Why Capitalism?

by Allan H. Meltzer

A review of the headlines of the past decade seems to show that disasters are often part of capitalist 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.

Genres: Economics, Politics, Nonfiction, Business

154 pages, Hardcover

First published December 8, 2011

Reviews

[Nate · Rating 1 out of 5]

"The United States government is on course in 2009, 2010, and 2011 to run the largest peacetime deficits in its history..." Hmmm, okay Mrs. Palin, I mean Mr. Meltzer, you are aware that the three 3 years you listed are not actually peacetime years right? This was by far the kookiest statement in the book, but was certainly not the only one.

Overall I am confused by some of the gaping holes in this short little book on capitalism. The author starts off the book with lots of ambiguous words and phrases for groups of people with opposing viewpoints, but doesn't really go in depth to them at all; it left me wondering whom is he exactly talking about. The only times I have heard the initial opposing viewpoints he references are from cheap attention getter headlines or a small sound bite from a TV program desperate for viewers. This author is a professor at one of the top universities in the country, is he really debating the extremely lame headlines from CNBC as if they are a bellwether for credible economic and financial viewpoints? I don't get it. For those who don't know, CNBC is to financial news as the National Enquirer is to long form journalism.

The book is filled with oddities and his retorts often seem extremely 1-sided and empty. Much more disturbingly though, is that they seem void of any in depth research, and often appear to be made up or misinformed.

For instance, with his view of why regulation girds capitalism, he writes, "Sarbanes-Oxley legislation reduced the attractiveness of U.S. equity markets. Many foreign firms left." Again, the use of very ambiguous language with the word "many." Personally I would replace it with "few," but whatever.

The reason-the already very questionable-small foreign firms left was not because the law prevented them from doing business, but rather that they could not do business AND follow the law. Sarbanes-Oxley required these (and all public) companies to be held accountable for their financial controls and the reporting of their published numbers. So what did the foreign firms who were cooking the books do: they left the exchanges. There are many arguments against Sarbanes-Oxley, but the one he specifically chooses to use is poor for his argument since one could easily surmise that the regulation of Sarbanes-Oxley actually weeded out corruption in this instance.

Okay so maybe his research, or lack thereof, was a little off on SOX. Fair enough, but he goes onto to just completely make up findings from studies.

For instance, "Outlawing cocaine has not prevented addicts from finding 'crack houses.' It should not surprise anyone that addicts find the house but the police rarely do. The reason is the addicts have a strong incentive but the police have a large disincentive. The criminals who trade in cocaine are likely to kill police who raid their outlets." Okay so he just made that up. There is no study stating that police rarely find crack houses (or if there is, he opts to not provide it in his reference section). No biggie, he was just using it as additional support to communicate to the common reader some of the caveats about regulation.

Fair enough, but that's far from the only instance of made up information. A chapter later he states "...but many who benefit from affirmative action programs are not prepared for the standards they face at the best colleges and universities and drop out of school." Next chapter, "In our 50 largest cities, about half the children do not earn a high school diploma from a public high school." He provides sources for some of his data, but oddly not the stuff that seems fictitious-geez, I wonder why?

Well maybe during those chapters he was feeling a bit creative and just opted to make up some information. What about when there is actually some data to go off of. Sadly, he doesn't seem to fair much better there either. When stating a viewpoint on improving education he says "Monetary rewards increase incentives, and many students develop useful work habits." Unfortunately the studies he's mentioning concluded that the monetary incentives only work in the short term and fail to produce any desirable long term effects, such as creating students who value a lifetime education.

When discussing some successful reform he talks about the changes to welfare in 1994. How it worked because it reduced the number of recipients and "...that children learned that adults work." Ahh, is that what they learned.

Well the reform that enacted the changes he's mentioning actually happened in 1996, not 1994; and the reason it reduced recipients was not because the program put the recipients to work, but rather because it made the requirements for being on welfare much stricter. It also added a time limit for how long someone could use the program, and it gave states more authority on the disbursement of the funds. Today the number of welfare recipients and the amount of money an individual receives (adjusted for inflation) is the lowest in the history of the program. However, food stamps-which have less stringent requirements-are at their highest rates. The success he mentions of this reform did not happen. Correlation does not mean causation, and anything more than a casual glance at the data would illustrate that.

I really found some of his views interesting: I agreed with many and found others thought provoking. I even liked his style of writing, but unfortunately I cannot recommend a book that is (quite shockingly) so poorly researched and edited. I read this book as a precursor to his much larger books on the federal reserve, but now I am questioning if I should even check those out.

[Asad Zaman · Rating 1 out of 5]

In a complex world, discovering causality is very difficult. Many things happen simultaneously, and post hoc ergo propter hoc reasoning is a common fallacy that is hard to detect and critique. Here is how I understand Meltzer's arguments. Meltzer defines Capitalism as private ownership of means of production, and free enterprise with minimal government regulations. In practice, ALL economies have government regulation of free enterprise, and a mix of private and public ownership. This gives Meltzer a free hand in proving that Capitalism works. Wherever he sees growth, he attributes it to the "capitalist" portion of the mixed economy. Wherever he sees failure, he attributes it to the "communist" portion - government regulations and control of production.

For example in a 90% capitalistic economy in the USA, a small injection of regulations (say 5%) leads to disaster and catastrophe. However in China, an economy which remains largely communist (government owns more than half of means of production), growth is attributed to the small injection of capitalist methods. Whereas the gradual liberalization of Chinese is praised, the Russian experience is not mentioned at all. At insistence of free market ideologues like Meltzer, Russia was forced to adopt a radical free market strategy (Shock Therapy of Jeffrey Sachs) which led to disaster.

In addition to wrong attribution of causality, I disagree with Meltzer on some factual claims. He considers the Reagan-Thatcher era of de-regulation to be a general success on economic fronts. Here is my capsule summary of banking regulation history, which is drastically different from Meltzer's portrayal of the same history. Wild speculation by banks led to collapse of banks in 1929, wiping out life savings of millions, and creating massive misery which lasted for decades in the USA. In wake of this failure, a regulatory structure which included the Glass Steagall act, was put into place which PREVENTED competition and speculation by banks. This worked very well for fifty years, with only minor and inconsequential bank failures until the 1980's. Then, with much fanfare, Reagan deregulated the S&L industry via the Garn-St. Germain Act, announcing a new era. Inside Job: The Looting of America's Savings and Loans by Pizzo, Fricker & Muolo documents how the deregulation led to systematic looting and the S&L crisis. As a result of the crisis, Taleb estimates (see page 43 of The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: "On Robustness and Fragility" ) "large American banks lost close to all their past earnings (cumulatively),about everything they ever made in the history of American banking - everything." Similarly, repeal of the Glass-Steagall act, which prevented banks from speculating, eventually led to the global financial crisis of 2008, in which free enterprise by banks led to the loss of trillions of dollars. An antidote for the belief that the private sector is more efficient and less corrupt than the government is a series of articles by Matt Taibbi, for instance "The Bank of America: Too Crooked to Fail" [ see [...] ]

To summarize, unregulated free markets led to the Great Depression. Regulations and Keynesian economics (which allows Governments to help the unemployed) led to stability and prosperity until the 1970's. De-regulation and liberalization in the Reagan-Thatcher era led to a massive increase in concentration of wealth at the top, and repeated financial crises, including the S&L crisis of the 80's and the global financial crisis of 2008. HOWEVER, free market ideologues like Meltzer have an ENTIRELY different interpretation of this same history. According to them, the Great Depression was caused by mis-management of the monetary policy by the US Government. The same mistake caused the S&L crisis in 1980's, and again, government (mis-)regulations are to blame for the global financial crisis.

One point on which Meltzer and I agree is that the Dodd Frank act is not worth the paper it is written. However, to Meltzer, this is evidence that regulations don't work. Many others, including myself, see it as evidence of regulatory capture. The 37 page Glass-Steagall act clearly and strictly prevented banks from speculative investments, and worked very well for half a century. The strength of the financial sector prevented the passing of the necessary regulations, and created the 900+ page monstrosity of Dodd-Frank, full of loopholes one could drive a truck through. Effective and necessary regulation could not be passed because the strong private sector prevented it from happening.

How can we decide who is right? From the birds eye perspective taken by Meltzer, I believe that it is impossible to be sure. However, when one gets down to the nitty gritty details of history - who did what to whom, a pretty clear picture of the causal chains emerges. In this respect, Naomi Klein's book The Shock Doctrine: The Rise of Disaster Capitalism is fantastic. I can honestly say that I learnt more about real world 20th century economic history and theory from this one book than I did from my Ph.D. in Economics at Stanford. The reader is invited to read both books and decide on the answer to Whether Capitalism works? for herself or himself.

[Luke West · Rating 4 out of 5]

Very interesting points on why capitalism is the best economic structure. I like how he doesn't take an obvious political side, very non-partisan. He highlights the key themes of why we as people are always changing our minds and the natural ebbs and flows of the debt and welfare. Overall fascinating book.

[Ryan Ward · Rating 1 out of 5]

This book is absurd. It could be satire it’s so blatant in its propaganda. It unironically quotes Thatcher and lavishes praise on Reagan. It claims with a straight face that the time of the “Pax Americana” (seriously, that’s what he calls it) since WWII was a time of global prosperity when the US benevolently watched over the world at great cost to itself and that the reason why people are now disallusioned with American imperialism is because living standards were raised so much people have time to complain. Ungrateful countries!

He repeats ad nauseum Kant’s rule, which is that some people are good and some bad so the problem is never systemic and anyway capitalism is the only system that guarantees freedom because John Locke and Friederich Hayek said so. He holds up Pinochet’s brutal free market reforms, which he admits were implemented in a problematic way during a “painful transition” as a success story. No matter that they drove 50% of Chile into poverty and killed tens of thousands of people.

Throughout he provides examples of successful economic growth which care nothing for the lives of real people, at one point stating sincerely that when NAFTA was signed, “The United States benefited from lower prices on consumer goods, but those who lost jobs for whatever reason” blamed the trade arrangements and “those who are injured do not choose to sacrifice for the common good”.

It goes on and on. The financial crisis was caused by “mistakes” made by bankers and government regulators. The US gives less foreign aid than other countries but it’s okay because they’re all corrupt anyway, nevermind that many have had their governments overthrown by the US and the corrupt dictators handpicked and installed according to US corporate interests. The callous disregard for real people and not economic abstractions drips from every page. His main conclusion seems to be that corruption happens anyway so why not just go with a system that guarantees growth and freedom? Because, after all, “Capitalism disburses power and limits corruption.” Seriously, that’s the last line of the book.

It’s actually amazing that this book was published by Oxford, it’s nothing more than free-market propaganda that comes from right-wing think tanks. Maybe he had a book deal because of his position as a presidential economic advisor… to Reagan.

[Puri Kencana Putri · Rating 3 out of 5]

"Capitalism works best in a stable environment that permits people to achieve their plans. To achieve the growth and freedom that only capitalism provides, country must adopt rules that force policymakers to plan for the medium term and prevent inflation."

This is the last part of the book that I'm trying to grasp at the moment. Meltzer, the writer as well as the defender of the idea why we need capitalism is trying to persuade the readers including me about the wise elements of capitalism in our lives. He underlines Kant and Kantianism on people and system that aren't perfect and likely to make mistakes. Thus, capitalism needs better environment, so that this ideology can deliver the basic needs; including to ensure freedoms and livelihood in much better ways.

Surely, I have been enjoying all the benefits, access, and basic life with the help of capital approach. I rant about govt policy through social media, wherein many investors put a lot of money to be invested at socmed corporations. I complain so much about poverty, yet I got a soft loan coming from an international bank to renovate my parents' house, I use a fancy computer where in daily I use it to write about human rights violations. Yes, our oxymoron situations can only be happened with these schemes.

Yet, as a preliminary reading this book has brought more thoughts on how we see capitalism with such different standards and values in our insignificant lives.

[Sarah · Rating 3 out of 5]

I agree with the points made in the book, I just felt it wasn't very coherent and it was slightly repetitive.

[James · Rating 5 out of 5]

9/10

[Stephen Morrison · Rating 1 out of 5]

Poorly argued nonsense. Meltzer more or less states capitalism’s superiority without backing it up. It’s not a serious book.

[Philski · Rating 4 out of 5]

Solid book, addresses capitalism independent of its implementation in various countries. The primary thrust is that capitalism is the only system which has been reliably shown to produce both growth and liberty. The second main tenet is that markets are dynamic where legislation is static, so while legislation may aim itself at a shortcoming or something it considers wrong in capitalism, the market can shift to avoid it. Finally, the third tenet is that legislation should focus on the belief or intent which is generating problems, not on creating walls or barricades which can be circumvented.

He repeats early and often that "capitalism without failure is like religion without sin" and backs it up with various cases and statistics worldwide. Allowing companies to fail is good for capitalism. When the government intervenes and determines things are "too big to fail" it causes multiple companies to decide the "safest" course of action is to simply become "too big to fail" and enjoy the security net. Similarly, the government encouraged risky loans leading up to the housing bubble popping - but because these were encouraged by the government companies looked at the short-term balance sheet, not the long term. Finally he talks about how government uses tricks in budgeting to hide long-term costs of pensions, various "reforms" leading to further deficit, and this has been going on since WWII; prior to WWII running a deficit was rare outside of times of war.

Interesting book especially the way it divorces capitalism from the government style.

[Francois Cloutier · Rating 5 out of 5]

Critiqué de toutes parts, le capitalisme avait besoin d'une défense claire et vigoureuse, ce dont tente de faire Meltzer. Ce petit ouvrage aborde un nombre étonnant de sujets : crise des subprimes, échecs socialistes, le rôle de la Federal reserve, pourquoi un retour à l'étalon-or n'est pas souhaitable (malgré ce qu'en pense Ron Paul), les politiques du Fonds monétaire international, l'aide aux pays pauvres par le World Bank, la corruption, le copinage, les mauvaises décisions politiques, etc.

Trois points me semblent synthétiser les idées principales de l'auteur.

1. Selon le principe de Kant, les hommes sont imparfaits moralement. Le capitalisme, contrairement au socialisme, ne tente pas de faire une rééducation morale qui aurait été décrétée par un groupe select d'intellectuels.

2. Les régulations (réglementations) visant à encadrer le marché sont difficiles, car le marché trouve des moyens de les éviter et/ou de s'approprier les organismes régulateurs. Les bonnes intentions politiques ont parfois des conséquences imprévisibles et/ou désastreuses.

3. La politique "too big too fail" est un désastre, car elle va à l'encontre d'un principe fondalement du capitalisme : le capitalisme sans échec (failure) est comme une religion sans péché. Cela ne fonctionne pas bien. Les banques et autres entreprises doivent donc assumer les conséquences de leurs investissements risqués et les faillites qui peuvent survenir, ce qui est le signe d'un capitalisme en santé.

[Charles Berteau · Rating 3 out of 5]

Review carried forward from "I'm Reading"

There is much to credit in this defense of democratic capitalism. It reminds readers of many meaningful points regarding the rule of law (not regulators); the inevitable outcomes of poor regulatory design; that humanity is the weak link. It forcefully defends capitalism versus alternatives that inevitably become coersive. Further, it blasts both US political parties, as they deserve, for spending more than we can pay and not honestly accounting for it ("We have two political parties. One wants to spend more and tax the rich. The other is willing to spend more but wants to tax less.")

The overall message is sound: current policy is unsustainable; we need honest NPV-based government accounting to allow the electorate to make tough choices that otherwise we all avoid; and that some guiding structure to enforce future-aware fiscal sanity is critical.

But the book itself is hard to read - incredibly tedious and repetitive for such a short book. It's not the crisp primer I was hoping for.

[Meepspeeps · Rating 3 out of 5]

I think this is a good primer on the advantages of capitalism as an economic system. The author demonstrates how capitalism has lifted more peeps out of poverty than other systems. He acknowledges that peeps who benefit from capitalism need to tax themselves to support necessary government services including programs for those who are unable to participate in the economy at a level that supports themselves and their families. His comments about self-discipline and other "blame the survivor" wording irritated me because peeps who are poor don't necessarily lack self-discipline. However, his overall points are good. He spends time on the USA political system stalemate and talks about the demise of USA power due to failure to make tough bipartisan choices. He gives good examples of how bad regulation leads to circumvention by those newly regulated. I strongly recommend it to peeps who favor socialism, or more socialism than the USA has today.

[Govind Chandrasekhar · Rating 3 out of 5]

The title drew me in. I needed some reassurance that capitalism is the best way forward, especially after having ruminated over several of its flaws while reading Fault Lines. The core idea of this book is that markets are more intelligent than central planners can ever be, that regulators are fallible despite good intentions since they suffer from the same flaw that central planners do, and that capitalism cannot be blamed for the mistakes that human beings make. The book gets a bit technical at times, so don't dig in unless you're up for a slightly dense read.

[Matt Thackeray · Rating 3 out of 5]

A simple critique of the current lurch away from neo-Liberalism. It takes a more neo-classical approach, along Hayekian lines, mixed in with a dose of Kant for Philosophical good measure. It makes soon good points about the growth the world economy has seen over the past 25 years and some prescient points about the rise of populism and economic nationalism. The points about regulation and government intervention are a little laboured and ignore the times when it has worked, and taxation on cigarettes and public health programmes for example.

[Frank Bowley · Rating 3 out of 5]

Though I agreed,with much of Meltzer argument, I found his style very off putting. I'm professionally an economist, and philosophically supportive of liberal capitalism, but this book makes capitalism seem the product of the most zealous tea party member.

[Vasco · Rating 3 out of 5]

Although oversimplifying some of its examples, the book manages to define what capitalism is and isn't, it's great advantage over other systems, its limits, and the implications of regulations on it. A good, short read.

[Lani M · Rating 3 out of 5]

Let's just say this is an introduction to capitalism equipped by concise fact here and there.

If anything, he kept reminding Kant's quote to us, that humans are imperfect and make mistakes. So, do not blame the system blindly.

[James]

Pittsburgh native Allen Meltzer has written a very brief defense of democratic capitalism. He has written to the average layman so it's an easy read so far.

[Gaurav Dubey · Rating 3 out of 5]

Good book to understand how and why capitalism works. But do not completely find myself agreeing with the author on certain points