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Why Capitalism? Hardcover – Mar 13 2012


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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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Amazon.com: 18 reviews
38 of 42 people found the following review helpful
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
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.
19 of 24 people found the following review helpful
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
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.
11 of 15 people found the following review helpful
An ideological polemic Sept. 1 2013
By Professor Asad Zaman - Published on Amazon.com
Format: Hardcover
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.


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