Capitalism: the best cure for poverty

by Robert Maynard

By now a growing number of people are familiar with singer, celebrity, and global anti-poverty activist Bono’s statement, while speaking to Georgetown’s Global Social Enterprise Initiative last year, that “Entrepreneurial capitalism takes more people out of poverty than aid.”  In a recent National Review article, the Cato Institute’s Michael Tanner quantified “Capitalism’s Triumph”:

Throughout most of human history, nearly everyone was poor. Even our wealthiest ancestors enjoyed lower standards of living than ordinary people in America today. It was not until the beginning of the 19th century that the masses started to enjoy real and growing prosperity.

What was the difference? Capitalism and its offspring, the Industrial Revolution. As Charles Murray explains, “everywhere that capitalism subsequently took hold, national wealth began to increase and poverty began to fall. Everywhere that capitalism didn’t take hold, people remained impoverished. Everywhere that capitalism has been rejected since then, poverty has increased.”

The transformation occurred first in the West, which was quickest to embrace capitalism, but is spreading now to the rest of the world. In the last 20 years, for instance, capitalism has lifted more than a billion people worldwide out of poverty, while the share of people in developing countries living on less than $1.25 a day has been cut in half. In China alone, 680 million people have been rescued from poverty, and the extreme-poverty rate has gone from 84 percent in 1980 to less than 10 percent today. In Africa, inflation-adjusted per capita incomes rose by an astonishing 97 percent between 1999 and 2010. Hunger in India shrank by 90 percent after the country replaced 40 years’ worth of socialist stagnation with capitalist reforms in 1991.

One can simply look at the difference between countries that embrace free-market capitalism, to varying degrees, and those with rigid state-controlled economies. Recall the classic comparisons between East and West Germany before the Wall fell, or now, between North and South Korea.

But perhaps more telling than such extreme examples is the fact that countries in the top quartile of the Cato Institute’s annual Economic Freedom of the World Index had an average per capita GDP of $31,501 in 2009, compared with $4,545 for those nations in the bottom quartile. The poorest 10 percent of the population in the most economically free nations had an income more than twice the average income in the least economically free nations.

Milton Friedman points out that “the only cases in which the masses have escaped from . . . grinding poverty . . . in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it’s exactly in the kind of societies that depart from that.”