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]