Book review: “The Power of Capitalism” by Rainer Zitelmann (Part 1)
2 September 2019
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4 July 2024
Dr Rainer Zitelmann’s book The Power of Capitalism could just as well have been titled “The Free Market’s Forgotten Success Stories”. Spanning five continents and seven decades, this book reminds us of the positive experiences of countries that have, in one way or another, gone through periods of major economic liberalisations, and which have become much more prosperous and dynamic as a result. But the book also contains a fair few cautionary tales of countries that have travelled in the opposite direction, with the results ranging from poor to disastrous.
If I had come across a book of this kind five or six years ago, I would not have been convinced of the need for it. I probably would have thought: this is all well and good, but… haven’t we, kind of, figured this out by now? Do we really need to be reminded of the fact that market economies generally outperform state-run or excessively state-dominated economies? Capitalism may not be popular, but don’t most people nowadays accept the basic case for a market economy of some sort, no matter how grudgingly?
Today, however, the zeitgeist is a very different one. “Millennial Socialism” is now all the rage. The Overton Window has shifted miles to the Left. Positions that, just a few years ago, were the preserve of fringe groups like the Socialist Workers Party are now mainstream, and popular. That idea that capitalism is on its last legs, that it is failing us in every possible way, and that it needs to be replaced, has become the conventional wisdom of our age.
Against this backdrop, the answer to the question “Do we really need a book reminding us that capitalism produces better outcomes than the alternatives?” is an emphatic “Yes!”. Yes, we do need to relearn those lessons. No, we cannot take any of this for granted. We need a book which makes the case for capitalism anew. And this is that book.
The first chapter of The Power of Capitalism is about the amazing economic transformation of China over the past forty years. After the utter disaster that was Maoist socialism, at the end of the 1970s, China began, very slowly and timidly at first, to finally allow some room for market forces. In this book, the familiar narrative of a top-down liberalisation, led by reformer Deng Xiaoping, is somewhat qualified. Zitelmann describes China’s relative liberalisation as a much more decentralised process that involved a lot of local experimentation. Zitelmann is not starry-eyed about China, and sees the economic reform process as very far from complete. But in a sense, it is encouraging that even highly imperfect pro-market reforms can lead to substantial improvements in people’s lives. Over the course of just one generation, the share of the Chinese population living in extreme poverty has fallen from more than 90% to less than 10%.
The story of Africa is less impressive, but there are silver linings too. In the post-war decades, most African countries experimented with various forms of socialism or other forms of state-directed development, again with poor results. Since the early 1990s, most of them have moved away from that, and towards more market-based economies. This has led to some improvements as far as it went. But the beneficial effects of economic liberalisation remain muffled when they are not accompanied by improvements in the legal and institutional framework. For example, in sub-Saharan Africa (and excluding South Africa), about three quarters of the workforce continue to work in the informal sector, where contracts are not easily enforceable, and where property rights are not secure. Nonetheless, compared to the era of LiveAid, when Westerners associated Africa primarily with hunger, disease and civil war, the continent has come a long way.
The third chapter contrasts West Germany’s post-war economic miracle to the drabness of socialist East Germany. In hindsight, we often treat the East German system as a freak accident of history, and West German capitalism as the norm. But as Zitelmann shows, in the immediate aftermath of the war, it was not at all clear that West Germany would adopt a market-based economy. There was initially a strong anti-capitalist consensus in the nascent Federal Republic, with both major parties advocating a government takeover of key industries. Free-market economics was a minority pursuit, and it was only due to the dogged determination of a small number of individuals that West Germany ended up with the liberal economic policy that unleashed the post-war boom. East Germany, meanwhile, had no such luck. They did better than other members of the Eastern bloc, but they fell light years behind West Germany.
Around the same time, a similar quasi-natural experiment was set up in Korea, with its division into a socialist North, and, from the 1960s onwards, an economy based on private enterprise in the South. The conventional wisdom on South Korea is that its economy developed because of the government’s activist industrial policy, and that this proves not the success of “capitalism”, but of state-led development. This narrative is qualified in Zitelmann’s book. South Korea’s initial industrialisation strategy led to a dangerous overreliance on state-supported mega-conglomerates, which also brought many problems with it. In any case, South Korea already started to move away from that model in the early 1980s, and thus before their economic take-off started in earnest.
To be continued…
Recommendations for further reading/watching/listening:
If I had come across a book of this kind five or six years ago, I would not have been convinced of the need for it. I probably would have thought: this is all well and good, but… haven’t we, kind of, figured this out by now? Do we really need to be reminded of the fact that market economies generally outperform state-run or excessively state-dominated economies? Capitalism may not be popular, but don’t most people nowadays accept the basic case for a market economy of some sort, no matter how grudgingly?
Today, however, the zeitgeist is a very different one. “Millennial Socialism” is now all the rage. The Overton Window has shifted miles to the Left. Positions that, just a few years ago, were the preserve of fringe groups like the Socialist Workers Party are now mainstream, and popular. That idea that capitalism is on its last legs, that it is failing us in every possible way, and that it needs to be replaced, has become the conventional wisdom of our age.
Against this backdrop, the answer to the question “Do we really need a book reminding us that capitalism produces better outcomes than the alternatives?” is an emphatic “Yes!”. Yes, we do need to relearn those lessons. No, we cannot take any of this for granted. We need a book which makes the case for capitalism anew. And this is that book.
The first chapter of The Power of Capitalism is about the amazing economic transformation of China over the past forty years. After the utter disaster that was Maoist socialism, at the end of the 1970s, China began, very slowly and timidly at first, to finally allow some room for market forces. In this book, the familiar narrative of a top-down liberalisation, led by reformer Deng Xiaoping, is somewhat qualified. Zitelmann describes China’s relative liberalisation as a much more decentralised process that involved a lot of local experimentation. Zitelmann is not starry-eyed about China, and sees the economic reform process as very far from complete. But in a sense, it is encouraging that even highly imperfect pro-market reforms can lead to substantial improvements in people’s lives. Over the course of just one generation, the share of the Chinese population living in extreme poverty has fallen from more than 90% to less than 10%.
The story of Africa is less impressive, but there are silver linings too. In the post-war decades, most African countries experimented with various forms of socialism or other forms of state-directed development, again with poor results. Since the early 1990s, most of them have moved away from that, and towards more market-based economies. This has led to some improvements as far as it went. But the beneficial effects of economic liberalisation remain muffled when they are not accompanied by improvements in the legal and institutional framework. For example, in sub-Saharan Africa (and excluding South Africa), about three quarters of the workforce continue to work in the informal sector, where contracts are not easily enforceable, and where property rights are not secure. Nonetheless, compared to the era of LiveAid, when Westerners associated Africa primarily with hunger, disease and civil war, the continent has come a long way.
The third chapter contrasts West Germany’s post-war economic miracle to the drabness of socialist East Germany. In hindsight, we often treat the East German system as a freak accident of history, and West German capitalism as the norm. But as Zitelmann shows, in the immediate aftermath of the war, it was not at all clear that West Germany would adopt a market-based economy. There was initially a strong anti-capitalist consensus in the nascent Federal Republic, with both major parties advocating a government takeover of key industries. Free-market economics was a minority pursuit, and it was only due to the dogged determination of a small number of individuals that West Germany ended up with the liberal economic policy that unleashed the post-war boom. East Germany, meanwhile, had no such luck. They did better than other members of the Eastern bloc, but they fell light years behind West Germany.
Around the same time, a similar quasi-natural experiment was set up in Korea, with its division into a socialist North, and, from the 1960s onwards, an economy based on private enterprise in the South. The conventional wisdom on South Korea is that its economy developed because of the government’s activist industrial policy, and that this proves not the success of “capitalism”, but of state-led development. This narrative is qualified in Zitelmann’s book. South Korea’s initial industrialisation strategy led to a dangerous overreliance on state-supported mega-conglomerates, which also brought many problems with it. In any case, South Korea already started to move away from that model in the early 1980s, and thus before their economic take-off started in earnest.
To be continued…
Recommendations for further reading/watching/listening:
- “The Power of Capitalism“: IEA podcast with Dr Rainer Zitelmann and Dr Kristian Niemietz
- “Socialism, Capitalism and Millennials“: THINK conference panel with Joseph Sternberg, Dr Kristian Niemietz, Dr Rainer Zitelmann and Rebecca Lowe
- “The Wealth Elite. A groundbreaking study of the psychology of the super rich” by Dr Rainer Zitelmann
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We also need to remember that unbridled anything, whether it be capitalism, communism, socialism, etc; is a pathway to failure. All things require balance (hence the phrase “checks and balances”). Why? Because all of these “isms” are underwritten by human nature, and history is clear on the dangers of this. Hence, a book that promotes one ism without due regard to its flaws and the need for healthy societies to be a mix of isms, is a book that is ultimately itself flawed. In essence, pragmatism is the answer. Not capitalism or any other ism per-se.