What is capitalism? He uses the term as a synonym for free markets. It’s only a matter of definition, and I will follow him here. Socialism, as traditionally defined, is the public (that is, government) ownership of the means of production. But as Zitelmann notes, the government does not have to own the means of production to control them; regulation suffices. Widespread regulation—presumably along with a large measure of redistribution—would thus be a form of socialism. Capitalism is, on many dimensions, the opposite of socialism.
Natural experiments / How have the two systems fared against each other? The first and major claim of the book is that capitalism benefits most individuals while socialism impoverishes them. This should be obvious from the recent historical record, at least as far as the extremes are concerned. History has offered us natural experiments that Zitelmann reviews.
North and South Korea provide one of these natural experiments. One may object that North Korea is not ideal socialism and South Korea is not perfect capitalism. The first part of this observation is true, but that’s part of the point: ideal socialism always ends up in practical poverty and tyranny. The second part of the observation is also true, but there is certainly much more capitalism in the South than in the North. After starting at a similar level of poverty seven decades ago, North Korea followed a socialist path and is now one of the most destitute places on earth, while South Korea’s residents enjoy a per-capita gross domestic product higher than Spain’s.
Zitelmann notes that migration flows tell us something about how most people prefer one type of system to the other. On the Korean peninsula, people flee the North for the South, not the other way around. (In economics, we call this “revealed preference.”) A similar pattern is observable in all cases of advanced socialism, from East Germany to Venezuela. The government of North Korea forbids emigration, as the government of East Germany did ostentatiously with the Berlin Wall. (East Germany’s official justification for the barrier was to prevent the infiltration of agents from the West.)
East Germany’s socialism was imposed by the Soviet Army after World War II, while West Germany was allowed to evolve toward capitalism. The West German economy rapidly surpassed the East German one. As the Berlin Wall was falling in 1989, Zitelmann reports, “only just over half of all East German households owned a car, and more than half of these were Trabants. … Private citizens had to wait between 12.5 and 17 years for a new car.” The socialist man not being less self-interested than the capitalist man, many East Germans who could not afford a car nonetheless applied for a spot on the queue and sold their spot on the black market. Used cars cost two or three times the price of new cars.
In West Germany, the Christian Democratic party was originally anti-capitalist, but chancellors Konrad Adenauer and especially Ludwig Erhard moved it toward a “market-oriented model.” As the director of the Bizone (American and British) economic administration after the war, Erhard had unilaterally abolished the controls of the planned economy. Later, in the first years of the 21st century, Social Democrat chancellor Gerhard Shröder effected another rebalancing toward the free-market economy. “France and Italy, to name just two—have watched Germany’s economic performance with envy,” Zitelmann writes.
Venezuela has not built the equivalent of the Berlin Wall, but who doubts that its regime has failed abjectly? Zitelmann compares this failure with the reverse path taken by the Chilean government after 1973. In terms of GDP per capita, Chile is now the richest country in Latin America. The “Chicago Boys” (the free-market advisers of dictator Augusto Pinochet) did a good job. Zitelmann admits that the economic transition was difficult (not to mention the repression of political opposition), but there was no widespread humanitarian catastrophe like what we are seeing in Venezuela.
More complex cases / Along with Erhardt, Margaret Thatcher and Ronald Reagan “were the most significant and most adamant proponents of free-market capitalism among the 20th century’s Western political leaders,” Zitelmann writes. He notes, however, that Reagan financed his military build-up with government debt. The federal budget deficit increased from 2.6% to 3.7% of GDP during his presidency.
Zitelmann’s enthusiasm for Thatcher and Reagan may be overdone. One can argue that they only temporarily slowed the trend toward more interventionist government. According to data compiled by John Dawson of Appalachian State University and John Seater now of Boston College, the Code of Federal Regulations, an annual consolidation of all existing federal regulations, roughly stopped growing in 1981 (the first year of Reagan’s presidency) and stayed that way through 1985. But it began growing again in 1986, two years before the end of Reagan’s second term.
Capitalism is lifting certain African countries out of extreme poverty. Those countries did not need more foreign aid or natural resources (which have always been abundant in Africa), but entrepreneurship and a retreat of the state. This is what is sparking economic growth. However, growth is still limited by poor social institutions and, in many countries, by the continuing repression of economic freedom.
Sweden is another case Zitelmann documents. Contrary to the myth of socialist Scandinavia, he argues that “Sweden stopped being a socialist country several decades ago—if it ever was one in the first place,” although he adds that “contemporary Sweden remains a traditional welfare state in some respects (e.g., it has comparatively high tax rates).” He explains that Sweden was a capitalist country between 1870 and the 1930s, then moved to an increasingly socialist model. But it moved back to capitalism in the early 1990s. The economy grew more during the capitalist periods, although Zitelmann notes that favorable “cultural factors” also played a role in Swedish prosperity.
This issue of cultural factors introduces more complications than perhaps Zitelmann is willing to admit. How can we determine if economic improvement comes from a move to capitalism or from other factors? And when does a country cross the invisible line between being socialist and being capitalist?
If we don’t know about how capitalism and socialism work in theory, we cannot hope to determine which system predominates in a particular economy.
Consider China. Has it become capitalist in recent decades, as suggested by the title of Ronald Coase and Ning Wang’s 2012 book How China Became Capitalist? (See “Getting Rich Is Glorious,” Winter 2012–2013). Zitelmann believes so. But others claim it is merely becoming capitalist. So, is China now capitalist with socialist elements, or socialist with capitalist elements? Is its incredible growth since its gradual liberalization in the 1980s the product of its socialist or capitalist elements? We cannot answer such questions without some theory about how capitalism and socialism work.
Economic theory strongly supports the idea that Chinese growth was generated by the relaxation of socialist constraints. Liberalization has allowed growth of entrepreneurship and incomes worldwide, lifting a large part of mankind out of poverty, as documented in The Power of Capitalism. Unfortunately, Chinese liberalization seems to have slowed recently and the future is rendered more uncertain by the current protectionist push of the U.S. government, which may isolate China in the world economy.
Improving the argument / It is difficult not to agree with Zitelmann that more capitalism stimulates economic growth while more socialism stifles it. But his argument could be improved.
For one thing, we must be more conscious that “capitalist” and “socialist” are matters of degree. The two systems are defined over many dimensions, which makes the measurement of the related components difficult not only in practice but even conceptually. Indexes of economic freedom (Zitelmann uses the Heritage Foundation’s Index of Economic Freedom) are only compound indicators that depend on the variables included and the weights assigned to them. In extreme cases such as the two Koreas or the two Germanys or Venezuela, the relative preponderance of socialist and capitalist elements is easy to “guesstimate,” but the guesswork is less reliable in many other cases. In this perspective, Zitelmann is probably right to challenge the Heritage index when it indicates that economic freedom has increased around the world in recent years.
Another suggestion to improve Zitelmann’s argument is to reject the idea that studying history is sufficient to determine whether capitalism or socialism “works better.” Only with an underlying theory can we make sense of the notion of what it is to “work better.” Only with an underlying theory, explicit or implicit, can the historian know which facts to look for. If we don’t know about how capitalism and socialism work in theory, we cannot hope to determine which system predominates in a particular economy.
According to standard economic theory, “working better” means better satisfying the preferences of individuals. We should consciously start from there. “You don’t need to read a lot of economic theory to decide which system is better,” Zitelmann writes. Perhaps not “a lot,” but certainly some.
He implicitly agrees with the importance of theory when, toward the end of The Power of Capitalism, he addresses the claim that the Great Recession of 2007–2009 showed that capitalism does not work. He rightly points out that the recession did not demonstrate a failure of the market, but instead confirmed the failure of government intervention. He explains how the recession, which started in residential real estate and the market for mortgage-backed securities, followed decades of federal intervention in these markets. More generally, he notes, “it is perfectly possible to demonstrate that many alleged contemporary ‘problems of capitalism’ are in fact the result of violations of the very principle of capitalism.” The nature or operation of the “very principle of capitalism” is a theoretical question.
Intellectualism vs. capitalism / Another issue Zitelmann tackles is one that has worried many classical liberals before: why are intellectuals mostly anti-capitalist on the Left and on the traditional Right? He quotes a recent declaration of Alain de Benoist, a French intellectual who, a few decades ago, was a guru of the New Right: “My principal enemy has always been capitalism in economic terms, liberalism in philosophical terms, and the bourgeoisie in sociological terms.”
Intellectuals, defined as “professional thinkers who are more skilled at expressing their thoughts than most other people,” don’t like capitalism, Zitelmann argues. They feel that their own perceived intellectual and moral superiority is not remunerated enough compared to what (successful) businessmen and entrepreneurs earn. Moreover, intellectuals tend to value formal, academic, explicit knowledge and to underestimate the role and importance of implicit knowledge: the knowledge of the artist, craftsman, and entrepreneur. Interesting hypotheses.
Zitelmann correctly notes that the business elite have no “intellectually adequate response” to attacks on capitalism. They turn the other cheek, not unlike the reaction before an angry customer who is always right. Worse, they often fall in the trap of crony capitalism, which is not the sort of capitalism Zitelmann is defending.
The Power of Capitalism concludes by calling for radical reforms to expand capitalism. The author realizes that such reforms are difficult to accomplish because they generate short-run disruption costs and don’t make good election programs. A crisis might spark the necessary reforms, but there’s the risk that voters will instead turn to anticapitalist politicians, as the Germans did when they gave the majority of their votes to the National Socialist and Communist parties in the early 1930s.
The Power of Capitalism is a sound and moderate book—perhaps a bit too moderate, if anything. More theory might have enhanced it. A few tables or charts, more primary sources and citations, and an index of subjects would have been welcome.
Nonetheless, Zitelmann’s book remains an instructive praise of capitalism. It should be especially appealing and useful to an audience of businessmen and entrepreneurs.
