A good question, many people would say right now. Why indeed? So it’s brave and probably timely for monetary economist Allan Meltzer to have written a book called [amazon_link id=”0199859574″ target=”_blank” ]Why Capitalism?[/amazon_link] (due out in March 2012 from Oxford University Press). Brave because it’s going against the flow. Timely because there are certainly some people who are over-reacting to the recent failures in financial markets by either forgetting for now the failures of governments or by assuming that a failure in specific markets is evidence that all markets fail. In this short and vigorously argued book Meltzer sets out to make the arguments for the capitalist market economy as the best of all possible (inevitably flawed) set of arrangements for allocating resources. Its great virtues are freedom and adaptability.
These are useful reminders in the present climate of opinion. Although Meltzer will find it an uphill struggle to convince many people that financial markets were over- rather than under-regulated, I did like his three laws of regulation:
1. Markets can circumvent regulations faster than bureaucrats can invent and implement them;
2. Regulations are static but markets are dynamic – the behaviour being regulated will change as a result of that fact. (ie. Goodhart’s Law)
3. Regulation is most effective when it changes the incentives of the regulated rather than just instructing them.
However, there are a couple of glaring omissions from Meltzer’s argument if he wants to engage with the centre of gravity of public opinion at present. The book doesn’t acknowledge that in many areas what we have is not a capitalist market economy but a capitalist oligopoly, certainly in banking and also in some other key sectors. What he presents as the merits of markets are often in fact the merits of competition. Nor does he address the concern about, not so much inequality per se as the fact that the middling families on whom a healthy democracy and society depend have not shared in advances in productivity and growth for a generation.
Readers who think these are the presenting problems of our times will perhaps find this book aggravating, but it’s good to challenge one’s prejudices from time to time. And I do think there’s a danger in these times that we’ll forget that more market rather than less can be a big improvement.
[amazon_image id=”0199859574″ link=”true” target=”_blank” size=”medium” ]Why Capitalism?[/amazon_image]
Sounds an interesting read and one which I look forward to. There is that oft-quoted cliche about Communism never having been tried properly in practice, and indeed the same is perhaps true of Capitalism. The theories sound great, but humans are not good at putting theories into practice, and understandably so. Personally, I prefer Capitalism because it has responsibility on individuals rather than the state, but this has led to terrible abuse by companies and wealthy individuals. If your whole society is structured around money, it is logical that those with more have more power. In itself not a problem per se, but it is how that power is exercised and how the wealth has been accumulated that matters. For example, Steve Jobs and Apple were/are very powerful but a strong case can be made that they gained their power by serving customers and benefitting society as a whole. Can the same be said of all banks right now? (Some, I imagine, yes, others, perhaps not).
Therefore, what seems to be wrong with today’s economic systems are not problems per se of Capitalism but of politics, and politicians, of unequal power of expression and of gross failings by particular companies and/or individuals (both of which have/had too much power). The pure Capitalism that Adam Smith espoused seems like a great idea that we have yet to try. But to put into action when we do not start with a blank slate does require that those with power use it wisely.
The strangest thing is that, arguably, none of these problems are difficult to solve. Everyone in the UK accepts that the economy became too unbalanced, for example, but the process of rebalancing involves pain and there is widespread concern about who shares the pain, who bears the brunt of it etc. Unless and until politicians bite the mettle, and the various vested interests (whether companies, unions or private individuals) accept the reality of the task ahead, we risk staying in the swirlpool.
It is certainly positive to see some of the comments made by people like Sir Philip Hampton, Bob Diamond et al who recognise some key issues within the banking industry. In the end, maybe this is a case of being careful not to throw the baby out with the bathwater?
There’s easy to solve and then there’s political pain…which is the real hurdle. Especially when the economy is weak so the pain is even more acute.