuals with similar educational backgrounds.

Real wages have been flat or falling for most college-educated workers since 2000. Economic Policy Institute

Another favorite Wall Street culprit for inequality, ironically and erroneously, is the Federal Reserve: Ironically, because of course investors have been great beneficiaries of the Fed’s low rate policies; erroneously because the argument ignores other positive effects from loose monetary policy, particularly a push toward full employment, that flow primarily to low- and middle-income Americans.

Fiscal policy

To his credit, Dalio gets one thing right: The need for greater emphasis of fiscal policy during recessions.

“Fiscal policy will have to be more coordinated with monetary policy, which can happen while maintaining the Federal Reserve’s independence,” Dalio concludes. “If done well, this will both stimulate economic growth and reduce the effects that quantitative easing has on increasing the wealth gap by shifting money and credit into the hands of those who have a higher propensity to spend from those who have a higher propensity to save and from those who need it less to those who need it more.”

Still, many of Dalio’s proposed solutions, like “public-private partnerships,” fail to address the key factors driving inequality, like the erosion of workers’ bargaining power and skyrocketing CEO pay that has nothing to do with efficiency or productivity.

Or, to let Giridharadas respond to Dalio in his own words:



