Why Capitalism?

Article excerpt

Why Capitalism? by Allan Meltzer New York: Oxford University Press, 2012, 143 pp.

Allan Meltzer is an eminent professor of economics at Carnegie-Mellon University. He is a world-renowned U.S. Federal Reserve scholar, a 1973 founder and chairman of the Shadow Open Market Committee, and an American Economic Association Distinguished Fellow. What else could he possibly add to those laurels?

Meltzer has written Why Capitalism?

Meltzer answers that question with personal and scholarly reflections on capitalism - the one economic system that achieves both prosperity and individual freedom. While Meltzer celebrates such bounty, anyone expecting a polemic will surely be disappointed.

Meltzer gives himself a wide enough berth to assess capitalism across many cultures, countries, and mixed economies. To satisfy his definition, functioning capitalism more or less requires individual ownership of the means of production, property rights protection, and the rule of law. As Meltzer sees it, these basic features can be found in economies with both large and small public sectors, in countries with massive amounts of regulation, and in places where the necessary institutional building blocks are just beginning to form. In no way does he expect his definition to be satisfied perfectly in practice.

Of the many stars in the constellation of capitalist thinkers, Meltzer mentions Friedman and Hayek. Otherwise, his central foundational figure is Immanuel Kant. The book begins with Kant's fundamental assertion about human nature: "Out of timber as crooked as that from which man is made, nothing entirely straight can be carved." And Meltzer echoes this truth throughout Why Capitalism?

The point is simple and powerful: Imperfect human beings build institutions that undergird economic systems. Capitalism will include flaws, imperfections, corrupt practices, and wasted resources. And so will any other economic system. Capitalism's saving grace, however, is found in decentralization of decision-making, in competition for resources, and in dynamic markets. Markets are filled with customers who create competitive forces that reduce the cost of error and the scope of corruption. The power of capitalism lies in the system's unique ability to punish resource owners who make bad decisions, to reward those who create value, and to adapt to rapidly changing conditions. Capitalism disperses power while other systems concentrate power.

Because of these inherent traits, Meltzer views capitalism as the best of the imperfect systems fashioned from crooked timber. …