Why Capitalism?

Editor’s note: Allan Meltzer, a visiting scholar with the American Enterprise Institute for Public Policy Research and a noted author on the history of the Federal Reserve, delivered on Mar. 9 a lecture titled, “Why Capitalism?” This is the final piece of a three-part series summarizing his lecture.

Income distribution is often the major policy issue in democratic capitalist systems. And Meltzer reminds of Alexis de Tocqueville’s warning “about the temptation for the voting majority to tax the incomes of those above the (income) mean.”

FAILURE OF WEALTH REDISTRIBUTION
Meltzer points to several studies that suggest “activist policies” to equitably redistribute income fails to help any socio-economic class. He points out the lack of proof in claims that the rich get richer at the expense of the middle and lower classes.

“Angus Maddison, the leading researcher on the history of economic growth, found that by the year 1000, Asian countries led all others in per-capita income. By 1820, the capitalist economies of Western Europe and the United States reached twice the Asian average. By 1950, the difference was wider. Several Asian countries adopted capitalist methods. The gap narrowed. After Japan and South Korea showed that growth was a capitalist, not a western, force others followed. Eventually China and India accepted capitalist methods.”

“U.S. data show that since 1975 household income at the ninetieth percentile (in 2003 dollars) rose faster than household income at the tenth highest percentile in every five-year period except 1990-95. Relative (real) income of the ninetieth percentile rose from 10.8 times the tenth percentile to 13.7 times.”

“A recent comprehensive study of Swedish income distribution during the twentieth century concluded: ‘Our findings suggest that top income shares in Sweden, like many other Western countries, decreased significantly over the first eighty years of the century. . . . Most of this decrease happened before 1950, that is, before expansion of the Swedish welfare state. As in many other countries, most of the fall was due to decreasing shares in the very top (the top one percent), while the income share of the lower half of the top decile … has been extraordinarily stable. Most of the fall is explained by decreased income from capital.’

And Meltzer also points out a whole host of flaws in income distribution reports cited by those supporting the concepts of wealth redistribution.
• People underreport, and accurate sampling is difficult.
• People move within the distribution, so the lowest 10 percent and the highest 10 percent are not the same people over time.
• The proportion of divorced, separated, or single mothers has increased.
• Educational attainment increased in importance as a source of income in the latter part of the twentieth century. Low educational attainment and broken family structure are related.
• Education as a cause of growth in capitalist countries also contributes to spreading the income distribution.

“Income redistribution is easier to promise than to achieve in practice by activist policies,” Meltzer noted.


ADAPTIVE CAPITALISM
Meltzer concludes his report by noting: “There is no better alternative than capitalism as a social system for providing growth and personal freedom. The alternatives offer less freedom and lower growth.”

What’s more, he notes that the common failures of alternative economic models is because “one person or group’s utopian ideal is unsatisfactory for others who live subject to its rules.” Unlike socialism or communism, capitalism is adaptive, and the private ownership of the means of production will flourish in all cultures.

Meltzer concludes: “Capitalism continues to spread. It is the only system humans have found in which personal freedom, progress, and opportunities coexist. … Capitalism is the only system that adapts to all manner of cultural and institutional differences. It continues to spread and adapt and will for the foreseeable future.”