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The Age of Turbulence: Adventures in a New World.

By Alan Greenspan. 2007. New York, NY: Penguin Press, Pp. 544, $35.00 hardcover.

In his recent memoir, The Age of Turbulence, former Federal Re-serve Chairman Alan Creenspan is conflicted about the merits of capitalism. On the one hand, he notes that "[i]f the story of the past quarter of a century has a one-line plot summary, it is the rediscovery of the power of market capitalism." On the other hand, Dr. Greenspan identifies two reasons why market capitalism has found only qualified acceptance even after the fall of the Berlin Wall and the collapse of communism.

First, capitalism brings instability. "Capitalism creates a tug-of-war within each of us. We are alternately the aggressive entrepreneur and the couch potato, who subliminally prefers the lessened competitive stress of an economy where all participants have equal incomes." Capitalism brings stress in the form of employment layoffs and the loss of investment capital, which are part of what Joseph A. Schumpeter has called creative destruction. At the individual level, Greenspan notes, creative destruction is often experienced merely as destruction.

The second problem, as Greenspan sees it, is that capitalism results in material inequality: "there is persistent widespread questioning of the justice of how unfettered competition distributes its rewards."

To be sure, Greenspan is an ardent defender of capitalism. He clearly sees capitalism and competition as the main driver behind the growth in material wealth throughout history. Creative destruction is indeed creative. What is destroyed is obsolete and inefficient ways of producing and delivering goods and services. What is created is innovation and efficiency and greater abundance, which in turn makes possible many nonmaterial blessings such as longer lifespans, better education, better working conditions, and greater environmental conservation, to name but a few.

Although outright communism may have ceased to exist almost two decades ago, the other extreme, unconstrained capitalism, is also rare. In reality, there are different types of market economies, with varying limits on the extent to which they allow competition to flourish. Opinions as to which location on this continuum is preferred may vary by individual, but they tend to cluster from nation to nation depending on the culture, history, and political leadership in those nations. The United States is relatively close to the unfettered side, Greenspan believes. Western European countries--especially France--which according to Greenspan display a "collectivist bias," tend to be located towards the fettered direction. He argues that it is exceedingly difficult for individuals to decide where on the continuum they would like to place themselves, for example in their choice of how much to work and how much leisure to enjoy, because the psychological drive to keep up with one's neighbors is too strong.

The recent increase in inequality is predominantly a U.S. phenomenon. Its cause, according to Dr. Greenspan, is not so much the European welfare systems, which have been in place for a long time, or the decline in the power of labor unions, which has occurred worldwide, but rather "the dysfunction of elementary and secondary education in the United States."

The problems with education, as Greenspan sees them, include the requirement of teacher certification, which one generally receives only with a degree in education rather than expertise in subject areas such as math. In addition, there are the single-pay structure for teachers and the lack of competition among public schools. Experience suggests that attempts to improve these issues often run into resistance by teachers' unions, but somehow Greenspan does not mention those as an underlying problem.

Dr. Greenspan's criticism of inequality is somewhat ambivalent. Nowhere does he state explicitly that he considers inequality undesirable per se. He argues that inequality is undesirable when it is excessive; but his main reason is that under excessive inequality, capitalism may eventually lose popular support, leading to populist measures (protectionism) that are harmful for all.

If he feels that inequality is undesirable only because of public perception, the book is a lost opportunity to help shape that public perception. Greenspan could have explained why inequality is not inherently bad, morally or otherwise, for example because different people achieve at different levels and so different rewards are arguably just rather than unjust. He only goes so far as to imply that there is no standard by which to judge whether income inequality is too large. "Relative compensation in our society is market determined, and reflects the value preferences of all participants in our economy. Is there a better arbiter?" But he could have gone further and fleshed out some of the positive consequences of inequality. For example, inequality may even be desirable if we accept Greenspan's logic that our neighbor's achievement constitutes an incentive for us to try and achieve as well.

If he feels that inequality is undesirable in and of itself, he does not attempt to convince us of that view. For example, he does not define how much inequality he considers excessive. Greenspan calls himself "a lifelong libertarian Republican." But the libertarian view is not that gross domestic product is like a large cake that is to be distributed while government's role is to make sure that the distribution happens equitably. Instead, the libertarian view is that there are only single slices that are created by individuals, who derive inherent ownership from the mere act of creating the slices. This view is based on ideas set forth by John Locke, the 17th century British philosopher, whom Greenspan mentions approvingly. But nowhere in the book does he attempt to resolve or clarify this apparent inconsistency in his views.

Dr. Greenspan turns out to be an engaging storyteller. He uses short, declarative sentences that are refreshingly light on his celebrated "Fedspeak." Autobiography and economics tutorial are blended effortlessly into a single narrative. Readers are likely to find the book an informative recounting of some of the issues that marked Greenspan's tenure at the Federal Reserve and that continue to be important to business economists.
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Comment:The Age of Turbulence: Adventures in a New World.
Author:Tempelman, Jerry H.
Publication:Business Economics
Article Type:Book review
Date:Apr 1, 2008
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