Book Review: Why Capitalism?

The book this week is Why Capitalism? by Allan Meltzer. Allan Meltzer is a professor of political economy at Carnegie Mellon University. In light of the recent financial crisis, he mounts a defense for capitalism. It won’t be anything new to libertarians, except specific examples from the last 5 years. It reads like fleshed out class notes and I would have liked to have seen more documentation. He occasionally makes bald statements that I’m sure can be backed up with facts and studies, but aren’t.

His basic points: Regulation should incentivize desired behavior, because markets will find a way around regulations that cost them money. Witness: tax code and compliance. Meltzer also leans heavily on Kantian philosophy, or at least the part of it that says that people are greedy and you can’t stop them from being that way. The problem isn’t capitalism, the problem is people. And while you could say the same thing about socialism and communism, capitalism has provided more freedom and more wealth than any other economic system in the history of the world and by those lights should be the economic system of choice (Which is an interesting takeaway from Kant, I think). His other major point is that regulations are written by lawyers and are static while markets are dynamic and will circumvent regulations that stand in their way more quickly than the regulations can adapt leading to bad, bad situations.

He says these things a few times as he discusses why the welfare state will eventually fail, why we run deficits most of the time since going off the gold standard, why foreign aid hasn’t helped much and why we will eventually have to deal with inflation in this country.

Meltzer goes on to point out how regulation in the last 20-30 years has disincentived good behavior and incentivized unbridled greed. I found the chapter on the history of the Fed and why they made the decisions they did since the end of WWII particularly interesting. Amazing how much it makes sense when someone explains motives. But as the book looks ahead to the future, it’s like seeing a car crash coming that you really really hope someone swerves out of but there’s very little room to maneuver and the drivers don’t have the guts to do it.

To sum up: nothing ground-breaking but a good little book worth the read, especially if you aren’t familiar with why “evil” capitalism hasn’t been shut down yet for the “morally superior” socialism.