In Defense of Capitalism

Capitalism is not a utopian system, but there is no better system for providing growth and personal freedom. Capitalism’s known alternatives offer less freedom and lower growth, and the “better alternatives” people imagine are almost always someone’s idea of utopia. Libraries are full of books on utopia

, and those that have been tried have either not survived or not flourished. The most common reason for failure is that one person’s or one group’s utopian idea is unsatisfactory for others who live subject to its rules. Either the rules change or they are enforced by authorities. Capitalism, particularly democratic capitalism, gains support because it provides a means for orderly change in government. Choice is one of freedom’s most valued attributes.

Critics of capitalism seek viable alternatives to support but usually fail to recognize that, unlike socialism, capitalism is adaptive, not rigid. Private ownership of the means of production flourishes regardless of culture. Capitalism’s critics have recently discovered Chinese capitalism to propose as an alternative to American capitalism, whose main feature is mercantilism and rigid controls on capital. China’s progress exploits international free trade—and the willingness of the United States to run a current account payments deficit. China is more authoritarian than Japan or the West, as Meiji Japan, Korea, and Taiwan also were in the past, and it lacks the rule of law, which is critical for the protection of personal and property rights. Growth produces a middle class, followed by demands for political freedom. China is in the early stages of development following the successful path pioneered by Japan, Korea, Taiwan, Hong Kong, and others who chose export-led growth under trade rules. Sustained economic growth led to social and political freedom in Japan, Korea, and Taiwan. Perhaps China will follow. No country has sustained economic growth without adopting the rule of law. Perhaps China will be the first. More likely it will not. Either freedom will increase as in Korea and Taiwan or growth rates will fall.

A large part of China’s growth rate results from movement of workers from low productivity in agriculture to manufacturing. If Chinese statistics can be believed, mobility from farm to factory accounts for about three-fourths of the growth rate. When that ends, as it will, the Chinese growth rate will decline substantially, as in Japan.

China faces another restriction on future growth. Restrictions on freedom limit innovation. Open democratic capitalist systems generate new ideas, new technologies, and new industries. Restrictions on freedom will limit China’s long-term growth by suppressing initiative and innovation. It is not enough to train engineers; progress requires freedom to innovate.

Capitalism continues to spread. Instead of ending, as some critics suppose, capitalism has spread to cultures as different as Brazil, Chile, China, Japan, and Korea. It is the only system humans have found in which personal freedom, progress, and opportunities coexist. Most of the faults and flaws on which critics dwell are human faults, as Immanuel Kant recognized. Capitalism is the only system that adapts to all manner of cultural and institutional differences. It continues to spread and adapt and will continue to do so for the foreseeable future as long as people value both growth and freedom.

Allan H. Meltzer is the Allan Meltzer University Professor of Political Economy at Carnegie Mellon University, Distinguished Visiting Fellow of the Hoover Institution, and author of A History of the Federal Reserve (University of Chicago Press, 2003 and 2009).

This article is from Why Capitalism? by Allan H. Meltzer (Oxford University Press, 2012).