25 March 2019

The Power of Capitalism

A journey through recent history across five continents

Rainer Zitelmann
2018, LID Publishing, 265 pages,
ISBN 9781912555000

Reviewer: Vicky Pryce, Chief Economic Adviser, CEBR

Rainer Zitelmann in his book ‘The Power of Capitalism’ argues that the evidence of the last 70 years shows that ‘more capitalism means greater prosperity’. Yes, it may indeed be better overall than socialism and the communism as we saw in the former Soviet Union and China. And globalisation and the opening-up of trade have indeed removed hundreds of millions from poverty. But it has all come at a price. Levels of inequality in general have increased. In the Western democracies top CEO rewards have ballooned, often not connected to performance and thus discrediting the system. In many developing countries, as the author acknowledges, administrative and political corruption has been rife and the benefits of globalisation have been exploited by a small ruling elite. He also acknowledges that some countries that have espoused free market systems are in fact still running authoritarian regimes, and that political freedom is also very important for quality of life. But the theme of this book is that, despite it all, capitalism and movement to a free market economy are the reasons we have enjoyed the massive increase in living standards and that capitalism is the system that delivers ‘the greatest quality of life for a majority of people’.

He fears that as the socialist system retreats from people’s memory many are becoming nostalgic again for a system that didn’t lead to growth and prosperity. He quotes a poll conducted in Germany in 2014 which found that 42% of respondents felt that “socialism/communism is a good idea that has been badly executed in the past”. Interestingly, the percentage in the former East Germany showed a majority for that view at 59%! He thinks that one should watch with alarm any increase in state interference in the market economy which he thinks will have negative consequences for prosperity.

He singles out Sweden as an area of focus, widely regarded as a successful ‘socialist state’. The other problem he highlights is the period over which data is used to prove one point over another. In his chapter on Sweden he contends that this is a misrepresentation of reality and that, in fact, ‘following the obvious failure of the socialist experiment, the balance between capitalism and socialism [in Sweden] has shifted towards capitalism’ . He then attacks Piketty’s contention that as a result Swedish inequality has increased radically by suggesting that Piketty chose to have as his base the time at which Sweden had the most egalitarian point in its history in the 1980s and 1990s and then compared those with points in the 2010s which were less egalitarian. Nevertheless, Zitelmann accepts that there has been some increase in inequality. He goes on to suggest that what Sweden, in fact, needs is more rather than less pro-market reform, attacking in particular the country’s rent control legislation which he blames for causing housing shortages, reducing the attractiveness of the country as an investment location and hurting the economy.

For Africa he believes that development aid in places has in general been pointless or – as he puts it – actually counter-productive but accepts that trying to impose a free market in a top-down approach as the IMF and the World Bank tried to do in the early 2000s was doomed to failure. The change has to be bottom-up. As an essential prerequisite for the markets to work, of course, one first needs conditions such as property rights, judicial effectiveness and government integrity to be met for the system to flourish. These are often lacking. But he takes encouragement from the fact that technology changes such as the rise of broadband and mobile technology have allowed a new breed of African entrepreneurs to seize control of market developments independently of government – such as the Sudanese born Mo Ibrahim who took full advantage of developing mobile technology and its application to the region’s growing  needs creating a multi-billion company that served the specific needs of many African countries .

With regard to China he argues that in fact despite the massive opening-up the country still scores poorly on many aspects of the market economy but cites data that shows that in regions where markets are more open inequality is lower.

He singles out Ronald Reagan in the US, Margaret Thatcher in the UK and Ludwig Erhard, the influential West German politician after WW2, as the most significant proponents of free-market capitalism in the last century and for having made ’ significant contributions to a growth in prosperity for the nations they governed’. Not everyone would agree with that statement or with many aspects of Zitelmann’s book. But there is a wealth of evidence presented here and some intriguingly put-together arguments which make the book an enjoyable read.