Why Capitalism? [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.

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.

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.

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