Allan Meltzer is one of the greatest economists of his generation. I have admired Meltzer since I started studying economics in the early 1990s, and his work on monetary theory has had a very significant impact on the development of my own views. His books on the history of the Federal Reserve and the reinterpretation of Keynes are among the most important books on monetary thinking written in the past 50 years. So it was with some excitement that I was looking forward to reading Meltzer’s recent book, Why Capitalism?
Why Capitalism? left me with mixed feelings, however. For free-market economists there is little to disagree with in the book – at least in the general sense. Meltzer argues strongly that the present crisis is not a result of the failures of capitalism and, instead, that the causes of the crisis are to be found in government failure. Whilst, I do not disagree with Meltzer, a leftist or a centrist would not be convinced by his arguments. Furthermore, rather than explaining why a free-market system is so effective, in the way that Adam Smith, Hayek and Friedman did, Meltzer focuses on criticising government intervention. There is nothing wrong with his arguments, but the critic of the market will not be convinced.
However, whilst this might not be the book for the staunch critic of a market economy or for university students who have already read Hayek and Friedman, there is much in the book for the high-school student approaching the subject for the first time. Each chapter is well-written and easy to read. The areas chosen by Meltzer do not necessarily fit into a logical structure but each of them provides an overview of important areas studied in high school economics courses.
The strongest chapter in the book is Meltzer’s discussion of the welfare state and regulation, where I particularly found his discussion of moral hazard in the global financial system insightful and convincing. Meltzer provides an excellent summary of his own work on the Asian crisis and how this related to the 2008 global crisis. Indeed, this part of the book could usefully have been much further extended given Meltzer’s experience.
The chapter on foreign aid is useful and is a policy topic still under discussion in many Western countries. The undergraduate student should probably go straight to William Easterly’s White Man’s Burden, rather than reading Meltzer's quasi-review of Easterly’s work. But the sixth-form student who is relatively new to economics can benefit greatly from reading Meltzer’s summary.
The third chapter on public deficits and the fifth chapter on why Meltzer thinks we are going to have high inflation seem to fight yesterday’s war. Even though countries are struggling with public deficits, it is much harder to find supporters for old-school fiscal stimulus today – other than Paul Krugman. But, it has to be admitted that, in many high school economics courses, Krugman is often treated as if he is a mainstream voice who has credibility in the field of monetary economics and public finance. Meltzer’s summary of the alternative position will be a useful counterweight.
Meltzer’s fear of inflation, however, does seem hard to justify. I would argue that the biggest risk to both the US and Europe is deflation. Indeed, Meltzer rightly warned against the risks of deflation in Japan in the 1990s and, in line with other monetarists such as Milton Friedman, he advocated large scale quantitative easing there in the 1990s. There is a striking contrast between that advice and warning about high inflation re-emerging as a result of the Federal Reserve’s quantitative easing programme over the past five years.
My main criticism of Why Capitalism? is that it gives the impression that Allan Meltzer, like many other proponents of free-market capitalism, had grown overly confident after the fall of communism and the success of capitalism around the world. We felt that we had won the intellectual battle and, when the crisis hit in 2008, we were badly prepared to defend capitalism. Why Capitalism? is not that defence. Nevertheless, for the student who is starting to study economics, it will provide a decent and highly readable introduction and a critique of some of the poorly formulated arguments of the left that so often pervade reading lists at this level.
This review originally appeared in the Spring 2014 issue of EA Magazine.