A review of Why Capitalism? by Allan H. Meltzer

‘No economic system focused on property confiscation and redistribution has ever sustained both growth and personal freedom’ (p. 4) – this basic truth is the core around which Allan H. Meltzer builds a passionate defence of the free market system.

Meltzer’s defence of capitalism is an appreciation of capitalism as the least indefensible of economic systems. Men are ‘morally imperfect, and so are their institutions’. Institutions exist not to straighten the crooked timber of humanity, but rather to preserve peace and cooperation among the wicked beings we are.

Meltzer calls his starting point ‘Kantian’ – yet, even without appealing to the authority of the sage of Königsberg, others may share his fundamental insight and reference it to Christianity or simply to ‘humility’. Among modern economists, this is most notably the perspective adopted by F. A. Hayek, who constantly emphasised the inherent limitations of our knowledge and stubbornly pointed out how policies outlined by conceited leaders may have unintended consequences.

The chief merit of this way of reasoning lies in contrasting capitalism with the Utopian dreams of its opponents. Alternative systems proved to be, to use a euphemism, quite inefficient at creating wealth.

Capitalism is a system of resource allocation based upon private property rights over the means of production. Capitalism is, so to say, plural. This is perhaps the very reason why Meltzer uses the ostensibly derogatory ‘capitalism’ instead of the ‘free-market economy’ or similar locutions. Why Capitalism? defends real world capitalist systems that are neither ‘rigid’ nor ‘all the same,’ but are instead rather adaptable to different cultural settings. ‘What [they] all share is ownership of the means of production by individuals who remain relatively free to choose their activities, where they work, what they buy and sell and at what prices’. Meltzer thus aims at providing a learned defence of ‘real capitalism’ as a much better arrangement than any ‘realised’ alternatives to capitalism ever managed to be.

This of course does not mean that the author is indifferent to the issue of economic freedom. If economic freedom comes in degrees in this world, an open-minded reader of Meltzer’s book would come to the conclusion that more economic freedom is better than less.

The rationale of Meltzer’s book is to provide ammunition for a particular intellectual battle: the one that takes place over the ‘narrative’ of the financial crisis.

Meltzer is extremely persuasive in applying his wisdom to the realm of regulation, particularly of the banking and financial industries. The financial crisis has been blamed, by and large, on the lack of appropriate regulatory firewalls against aggressive risk-taking. But the narrative of the crisis as the product of a lack of proper rules to oversee risk-taking has now been questioned in a growing body of literature – most notably, Jeffrey Friedman and William Kraus’s Engineering the Financial Crisis: Systemic Risk and the Failure of Regulation.

Meltzer’s work is not particularly original in this area. He vigorously opposes the narrative of the regulatory absence, tracing the crisis back to ‘too big to fail’ and, up to a point, to loose monetary policy. But the value of his book lies in the clarity with which he is able to make a simple case for scepticism towards regulation.

Such a case, at first, is built upon an understanding of the ‘Peltzman Effect’: ‘although the regulation gives the appearance of protection, the world may in fact have only been made riskier by lowering individuals’ guard against caveat emptor’. The Peltzman Effect argument is counter-intuitive and not easy to grasp. But Meltzer effectively complements it with a political economy vignette of regulation that may persuade readers. The two most notable reasons why regulations fail are capture of regulators and businesses’ ability to circumvent regulations.

To prevent both capture and circumvention completely is next to impossible in this world of wicked human beings. Meltzer’s scepticism, however, is valuable not necessarily because of his suggested remedies, but because it is instrumental in identifying the malaise. Meltzer’s Why Capitalism? will thus do a great service to its readers, particularly if they are not naturally inclined to answer ‘why not?’.