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Why Capitalism? [Hardcover]

Allan H. Meltzer

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Book Description

March 13 2012 0199859574 978-0199859573
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.

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"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


"If you want a realpolitik view of the world, Meltzer's your guy. You know right away that you are in for quite a ride when, in the introduction, he acknowledges the range of his influences, from Immanuel Kant (for example, human nature as 'crooked timber') to Karl Popper to Friedrich Hayek, and to Milton Friedman, among others. He takes you back in time and sketches from a broad perspective the old battle of capitalism versus communism and socialism, and extols the genius of the freedom of capitalism. For those interested in recounting the perils of government regulation and failed attempts at income distribution, it's a treasure, especially in the last chapter. There, the author describes the role of the Federal Reserve, particularly in moderating inflation, Meltzer's specialty."--Journal of Environmental Investing


About the Author

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.

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Front Cover | Copyright | Table of Contents | Excerpt | Index
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Amazon.com: 3.8 out of 5 stars  18 reviews
38 of 42 people found the following review helpful
4.0 out of 5 stars Simple, Clear, Direct Feb. 22 2012
By Ira E. Stoll - Published on Amazon.com
Format:Hardcover
This book is short -- just 160 pages -- but its simple, clear, and direct language makes a big point: that capitalism "is the only system known to humanity that increases both growth and freedom." As a result, far from ending, capitalism has spread to formerly socialist or communist enclaves such as Eastern Europe, India, and even China.

The book is not simply a paean to capitalism, though. It's also a look at some of the problems the country is facing, including the decline in the value of the dollar, the financial crisis and its aftermath, and the federal debt and deficit.

Mr. Meltzer's three laws of regulation help in part to explain the crisis. The first is that "lawyers and bureaucrats regulate," but "markets circumvent regulation." Second, and related, is that "regulations are static. Markets are dynamic." Third, "regulation is most effective when it changes the incentives of the regulated."

While Mr. Meltzer does not favor a return to a gold standard for the dollar, he does acknowledge that when it existed, "governments could not run large, continuous, peacetime budget deficits." The nation's current fiscal trajectory, he says, is unsustainable: "Either the United States voluntarily adopts fiscal discipline or eventually it will face a crisis with rising interest rates and a falling currency."

The book is sprinkled with policy recommendations. World Bank loans should go to "poor countries that adopt pro-growth policies," rather than to countries such as Brazil, China, India, Mexico, and Turkey that can borrow in the capital markets. The Federal Reserve "should adopt and announce a rule announcing what output and inflation combination they intend to seek over the next two or three years. If the Fed fails to achieve its targets, it should offer an explanation along with the resignations of the responsible officials." Banks should be required to hold more capital relative to their assets, and stockholders and managers, rather than taxpayers, should bear the burden of losses.

This is well worth the time for those interested in a utilitarian defense of capitalism along with some thoughts on the present public policy challenges from someone with a pro-capitalist point of view who served in both the Kennedy and and Reagan administrations and has been teaching on the subject at Carnegie Mellon since 1957.
14 of 17 people found the following review helpful
5.0 out of 5 stars A cogent defense of capitalism, and a cautionary look at the limits of government regulation April 30 2012
By E. Jaksetic - Published on Amazon.com
Format:Hardcover
In this brief book, the author presents a succinct, cogent defense of capitalism and highlights the practical limitations of government regulation. A strength of the book is that the author avoids reliance on abstractions and theoretical concepts, and relies heavily on concrete examples from past and recent history to illustrate, elaborate, and support his contentions and arguments.

In defense of capitalism, the author responds to the usual criticisms that: (1) it is based on greed and selfishness; (2) it is immoral, unjust and unfair; (3) it debases people and society; and (4) it repeatedly fails and provokes periodic, serious economic crises. In addition to addressing the criticisms of capitalism, the author affirmatively contends that: (a) capitalism is better than socialism, communism, or other alternatives as a working economic system; (b) capitalism is more practical and adaptable to the inherent limitations of human beings than the generally utopian economic alternatives proposed to replace it; (c) the inevitable failures that occur in economic activities are handled more effectively under capitalism than under other economic systems; and (d) capitalism is better suited to encourage economic growth and individual liberty than other kinds of economic systems.

The author's discussion of the practical limitations of government regulation is insightful, fascinating, and sobering. The author identifies the two great weaknesses of government regulation: (1) regulations are generally static and often ill-suited to be effective in controlling the activities of people and entities, which generally respond and adapt to the regulations in dynamic, creative ways; and (2) the practical results of regulations often differ significantly from the goals and intentions of the regulators. The author's critique of regulations is not an argument against all regulations, but rather a cautionary tale about the limitations of regulations and the need to be realistic and modest about the ability to promulgate practical and effective regulations.

The author also discusses deficit spending in the United States, the general failure of foreign aid to achieve its goals, and why increased inflation is likely to occur in the near future. However, those discussions reiterate the author's views on the benefits of capitalism, the weaknesses of economic systems other than capitalism, and the limitations of government regulations.

The book is written in a nontechnical, readable style that is accessible to the general public. A reader does not need formal training or experience with economic or financial theory to read the book, but some knowledge or experience with them would be helpful to better understand and evaluate the author's contentions, arguments, and conclusions. I strongly recommend this book because it discusses timely and important issues in an informative and thought-provoking way.
18 of 23 people found the following review helpful
2.0 out of 5 stars Disappointed June 11 2012
By M. Lowy - Published on Amazon.com
Format:Hardcover|Verified Purchase
I was hoping for a learned and stirring defense of capitalism. Instead, what I read was a good start, then a ramble about various subjects. The interesting generalities cited by other reviewers come mainly from the early part of the book. If they had been followed up by more detailed investigations of matters such as the theory or philosophy of regulation in a capitalist system, that would have been quite interesting. Alas, that subject, as an example, basically was abandoned.

I was disappointed.
9 of 11 people found the following review helpful
5.0 out of 5 stars WHY CAPITALISM ? IS ANSWERED April 19 2012
By mike mork - Published on Amazon.com
Format:Hardcover|Verified Purchase
Professor Meltzer took time off from his current project of writing the final book in his "A History Of The Federal Reserve" to answer critics of capitalism in the aftermath of the "Great Recession". He shows the myriad advantages of capitalsm over socialism and its variants.Contrary to popular belief capitalism disperses power while socialism concentrates power and "begins with persuasion and almost always ends with coercion".
He examines the role of regulations in the latest financial crisis and says the recently passed Dodd Frank would not have prevented it. In his view getting rid of "too big to fail" is essential because "capitalism without failure is like religion without sin". It doesn't work.
Taking a world wide view he points out that capitalism has lifted entire countries out of poverty and foreign aid is mostly counterproductive.
He points out that voters generally vote for low taxes and less regulation when times are bad and more taxation and regulation when times are good. If this holds true this should help Romney in this years election.

In the final chapter the professor goes back to his monetarist roots and examines "Why Inflation Will Return". He explains that after a successful period in Federal Reserrve history (1985-2002) that the Bernanke Fed has gone back to relying on the Phillips Curve that got us into so much trouble in the 1970's. He does offer an alternative for low world wide inflation without a gold standard involving the three major currencies.

In summary an excellent, very contempory discussion of "Why Capitalism ?" in the aftermath of the recent financial crisis.
5 of 6 people found the following review helpful
5.0 out of 5 stars The real problem with capitalism is "free" Oct. 14 2012
By Theodore A. Rushton - Published on Amazon.com
Format:Hardcover|Verified Purchase
This is a wonderful book for simple-minded folks who think capitalism will solve most or all problems of society; unfortunately, it ignores the basic problem of "free" in any society.

He says capitalism is the world's finest economic system at producing goods and services needed to give everyone a "free" lunch; he fails to point out nothing in life is free even though people expect "free" government benefits and services. Someone always pays. In our society, taxpayers eventually "buy" the free lunch.

That said, it is well worth reading. Meltzer asserts capitalism is the best solution, even taking into account that basic imperfections of people who like to maximize personal benefits and minimize costs. He vigorously condemns politicians of both parties; including Republicans who saw "that liberal governments gained votes by increased spending, they [Republicans] offered the same in reverse, attracting voters by tax reductions."

Unfortunately, he ignores any corrective social or economic cure for the seduction of "free" -- the most powerful word in the English language. It is not "free" as in personal freedom, it's "free" as in government benefits ranging from welfare to healthcare to defense to tax cuts. The temptation since the Eisenhower years is that government benefits are "free" if financed through deficit financing.

Meltzer writes, "Vice President Cheney expressed the viewpoint of many politicians when he told Treasury Secretary Paul O'Neill that President Reagan had shown that budget deficits don't matter." It's not just Obama, Bush or Reagan -- Bill Clinton is praised for three successive balanced budgets -- it's the fault of all politicians who promise increased benefits now without the cost of higher taxes or reduced services.

Meltzer eloquently outlines the problem; he fails to explain how people can be led to adopt the self-restraint and personal sacrifice needed to end the current idea of "free" government benefits.

Don't blame the politicians; they do what people expect. Unless voters change their attitudes about what governments can and cannot do, the problem will worsen. Capitalism can't solve greed. As the 'Pogo' comic strip by Walt Kelly said more than half-a-century ago, "We have met the enemy, and it is us."

Meltzer asserts capitalism is tremendously adaptible and responsive to the public, far more so than any other economic system. If people expect a "free lunch," capitalism will cater it. But the bill must someday be paid -- as is becoming grimly evident in Greece -- or the society will collapse.

Meltzer misses the point that our faults lie within ourselves, not in our politicians, economists or even vulture capitalists. Until wise economics professors such as Meltzer and readers of this book truly understand how self-indulgence is ruining the finest economic system, our problems will continue to worsen.

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