Why Capitalism?

• Author: Palmer, Tom G.
• Position: Book review

Why Capitalism?

Allan H. Meltzer

New York: Oxford University Press, 2012, 143 pp.

Allan Meltzer is one of the world's most distinguished monetary economists and financial system experts. He is also a font of horse sense when it comes to how societies work and how they fail.

In Why Capitalism? Meltzer has assembled a number of short studies of policy, the good and the bad, tied together by an aphorism from Immanuel Kant: "Out of timber so crooked as that from which man is made, nothing entirely straight can be carved."

The quote comes from Kant's essay "Idea for a Universal History from a Cosmopolitan Point of View," and it addresses a deep problem of politics: "Man is an animal which, if it lives among others of its kind, requires a master. For he certainly abuses his freedom with respect to other men, and although, as a reasonable being he wishes to have a law which limits the freedom of all, his selfish animal impulses tempt him, where possible, to exempt himself from them. He thus requires a master, who will break his will and force him to obey a will that is universally valid, under which each can be free. But whence does he get this master? Only from the human race. But then the master is himself an animal, and needs a master." Kant called that "the hardest problem of all" and concludes that "its complete solution is impossible."

Meltzer calls that "the Kantian problem" and from it he draws implications about the legal and regulatory frameworks of modern economies. One cannot expect moral perfection from human agents; we're all imperfect. Focusing on incentives that are likely to produce desirable outcomes is far more reasonable than exhortations from imperfect humans to imperfect humans to follow the rules because they are right in and of themselves. It's not that Meltzer is against exhortations; it's just that he thinks they're less likely to get the desired results than institutional designs that incorporate incentives for desirable behavior and disincentives for undesirable behavior.

Of course, that presumes that there is some consensus on the desirable and the undesirable. Meltzer deals with that issue by implicitly assuming that we prefer prosperity over poverty and then arguing that a relatively limited government (rules of the game plus public goods plus some income redistribution) is necessary for the goals he stipulates. According to Meltzer, "Governments have a role in promoting growth and living standards--they are...