Conclusion and Caveats

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Overview

The purpose of this unit is to provide data and lessons to help analyze the question, Is Capitalism Good for the Poor? We believe the reasoning and supporting evidence offered herein makes a strong case for answering, “Yes,” to that question. The lessons and activities help demonstrate the unparalleled ability of capitalist institutions to create wealth, to raise standards of living, to affirm human dignity, and to promote ethically desirable social behavior. However, while we affirm its power to improve the lot of the world’s poor, we caution those who would regard capitalism as a simple and sole panacea. Critical reviewer Roger Ransom writes:

Lost amid the acclaim for capitalism as a successful engine of growth is the unnerving fact that the expansion of output has not benefited everyone equally . . . . Critics who argue that capitalism does not favor the poor point to huge inequalities in income and wealth . . . [and a] growing level of insecurity that has accompanied the cycles in economic activity . . . . Problems of inequality and insecurity are accentuated by a reliance on individual property rights that stymies collective efforts to mitigate the effects that restricted choice places on the poorer class of people in a capitalist society. (3)

Such cautionary observations carry intellectual weight, and thoughtful economics students will consider them carefully. Economic reasoning demands that we evaluate opportunity costs even when – or perhaps especially when – we would prefer to overlook them. To that end, we offer the following summary of both the conclusions and the caveats presented in the curriculum, Is Capitalism Good for the Poor?

Conclusions

Many economic institutions have been tried, and will be tried in this world of sin and woe. No one pretends that capitalist institutions are perfect. Indeed, it has been said that capitalism is the worst form of economic organization except all those others that have been tried from time to time. * (with apologies to Sir Winston Churchill)

• Historically, economic growth, not redistribution of wealth, has proven to be civilization’s most effective weapon against poverty. Capitalist institutions – competitive markets, strengthened by private property rights secured by the rule of law, – have provided extremely powerful incentives for a continuous stream of innovation and entrepreneurship that has fueled the growth of production.
• Regardless of resource endowments, culture, or other characteristics, countries that have adopted the key institutions of capitalism have experienced the highest levels of economic growth, and have seen the biggest improvements in citizens’ standards of living. Conversely, those that have failed to establish capitalist institutions have created little wealth, and have suffered the frustration of stagnating per capita incomes or, as in much of Africa, the slide into ever-worsening squalor.
• While it is possible to identify the key institutions of capitalism and to make some appraisal of the degree to which each is present in any given country, it is problematic to suppose that nations are either “capitalist” or “not.” To speak of “capitalism” as an identifiable “system” is to ignore both reality and possibility. The institutions of capitalism vary in degree and combination in different countries, and the phenomenal wealth produced by the full complement of these institutions working in concert should not blind us to the strengths and weaknesses of each when implemented individually or in various combinations.
  • For example, we have argued that wealth-producing markets flourish under the rule of law. However, as the story of India in the modern age (and arguably of the United States) illustrates, if the rule of law is directed to regulation or redistribution, it reduces the freedom of markets and their ability to drive economic growth.
  • The strongest incentives for wealth-producing activities are found where private property rights are secured by law. Yet even when the rule of law is weak or absent, or is undermined by corruption, terrorism and class privilege, as it is in much of Latin America, titling projects have succeeded in spurring investment and entrepreneurship among the poor.
  • The recent history of China, where the rule of men persists, testifies to the wealth-producing power of introducing limited markets and limited private property rights where once there were none.
• The power of capitalist institutions to produce wealth raises the question of why capitalism has failed to take root in so many countries – and it is a question that remains unanswered by even the most respected economists. Nobel Laureate Douglass C. North writes:
  • “We know the sources of productivity growth and we even know the essential institutions, political and economic, to produce the desired results. We have only a very imperfect understanding of how to get those conditions.” (3)

Caveats

• Unequal distribution of wealth is an issue both among world nations and within individual economies, from the richest to the poorest, and it is true that the largest gap between rich and poor is found in countries where the poor are the wealthiest relative to the rest of the world. In acknowledging this disparity, it is important to emphasize that the percent of the population identified as poor varies relatively little among nations. In rich and poor nations alike, those at the bottom 1/10th of the income distribution, typically receive between 2 and 3 percent of national income.
  • We have argued that if the poorest in any country are likely to have only a small portion of the economic pie, then having a small portion of a much larger, and growing, economic pie is far better than having that same portion of a small or shrinking economic pie. It would be prudent to add, “all else being equal,” to this generalization and to acknowledge that in the political world people’s perceptions of inequality may be of greater import than the reality of their relative well-being.
  • It should also be noted in any discussion of economic well-being and the plight of the poor that while the size of the pie may increase more rapidly in the presence of the institutions of capitalism, a growing pie does not guarantee any increased degree of economic mobility for the poor. Investments in education and healthcare for all, plus the presence of open markets appear to be key to upward mobility among those at the bottom of the income scale.
• A second caveat in studying the forces of economic growth calls for recognition that objective analysis may lend an aura of simplicity to complex reality. To argue that capitalism reduces poverty is not to blithely suggest that the poor can help themselves by simply adopting the institutions of capitalism. It would be folly to underestimate the difficulty of the task or the strength of the barriers to implementing sustainable change.
  • Many factors – history, geography, environment, education, cultural mores, and belief systems – foster or inhibit the establishment of a nation’s institutions. Even something so simple as the reliance on anonymous impersonal exchange that citizens of developed economies take for granted, is fraught with difficulty for the world’s poorest societies.
    • “The shift from personal to impersonal exchange requires a political, economic, and social structure that runs counter to the innate genetic predispositions that millions of years of hunter/gatherer heritage had prepared humans for . . . . The widening gap between rich and poor countries that we are observing in modern times is a reflection of our inability to reproduce the necessary conditions in countries with a heritage of personal exchange.” (North 2)
• Finally, a further word about the importance of the rule of law is in order; it is absolutely foundational to the long-term presence of the other institutions we have identified as “capitalist.” When the rule of law is present, a society is governed according to “widely known and accepted rules followed not only by the governed but also by those in authority” (Center 47). The requirements that the rules be both “widely known and accepted” and that they be “followed by those in authority” highlight the fact that written and/or stable laws, while necessary, are not sufficient to establish the security necessary for other capitalist institutions to flourish.
  • The ability of a political authority or judiciary to arbitrarily change the rules identifies those nations – like China – in which stability and order limit rather than enhance the wealth-producing potential of markets.
  • Cultural norms may subvert the rule of law. In India, the world’s oldest democracy, the Untouchables have property rights in theory and on paper, but not in fact.
  • The scourge of poverty in sub-Saharan Africa provides countless examples of the debilitating effects of the rule of physical force and the insecurities of even the strongest and seemingly benevolent rule of man.

Can the less-developed countries of the world quickly lead themselves out of poverty by establishing the institutions of capitalism? The answer to this question is clearly, “No.” It takes time to develop the political institutions and lay the economic framework that will realize the full potential of a country’s human and material resources.

Despite the obstacles, there is hope in being able to identify the path out of poverty. History shows us that when the institutions of capitalism are present, wealth is created and absolute standards of living rise. While it would be a mistake to suggest that the task is less than daunting, it is nonetheless true that adopting policies and practices that foster the introduction and strengthening of capitalist institutions – the rule of law, competitive markets, property rights, and incentives for entrepreneurship and innovation – hold the greatest hope for improving the lot of the world’s impoverished millions.

The FTE offers these lessons in the hope that they will serve to enrich the discussion and enlighten the analysis of the question Does Capitalism Help the Poor? And perhaps they will redirect the efforts of some who want to help the poor, focusing their efforts on systemic change that can promote economic growth and the creation of wealth.