Why Capitalism ? - Allan H. Meltzer

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Why Capitalism ?

by
Allan H. Meltzer

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

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.

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:

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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About the Author:

Allan H. Meltzer teaches at Carnegie Mellon University. He was born in 1928.

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