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 second part of a three-part series summarizing his lecture.

While critics of capitalism point to the greed and self-interest of capitalism, they do not proposed alternative forms other than socialism, communism or other forms of authoritarian rule.

The two drawbacks of the alternatives to capitalism, according to Meltzer, are that they ignore the principle of human imperfection and they ignore individual differences and concepts of equality, fairness and justices. The result is a system that forces the population to accept “rigid direction” toward so-called equality.

“In practice, the rulers’ choices are enforced, often using fear, terror, prison, or other punishment. The history of the twentieth century illustrates how enforcement of promised ends became the justification for deplorable means. And the ends were not realized,” Meltzer noted.

CAPITALISM V. GOVERNMENT
Meltzer also uses a series of arguments to reach the conclusion that failures of capitalism are judged more harshly that failures of governments. The series follows this path:

“Transferring resource allocation decisions to government bureaus does not eliminate crime, greed, self-dealing, conflict of interest, and corruption.”

“Capitalism allocates by letting relative prices adjust to equal the tradeoffs expressed by buyers’ demands. Fixing prices eliminates the possibility of efficient allocation and replaces consumer choice with official decisions.”

“Capitalism permits choices and the freedom to make them. Some radio stations play jazz, some offer opera and symphonies, and many play pop music. … Under Socialism, the public watches and hears what someone chooses for them. The public had little choice.”

“As Lord Acton warned, concentrated power corrupts officials. Some use concentrated power to impose their will. Some allow their comrades to act as tyrants. Others proclaim that ends such as equality justify force to control opposition.”

“Capitalism does not offer a vision of perfection and harmony. Democratic capitalism combines freedom, opportunity, growth, and progress with restrictions on less desirable behavior. It creates societies that treat men and women as they are, not as in some utopian vision.”

“Those who use these examples to criticize capitalism do not use the same standard to criticize all governments as failed arrangements when a Watergate or bribery is uncovered. Nor do they criticize government when politicians promise but do not produce or achieve. We live after twenty-five to forty years of talk about energy, education, healthcare, and drugs. Governments promise and propose, but little if any progress is visible on these issues.”

“In the last year we experienced some major errors by government or its agents. Here are some examples. The Federal Reserve ‘rescued’ American International Group (AIG) by using billions of taxpayer dollars. AIG had three profitable divisions, including a highly successful insurance company. Bankruptcy court would have been a better outcome. … Congress approved purchases of ethanol made from corn that raised the world price of food but did not reduce pollution. And government loaned money to General Motors and Chrysler followed by loans to an auto finance company that immediately offered zero interest rate loans to borrowers with poor credit ratings. Government promises to spend for old age pensions and health care far exceed any feasible revenues to pay for the promises. Does Congress develop a feasible plan? The estimated present value of the unfunded health care promises is $70 trillion to $80 trillion dollars. No private plan would be allowed to operate this way.”

EXAMPLES OF FAILURE, SUCCESS
Meltzer’s strongest argument compares the aftermath of World War II. He notes there were two great societal experiments. The USSR and the countries it controlled use centralized planning to allocate resources. The U.S. and its allies relied primarily on market forces (supply and demand; consumer choice) to allocate resources.

“The results are clear. Capitalism and the market system proved much more effective at development and poverty reduction than planning systems … There is not a single example of sustained successful growth under traditional Communism,” Meltzer wrote.

Also, Meltzer notes that further proof of the failure of government planning is the fact that India, China and most of the former Soviet-controlled countries have opened their economies to market forces.

“The result was a dramatic reduction in poverty. Many more people improved their living standards than in fifty years of development under government planning, regulation, foreign aid, and resource allocation,” Meltzer explained.

Meltzer also delved into the “orthodoxy” required of those who promote government interference into the choices of the individual. He notes that socialism is based on an orthodoxy or plan for promoting the common good. Such systems inevitably begin with persuasion and end with coercion. Capitalism in a democratic society doesn’t lead to government coercion.

“Democratic capitalism is not a rigid orthodoxy,” he writes. “People can choose more redistribution or less. They can change their votes. Some countries choose a larger welfare state with greater redistribution. Others choose a smaller public sector and a higher rate of growth. A remarkable feature of democratic capitalism is that its outcomes are relatively stable. … Democratic capitalism persists and spreads because it is not a system of imposed morality.”