Why Capitalism?

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Allan Meltzer on Book `Why Capitalism?': Video - Bloomberg
► 9:43► 9:43	www.bloomberg.com/.../88070470-allan-meltzer-on-b...2012년 3월 9일 - 10분 Allan Meltzer, a professor at Carnegie Mellon University, talks about the Greek debt crisis and his book "Why ...

Why Capitalism?

Allan H. Meltzer

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ISBN13: 9780199859573ISBN10: 0199859574 Hardback, 168 pages

Jan 2012,  In Stock

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Description

A review of the headlines of the past decade seems to show that disasters are often part of capitalist systems: the high-tech bubble, the Enron fraud, the Madoff Ponzi scheme, the great housing bubble, massive lay-offs, and a widening income gap. Disenchantment with the market economy has reached the point that many even question capitalism itself.

Allan H. Meltzer disagrees, passionately and persuasively. Drawing on deep expertise as a financial historian and authority on economic theory, he provides a resounding answer to the question, "why capitalism?" Only capitalism, he writes, maximizes both growth and individual freedom. Unlike socialism, capitalism is adaptive, not rigid--private ownership of the means of production flourishes wherever it takes root, regardless of culture. Laws intended to tamper with its fundamental dynamics, such as those that redistribute wealth, fail. European countries boasting extensive welfare programs have not surpassed the more market-oriented United States. Capitalism does require a strong legal framework, Meltzer writes, and it does not solve all problems efficiently. But he finds that its problems stem from universal human weaknesses--such as dishonesty, venality, and expediency--which are not specific to capitalism. Along the way, he systematically analyzes the role of government, positing that regulations are static, but markets are dynamic, usually seeking ways to skirt the rules. Regulation is socially useful if it brings private costs into line with social costs (for example, the cost of taxes to hire policemen compared to that of the impact of rampant crime); if it doesn't, regulation simply invites circumvention.

Vigorously argued, sweeping in scope, Why Capitalism? reminds us of the fundamental vitality of the one economic system that has survived every challenge, and risen to dominate the globe.

Features

• Author is a well-known figure in this debate, and is eminently well-qualified

Reviews

"A concise alternative to current economic policies for those who look with suspicion at the writings of economists and financial specialists...A lively, politically challenging contribution to a developing discussion on how to change international monetary arrangements." --Kirkus Reviews

"Allan Meltzer's Why Capitalism is a thoughtful, historically-based analysis of the roles of government and free markets in a democratic society. Meltzer has thought deeply about the workings of both and has a good sense of which functions each best can be trusted to serve. His analysis of financial regulation in general and of the Dodd-Frank bill in particular is the best I have seen." -- Robert Lucas, University of Chicago, 1995 Nobel laureate in economics

Product Details

168 pages; 1 b/w line illus.; 5-1/2 x 8-1/4; ISBN13: 978-0-19-985957-3ISBN10: 0-19-985957-4

About the Author(s)

Allan H. Meltzer is Allan H. Meltzer University Professor of Political Economy at Carnegie Mellon University. He is the author of A History of the Federal Reserve, Volumes 1 and 2.

Why Capitalism ?

by
Allan H. Meltzer

general information | review summaries | our review | links | about the author

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Title:	Why Capitalism ?
Author:	Allan H. Meltzer
Genre:	Non-fiction
Written:	2012
Length:	143 pages
Availability:	Why Capitalism ? - US
	Why Capitalism ? - UK
	Why Capitalism ? - Canada
	Why Capitalism ? - India

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Our Assessment:

B- : more polemic than argument; too much repetition, too little detail

See our review for fuller assessment.

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Review Summaries

Source	Rating	Date	Reviewer
Publishers Weekly	.	19/12/2011	.

  From the Reviews:

• "Reading more like a collection of essays than anything formal, the book is both powerful and opinionated. At times critical and at others solution oriented, Meltzer delivers his ideas in a manner that feels like an extended lecture, intent on demonstrating that it is because "democratic capitalism is not a rigid orthodoxy" that it remains viable." - Publishers Weekly

Please note that these ratings solely represent the complete review's biased interpretation and subjective opinion of the actual reviews and do not claim to accurately reflect or represent the views of the reviewers. Similarly the illustrative quotes chosen here are merely those the complete review subjectively believes represent the tenor and judgment of the review as a whole. We acknowledge (and remind and warn you) that they may, in fact, be entirely unrepresentative of the actual reviews by any other measure.

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The complete review's Review:

       Why Capitalism ? is, unsurprisingly, a book arguing that 'capitalism' is the way to go, as all those other approaches -- like dreaded socialism -- haven't worked out too well.
       'Capitalism', for Meltzer, boils down to:

ownership of the means of production by individuals who remain relatively free to choose their activities, where they work, what they buy and sell, and at what prices.

       'Ownership of the means of production by individuals' is already a concept fraught with complications, but the key word here is "relatively". In making his case, Meltzer happily presents, for example, China as enjoying such a boom recently because it embraced a "capitalist growth strategy" -- even though China surely still ranks abysmally low on the 'relatively'-scale; in fact, by any measure, its economy still looks almost entirely dirigiste, the local 'rule of law' is dubious and unreliable, and collective ownership (to varying degrees) still dominates the economy -- and yet it's outstripped practically all other 'freer' capitalist nations in economic growth by leaps and bounds for a significant period now ..... In allowing for such an expansive -- indeed, nearly all-encompassing -- definition of 'capitalism', Meltzer makes the easy case: after all, other than some tin-pot foreign aid-abusing African dictators and demented outliers like North Korea, pretty much every government and nation practices at least some vague form of this kind of 'capitalism'.
       Why Capitalism ? takes the superiority of the system essentially as a given -- and on his terms, where even contemporary China somehow qualifies as 'capitalist' (of sorts), it would be hard to argue otherwise. But while Meltzer plays loose with his definition of capitalism where it suits him, he does, in fact, have a specific vision in mind. He is, in fact a proponent of a very pure capitalism and very free markets, and he argues strongly against government interference and, especially, regulation.
       Meltzer is consistent: he does not believe in 'too-big-to-fail', because of the resulting moral hazard -- and among the "major errors by government or its agents" in the US in recent years he counts both the AIG bailout, as well as those of General Motors and Chrysler -- arguing:

Even if the companies repay the advances, the system will suffer because some large firms will take on excessive risk expecting to be spared if losses occur.

       In an abstract, academically ideal world he's right, of course -- though arguably deterrent policies could be put in place that would help prevent other large companies from taking that excessive risk. In real life, the automaker bailout was a politically necessity -- and, inconveniently for pure-capitalist supporters, stunningly successful. [As someone who opposed these (and all) bailouts on similar ideological grounds, I have to admit I was wrong, at least as far as the carmakers go (I still think the bank rescues were mishandled); Meltzer remains convinced he isn't.] Over the very, very long term, Meltzer may be correct (but, given how other circumstances change over time as well, the question may well no longer even matter after a certain point), but the short- and medium-term consequences of any other solution to the imminent collapse of the Detroit car making giants would surely have been catastrophic locally, and a massive blow to the American economy with devastating ripple effects extending over considerable distances, and for a considerable while.
       Meltzer acknowledges a government role in certain areas -- including maintaining the rule of law (and that with an emphasis, of course, on property rights, a foundation of functioning capitalism). Yet he also notes that in democracies such as the United States all sorts of inconvenient forces undermine capitalist ideals. Elected officials pander to voters by promising them either greater benefits (generally without plausibly explaining where the money to pay for them is to come from) or lower taxes (generally without a reduction in existing benefits voters have gotten used to), leading to deficits and, eventually, catastrophe. Lobbyists and big money undermine the electoral and legislative processes at every turn. And don't get him started on regulation ..... (He even offers his own catchy 'laws of regulation'.)
       Yet Meltzer is forced to admit:

The very dynamism of capitalist economies makes circumvention of regulation likely, as the relative competence and insight of the private sector outstrips that of the public.

       He's right, of course, that failure to account for longterm consequences and costs of regulation, as well as the danger of regulatory capture, undermine the ostensible objectives of much regulation. But he doesn't devote much space to considering either the benefits or necessity of regulation (while even he has to admit that a tiny bit is necessary). The reality is that political demands in a democracy will always see a clamor for regulation. The goal, of course, has to be an improved regulatory system -- but Meltzer merely shouts for less regulation, as if that were always in and of itself a good thing.
       And then there's the whole redistribution of income dilemma, which Meltzer also has issues with: it remains an inconvenient problem in any democratic capitalist nation, with political necessity arguably undermining capitalist ideals.
       In fact, Meltzer's criticism -- about regulation and pandering to voters, among other things -- also implicitly suggests something he doesn't want to own up to: that democratic capitalism is inherently flawed. Which slightly undermines that whole capitalism-is-best argument .....
       Economic growth appears to be Meltzer's measure of success, and for the most part he doesn't consider associated costs or its nature: economic growth is the be-all and end-all. Yet while no doubt he doesn't think the policies of the majority of the petro-states -- where the means of production remain largely collective -- are viable over the long term, he doesn't bring them up at all since they do spoil the picture in a way: they've enjoyed great economic growth -- of sorts -- yet that success hardly looks like a lasting one, as these remain societies and systems that need that oil to grease the wheels and largely are unprepared for the day it runs out. Meltzer also doesn't make much of the fact that much American 'economic growth' in recent decades can be attributed largely to the growth of the financial sector -- whose contribution to improving national quality of life has been far below its weight -- the churning of money has contributed to the economy (in the broadest sense of the term) but not to nearly as much effect as a similar growth rate in manufacturing or most other services likely would have. The fact that recent American economic growth has been overwhelmingly among the super-rich also goes unmentioned, though surely there's a very big qualitative difference between economic growth that all of a country's citizens benefit from, and economic growth that mainly benefits a tiny percentage.
       There are a few crotchety asides -- like complaints about poor family structure, leading to a poorly educated workforce. (Meltzer pretty much leaves it at that and doesn't really dig around here to see if the one has anything to do with the other, but note for example that well-educated Scandinavians have out-of-wedlock birthrates equal to or higher than that of the US: 40% in current educational poster-child country Finland, around 55% in both Sweden and Norway (and, no, cultural homogeneity isn't sufficient to explain their success: Sweden has a US-like foreign-born population of over 14%).)
       Meltzer isn't entirely opposed to some government role -- though in everything aside from defense he seems to accept it only very grudgingly -- and he even approves of some taxes, noting in particular that: "If we had heavily taxed carbon 40 years ago", the United States might be considerably better off than it is now (but: "We could not summon the self-discipline to do that, and our government did not call upon us to make the adjustment" ...). Given all the missteps that have been taken he also warns about inflation -- the last chapter is actually even titled: 'Why Inflation Will Return'. But overall what he really wants to see are: "clear, simple rules that limit official discretion" and a "stable environment that permits people to achieve there plans".
       Such utopian ideals are all well and good, but the political reality on the ground is hardly conducive to Americans reaching them. Indeed, many of Meltzer's arguments have the same tilting-at-windmills feel of claims by socialism-apologists: both take a knock-some-sense-into-people approach, arguing that if people just saw the light and did things the right way, then the world would be a wonderful place. Meltzer is correct in acknowledging human weakness, leading to the abuse of whatever system is in place, but the key to a functioning society is bona-fide democracy and dependable rule of law -- not an underlying capitalist or socialist approach. And Meltzer seems to have his serious doubts about how far democracy -- at least of the American sort -- can be trusted; he certainly doesn't like the way a lot of things are working out now.
       One has to accept Why Capitalism ? as a polemic rather than scholarly study, but the shorthand can get irritating: the concerns by critics of the repeal of the Glass-Steagall Act are, for example, simply brushed aside since -- so Meltzer --:

Such critics usually don't specify what problems this repeal caused or recognize that Glass-Steagall had been circumvented long before its repeal.

       (The latter is Meltzer's favorite kind of example -- laws and regulation are made to inevitably be if not broken then at least circumvented by the clever market (though in this case the government increasingly taking a blind eye (and wink ...) approach also played a role) ..... But surely just a bit of probing would suggest that the situation looks very different post-repeal, compared to during those circumventing-times.)
       Occasionally he'll be even more succinct: "Regulation failed." Full stop. The idea that there's a larger context -- political as well as economic -- is rarely explored in any depth, and many of Meltzer's positions are too extreme to accept by such fiat. Meltzer may well speak from age and experience, reducing a lifetime's worth of accumulated knowledge into simple but absolute positions, but for the average reader there's just not enough supporting argument to convince here.
       Ultimately, Why Capitalism ? isn't built on firm enough foundation (it may be there, but Meltzer doesn't take the time to reveal it to readers) and too obsessed with a few personal bêtes noires -- like the flaws of regulation, from how it is conceived to how it implemented (and clung onto). There are many sensible observations here, but with limited realistic suggestions as to how to change the political, legislative, and regulatory systems, Why Capitalism ? doesn't get us very far; with its emphasis on economic growth as the holy grail, without any discussion whatsoever about the costs -- upfront and hidden -- it also fails to convince fully that a pure capitalism really is for the best.

- M.A.Orthofer, 16 February 2012

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Links:

Why Capitalism ?:

• Oxford University Press publicity page

Reviews:

• Kirkus Reviews
• Publishers Weekly

Allan H. Meltzer:

• Faculty page
• Allan H. Meltzer at the American Enterprise Institute

Other books of interest under review:

• See Index of books dealing with Business and Economics

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http://www.complete-review.com/reviews/economic/meltzera.htm

CAPITALISM REMAINS OUR FUTURE

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By Allan H. Meltzer

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The Montréal Review, November 2012

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"Why Capitalism?" by Allan H. Meltzer (Oxford University Press, 2012)

***

"Allan Meltzer's Why Capitalism is a thoughtful, historically-based analysis of the roles of government and free markets in a democratic society. Meltzer has thought deeply about the workings of both and has a good sense of which functions each best can be trusted to serve. His analysis of financial regulation in general and of the Dodd-Frank bill in particular is the best I have seen."

--Robert Lucas, University of Chicago, 1995 Nobel laureate in economics

***

It was with a mixture of surprise and disbelief in the fall of 2008 that I read journalists' commentaries on the end of capitalism. Many welcomed the expansion of regulation and government intervention and the weakening of market competition as a regulator. Several journalists asked me to comment on the alleged end of capitalism. Did they not see that capitalism had become the dominant form of economic organization that had spread in the past 50 years from a few countries in North America and Western Europe to Asia, Latin America, and now to Africa?

My book, Why Capitalism? offers my explanation of the success of democratic capitalism and the failure of alternatives. Democratic capitalism has three unequaled strengths. It is the only system that achieves both economic growth and individual freedom, and it adapts to the many diverse cultures in the world. Adapting to cultures means that it works well with people as they are, not as someone would like to make them. Democracy works to remove the most common criticism of capitalism-that it generates inequality in income distribution. Voters choose the tax rates and income redistribution that satisfies a majority of voters, never all of them.

"Democratic capitalism has three unequaled strengths. It is the only system that achieves both economic growth and individual freedom, and it adapts to the many diverse cultures in the world... Democracy works to remove the most common criticism of capitalism-that it generates inequality in income distribution."

Capitalism places the ownership of the means of producing goods and services in the hands of individuals. The allocation of physical and human capital is based on individual decisions. Power is dispersed; abuse of power brings competitors. Mistakes and poor judgments can end in failure. Capitalism without failure is like religion without sin. It doesn't work.

Alternatives to capitalism, whether socialism, communism, fascism, or some religious orthodoxies offer some groups utopian vision of mankind that becomes the one "right path." Utopian visions and orthodoxies must be enforced, so they always bring enforcement, often brutal enforcement. The 20th century saw many such outcomes. None achieved both higher living standards and greater individual freedom. National Socialism, Soviet and Chinese Communism instead produced mass murders of millions. This should have extinguished the appeal of utopian visions, but it has not. Many still believe that social justice can only be achieved by ending or severely regulating capitalism. Experience disputes that notion. Alternatives to capitalism concentrate power in few hands, opening the way to tyranny and brutality, not justice.

"Capitalism without failure is like religion without sin. It doesn't work... Alternatives to capitalism concentrate power in few hands, opening the way to tyranny and brutality, not justice."

Especially during the past four years in the United States, greatly increased regulation and government spending restricted capitalist development. The main reasons economic recovery from a deep recession was slower than in any postwar recovery are that incentives for risk-bearing diminished and uncertainty increased. No one could know what future tax rates, health care and energy costs, and other regulations would do to future profits. The result: businesses held billions of idle cash and banks held more than one trillion of idle reserves. Instead of investing, they waited for a clearer, less uncertain future and heightened incentives for profits and growth. Increased centralization of decisions added to the uncertainty that is ever present.

U.S. experience is not unique. Japan has stagnated for 20 years under large government spending programs. Government operated social welfare states, Italy and Greece, suffer deep decline. The heavily regulated social welfare state guided by government officials has failed.

Long ago John Locke recognized that collective action is the efficient response to some social problems. Voters in democratic capitalist countries can vote to redistribute and regulate. Modern economics extends that result by recognizing differences between private and social cost. Much regulation restricts competitive solutions, but regulation often fails to achieve efficient or desirable outcomes because it is subject to capture by the regulated and to circumvention by those most affected. Regulation works best to align private and social costs when it changes the incentives of the regulated. Much regulation, instead, creates incentives for circumvention, crony capitalism and corruption.

"Regulation works best to align private and social costs when it changes the incentives of the regulated. Much regulation, instead, creates incentives for circumvention, crony capitalism and corruption."

Capitalism is not a perfect solution to human problems. Perfect solutions are utopian; capitalism is a human institution that works with humans as they are. I share the view strongly taken by early Christianity that the great German philosopher Immanuel Kant expressed very well. People are not perfect, so their systems reflect their imperfections. Capitalism and markets are not responsible for what has gone wrong in the European Union and the United States. People, most often people in powerful positions, created the current crisis by offering well-intentioned policies such as programs to increase home ownership by low income families. Agencies of the U.S. government offered mortgage bankers huge profits for lending to low income borrowers with no down payment loans that government agencies bought. For a short time it appeared to work. Then the housing market collapsed.

Capitalism disperses and limits power while the alternatives concentrate power in a few hands. Capitalism gives owners and managers incentives to serve the public. Failure to service the public often leads to bankruptcy. Governments do not face the same incentives as private owners and managers. When they fail to achieve the promised improvements in welfare, they do not disappear. Instead they get more money.

A few years ago, Canada elected a government determined to reduce the role of government and increase the incentives for economic growth. The benefits should be obvious to all. After years of government regulation and direction, India and China increased market incentives. Millions of people rose from poverty. The success of private incentives is again confirmed.

In the spring of this year, much of the press hailed the "Occupy" demonstrators and their criticisms of capitalism. Participants never offered a coherent program. They had no program. And they were ignorant of the facts of history and economic development. In the past 60 years, more people in more countries increased living standards by larger amounts than in any time in human history. Millions were lifted from poverty. The reason: market capitalism and rules for freer trade permitted countries to specialize in producing and selling products that captured their comparative advantage. Freer trade and market competition-capitalism-permitted the gains in human welfare. No other system achieved anything similar while maintaining and expanding freedom.

"In the spring of this year, much of the press hailed the "Occupy" demonstrators and their criticisms of capitalism. Participants never offered a coherent program. They had no program. And they were ignorant of the facts of history and economic development."

Cultural differences require that there is not a single capitalist orthodoxy. European capitalism differs from Canadian or U.S. capitalism and all of them differ from Japan. State capitalism in China gives a large role to the state. That role has increased in recent years, so I expect the spectacular growth rates of the past 20 years to decline. It is not an accident that the major innovations of modern times begin in countries with greater freedom. Capitalism disperses power and encourages innovation.

The critics of capitalism are wrong. As long as people value freedom and growth, some form of capitalism will remain the principal way to organize economies. Political choice will force deviations from time to time, but a free public will find its way back. Capitalism will remain our future. And because we are not perfect, our system will have flaws. Freedom will permit critics to voice their criticisms, successfully at times.

***

Allan H. Meltzer is the University Professor of Political Economy and Public Policy, Carnegie Mellon University and Distinguished Visiting Professor at the Hoover Institution, Stanford University. He is the author of A History of the Federal Reserve, Volumes 1 and 2.

http://www.themontrealreview.com/2009/Why-Capitalism.php