SRODES: Capitalist answer to economic woes

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By REVIEWED BY JAMES SRODES

HOW CAPITALISM TURNS PROFIT INTO PROGRESS

By Thomas G. Donlan

FT Press, $24.99, 215 pages

Those who decry the decline of the American newspaper should look at Barron's National Business and Financial Weekly which chugs along giving its loyal readership what they want: Tough-minded analysis that cuts to the chase and frequently contradicts current received wisdom from other money media.

One of the strong-suits of the Barron's brand for the last 15 years has been Thomas G. Donlan, its Washington-based columnist and editorial page editor. Now Mr. Donlan has produced this spare primer on the roles of profits and wealth and the true functioning of capitalism. It is a timely book that focuses on the key economic "hot button" issues being manhandled and misinterpreted by both our main presidential candidate choices and it serves to underscore how poorly that crucial debate is being conducted by our two political parties and their likely nominees.

What this book is not is an unalloyed hymn of praise to Big-C Capitalism, the unrestrained zero-sum grab for wealth without regard. Mr. Donlan is too good a reporter for that. In a punchy, accessible writing style he argues that capitalism is not an "ism" at all - a la fascism or communism - but rather a description about how free individuals go about improving their lives through exchanges of value with other free men and women.

Under that definition of course we do not live in a capitalistic society by any means. And that is Mr. Donlan's point and main complaint. The real distortions, inequalities and environmental threats we face in this summer of discontent stem largely from efforts by governments and other special interests with power to affect outcomes through interferences of one kind or another.

The first case in point is the current version of the energy crisis that might better be classed as an extraordinary delusion and crowd madness. We have a sitting president doling out tax dollars so SUV owners can fill their tanks while his putative successors demand an America free of oil imports and the punishment of the very oil producers who are supposed to provide that freedom.

Mr. Donlan shows some courage in challenging the fundamental misconception about the intersection of energy and economics. This is the much decried "peak oil" threat forecast in 1956 by Shell geologist M. King Hubbert who predicted that world production levels would peak in the 1970s and the decline in production afterward would collide with rising demand for the product from developing nations. Hubbert has become an almost Keynesian icon of the alternative energy lobby (rarely read but often quoted) and is cited as proof that the current record oil prices are part of an Elders of Zion-type conspiracy of the Saudis and Big Oil.

First, Mr. Donlan marshals some impressive facts. America actually has done pretty good in improving more efficient use of its energy consumption. He notes that in 1970 the United States consumed 18,000 British thermal units (BTUs) of energy to produce a dollar of gross domestic product. By 2006, we were consuming less than 9,000 BTUs for each GDP dollar while during that period our GDP nearly tripled from $3.8 trillion to $11.4 trillion. If the oil market is tight (and it is) right now, we might look to China which uses nearly as much energy as we do while producing about one tenth the GDP.

As he points out, "The massive inconvenience of long gas lines in the 1970s were the fault of government price controls and supply allocations. By the beginning of 2008, Americans were facing higher prices than in 1979, adjusted for inflation, and yet there were no gas lines because markets were allowed to function."

In short, prices really aren't high enough - not yet. " [H]igh prices will do more in less time to cure a shortage of energy than anything else. High prices will curtail use, focus consumers on using energy efficiently, and create the capital necessary for investment in new sources of energy. If we let the market decide which sources of energy best satisfy our needs, we will have what we need at the lowest possible cost."

Mr. Donlan's is not at all the desiccated theoretical conservatism that frets over NAFTA or joins anti-immigration nag Lou Dobbs in wishing all foreigners would just go home. Government does have a role in Mr. Donlan's world but it is one of fostering freedom of movement (of capital, goods and labor) and not of trying to pick winners. Immigration, he reminds us, "is just trade by another name."

"Immigration is not all about blue-collar workers. Our current system doesn't even give a decent welcome to the best and the brightest would-be immigrants. The H-1B visa, which is supposed to provide special consideration to engineers, programmers, and other highly productive workers in short supply, is capped at 85,000 visas per year. High-tech companies hungry to hire burn through that quota in one day, and then some Americans wonder why they locate factories and research labs overseas," he notes.

By contrast, while the European Union does not get many things right, Mr. Donlan argues they are on a better track than the United States with their plan to provide permanent residency for newcomers who want to work or start new business ventures. His solution for America's perceived crisis in illegal immigration is to "welcome anyone who has a job waiting or agrees to take no social services during the five-year naturalization period."

The capitalist solution to the broader economic crisis that has the politicians transfixed is equally and elegantly simple: Let it happen, he concludes. "Overextended homeowners give up their homes and go back to renting. Banks that lent too much on terms that were too generous have to take losses on their books and in the market. Some have to go out of business or accept mergers with stronger banks on terms not much different from going out of business. Unwanted homes have to be sold at low prices, driving down the general price of real estate, even for people who did not participate in the general frenzy of real estate speculation. Taxes might have to be raised at all levels, and spending that seemed desirable has to wait for a better day," asserts Mr. Donlan.

"That better day will come," he predicts. And he may be right. For despite the best efforts of Washington's incumbents and the promises of their successors, Mr. Donlan's prescription seems to be happening in spite of efforts to short-circuit the process.

Like all breaths of fresh air, Mr. Donlan's book can be abrasive to those who lead sheltered lives, but it is a refreshing and timely restatement of some home truths that should be widely read before the polling stations open in November.

James Srodes is a former Washington bureau chief for both Forbes and Financial World magazines.