Capitalism Survives Its Own Funeral, Allan Meltzer Reports

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The New York Sun

At the height of the financial crisis in late 2008 and early 2009, a wave of articles declared the end of capitalism. A half-dozen reporters writing about the issue called Allan Meltzer, who since 1957 has been teaching about capitalism at Carnegie Mellon University in Pittsburgh.

Five of the calls he answered. The sixth was from a reporter of Die Zeit, the German weekly, who, as Professor Meltzer recalls it, asked, “Professor, what do you think about the end of capitalism?”

Professor Meltzer replied that that was the stupidest question he’d been asked in 50 years.

The reporter hung up the phone before Mr. Meltzer got to explain why, but the fuller answer is in Mr. Meltzer’s new book, “Why Capitalism?”, which Oxford University Press published this week.

The book is short — just 160 pages — but its simple, clear, and direct language makes a big point: that capitalism “is the only system known to humanity that increases both growth and freedom.” As a result, far from ending, capitalism has spread to formerly socialist or communist enclaves such as Eastern Europe, India, and even China.

The book is not simply a paean to capitalism, though. It’s also a look at some of the problems the country is facing, including the decline in the value of the dollar, the financial crisis and its aftermath, and the federal debt and deficit.

Mr. Meltzer’s three laws of regulation help in part to explain the crisis. The first is that “lawyers and bureaucrats regulate,” but “markets circumvent regulation.” Second, and related, is that “regulations are static. Markets are dynamic.” Third, “regulation is most effective when it changes the incentives of the regulated.”

While Mr. Meltzer does not favor a return to a gold standard for the dollar, he does acknowledge that when it existed, “governments could not run large, continuous, peacetime budget deficits.” The nation’s current fiscal trajectory, he says, is unsustainable: “Either the United States voluntarily adopts fiscal discipline or eventually it will face a crisis with rising interest rates and a falling currency.”

The book is sprinkled with policy recommendations. World Bank loans should go to “poor countries that adopt pro-growth policies,” rather than to countries such as Brazil, China, India, Mexico, and Turkey that can borrow in the capital markets. The Federal Reserve “should adopt and announce a rule announcing what output and inflation combination they intend to seek over the next two or three years. If the Fed fails to achieve its targets, it should offer an explanation along with the resignations of the responsible officials.” Banks should be required to hold more capital relative to their assets, and stockholders and managers, rather than taxpayers, should bear the burden of losses.

In a phone interview, I asked Mr. Meltzer if his plan for increased bank capital requirements conflicts with Meltzer’s first and second laws of regulation. He said the case for regulation is in situations where private costs and social costs differ, and he counted banks as such a case: “Banks took a lot of risks, and we the public paid for them.” The trick is to craft any regulation so that it complies with Meltzer’s third law, changing the incentives not of the regulators, who, he says, “completely failed,” but of the bank managers and stockholders.

As a resident of Pennsylvania, Mr. Meltzer was represented in the United States Senate for 12 years by Rick Santorum. I asked the professor whether he thought Mr. Santorum, now running for president as a Republican would be a good advocate for capitalism. Mr. Meltzer responded that while Mr. Santorum is “very strong” on “family values,” other issues more at the fore now — the deficit, the debt, the growth rate — “aren’t the places where he’s very strong.”

The list of living Americans who served in both the Kennedy and Reagan administrations and who are still writing books and teaching courses is a short one, a fact perhaps not lost on the students who fill up Professer Meltzer’s elective class on capitalism at Carnegie Mellon’s Tepper School of Business. The university limits the size of the class to 60, and Mr. Meltzer mentions that even some other faculty members show up.

For those of us who haven’t had the opportunity to be colleagues or students of Professor Meltzer’s, “Why Capitalism?” is an excellent introduction. At a list price of $21.95, compared to the $54,800 a year in tuition and fees (excluding room and board) that the Tepper School charged students who started in Fall 2011), it leaves the potential purchaser with plenty of money to spend or save mostly freely. For it turns out that, reports to the contrary notwithstanding, the capitalist system is far from dead, thanks to articulate defenders like Mr. Meltzer and, also, to its own formidable inherent advantages.

Mr. Stoll is editor of and author of “Samuel Adams: A Life.”

The New York Sun

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