In defence of capitalism
The world is getting better thanks to economic freedom
On 13 February, The Philosopher’s Yard, a debating society at Birmingham University, organised a panel discussion on capitalism. The IEA’s Kristian Niemietz represented the pro-capitalist side. The article below is based on his opening remarks.
I am here today to defend capitalism.
I realise that that is not a popular cause, and I am not expecting any applause. All the surveys show that capitalism has a terrible reputation.
For example, according to a YouGov survey from last December, only 30% of the population have a positive view of capitalism, with 45% having a negative one. More importantly, the same survey also shows that among the pro-capitalists, hardly anyone feels strongly about their views, while among the anti-capitalists, about two fifths do. Millennials and Zoomers are much more anti-capitalist than the Baby Boomers, so demographic factors are very much working in favour of this anti-capitalist zeitgeist.
So why defend such an unpopular system?
I’ll focus on three points:
The state of the world is not nearly as bad as currently assumed. There has been far more economic, social and environmental progress than is commonly recognised.
That economic, social and environmental progress has not been randomly distributed. It is systematically biased towards the more market-based economies of the world.
This is not just a correlation. It is a causal relationship.
The state of the world
Since 1990, global GDP per capita has more than doubled in real terms. This means that the world, as a whole, is now more than twice as rich as it was when I was at primary school.
This is the richest the world has ever been. Today’s living standards are historically completely unprecedented. And it is still getting better.
One consequence of that – or rather, it is not really a “consequence”, but just another aspect of it – is the steep drop in extreme poverty. Historically, about 80% of the world’s population used to live in what we would now call extreme poverty, that is, on less than the equivalent of $2 a day. In 1980, this was still true of almost half. Today, it is true of less than one in ten. This is the lowest it has ever been in history.
Now, “extreme” poverty is a very austere measure. Obviously, if you use higher poverty thresholds, say, the real-terms equivalent of $5, $7 or $10 a day, you get higher poverty rates. But the trend is always the same. Whichever threshold you use, global poverty is falling. It has been falling particularly steeply over the past quarter-century or so. Things are moving in the right direction, if not as quickly as they could.
One result of this is that we are living longer lives than ever. Historically, life expectancy at birth used to be about 30 years, or 50 if you managed to survive your first year. Today, the average citizen of the world can expect to celebrate their 70th birthday. In the 1960s, that was only true in the richest parts of the world, namely in Western Europe, North America, Japan, Australia and New Zealand. Today, it is the global average.
Part of the reason is the steep drop in child mortality, which has dropped from over 10% in the late 1980s to less than 5% today. Again, in the 1960s, it was only in the richest parts of the world that you would see child mortality rates of less than 5%. Today, that is the global average. And it is still falling.
Or literacy. In 1900, only about one fifth of the world’s population (not counting young children) knew how to read and write. In the 1960s, it was still less than half. Today, that rate is not much below 90%. And it is still rising.
I could go on. The point is that things are clearly improving across the board.
Economic freedom and social progress
What does that have to do with capitalism, you may ask. Is this not simply a by-product of industrialisation? Would this not also have happened under any other system?
The answer is no. It would not. Progress is systematically biased towards the more market-oriented economies.
You may have come across the so-called Economic Freedom Index, an index which tries to measure how capitalist an economy is, on a scale from 0 to 10. It measures things like the protection of private property rights, freedom of contract, freedom to trade across borders, freedom to use alternative currencies, and so on. In practice, all economies are mixed economies, so none of them get a score of 10, or even a 9. But some come closer than others. The index has Hong Kong, Singapore and Switzerland at the top, and Sudan, Zimbabwe and Venezuela at the bottom.
The index reveals a very clear pattern. Places that are higher up on that list are richer, they are doing better on all the indicators that I mentioned, and they are also doing better when it comes to environmental protection. They are unambiguously better places to live, on anything we can measures. The correlation is remarkably strong, especially if you bear in mind that the Economic Freedom Index and the outcome measures operate on different timescales. The Baltic states, for example, liberalised their economies very rapidly in the 1990s, but it took much longer for economic and social outcomes to reflect that.
Causation, not just correlation
This is not just a set of bivariate correlations. There are good reasons to believe that there is a causal relationship between economic freedom and prosperity, broadly defined. I will touch on three of those very briefly.
Firstly, the economist Friedrich Hayek, the indirect founding father of the Institute of Economic Affairs, has always described market competition as a “discovery process” or “discovery procedure” (Entdeckungsverfahren). What he meant by that is simply that we do not know, at the outset, how to organise a successful business or a successful industry, let alone a successful economy, because most things about economic life are unknowable in advance. We have to try lots and lots of different things, most of which will fail. A market economy is an evolutionary learning process. Hayek said this in the 1960s, but business history since then has impressively confirmed this to be true. If you look at the history of almost any successful product, industry or technology that we use today, you will usually find that in its early days, knowledgeable people were confidently predicting that it would never take off. No other economic system has thus far been able to replace the discovery function of markets.
Secondly, there is the role of price signals in coordinating economic life. The price mechanism is an extremely efficient method of collecting and spreading economically relevant information among millions of people. It’s how consumers communicate with producers, telling them what they want more of and what they would rather have less of. It’s how producers communicate with consumers, telling them what is relatively scarce, and what is relatively abundant. Again, no non-market system has ever been able to replace the price mechanism.
Last but not least, too many anti-capitalists make the mistake of assuming that all the negative characteristics they attribute to the market economy, such as greed and selfishness, are uniquely capitalist, and would disappear under a different system. They would not. They do not disappear in the non-market sphere today either. The political process can be just as much about selfishness and greed as the marketplace, and perhaps more so. One of my recurring obsessions is the housing crisis, and the role organised NIMBY groups play in it. NIMBYs are very selfish people. Their attitude is: I already have a nice house, and I don’t care about anyone else. I have the political muscle to block housebuilding, and I will use it. That is as selfish as it gets – but it is a selfishness that expresses itself outside of the market economy. They are using the political process, political means, to get their way. The idea that once you abolish markets and replace them with political decisions, everything will be based on altruism and concern for “the common good” is hopelessly naïve, to say the least. Selfishness and greed in the political sphere are vastly more destructive than in the marketplace. That is one reason why I would rather minimise the political sphere, and maximise the sphere of voluntary exchange.
Markets can go wrong in lots of ways. As an economist, I am more than aware of that. But despite all that – I still think that capitalism is infinitely better than its reputation.
 | A guest post by
|
Good piece Kristian. The capitalist society is governed by the system that allows it to. As much as the economies have grown to be richer and social benefits have definitely improved in my lifetime it has been due to the production of digital money, leveraged but also inflationary values combining with the natural progressions of invention. Your final observations of a fairer rules based society and leaderships based on a capitalist doctrine with fairness is reliant on the system and its leaderships. My gripe with the systems is that it’s been inherently the same since money was produced thousands of years ago. Spend and hope it comes back! And earn by being industrious. But the rulers always had the upper hand by taxing under their own rules to always give them more and everyone else less. This happened hazard system is still in play today, more likely to be in those lesser countries on your index. Since WW2 of course the new look was democracy. But still under their own same rules. But as we have began to change our thinking through openness and democracy and the strive for transparency in politics then the politics changed but the basic capitalism monetary systems haven’t. Obviously Thatcher removed exchange control regulations that allowed money to flow in and out of the UK in the hope more would come in but, that brought with it foreign ownerships especially in charge of our essential utilities and government run businesses all in the name of ‘investment’. She refused to adopt the Euro. So kept us half in and half out something we are now all paying for with the squeeze from EU and USA. Ironically this can now give us the independence we actually want and in my view we can achieve and leading the world with a new updated monetary system for the future. As you say Kristian you are happy with a capitalist system albeit now more and more it seems to be an oligarchy of the rich undemocratically running the more corrupt nations to maintain their richness and power. I am not an advocate of either or any! And in isolation I appear to be the only voice I can hear making a fairer autonomous system which for the first time in history, can now be invented with the advent of computerised Banking. We can now make the changes never before possible to ensure money flows without the rich having any hold or control over it if we decide to that is? Im a capitalist in part as I believe we should be able to earn as much as we can, and if we are clever it brighten then make that influence the amount we earn. I believe taxes like income tax are a form of robbery. As we earn it but don’t get it or are we able to spend it! So that’s unfair. It’s paid by our employers not by the employer! That fact is lost on most but it’s important to understand that taxes are triggered by spending. So if money is not spent it collects no tax! None! And there is the problem for our economy. The rich can hang on to money essential for our tax producing economy hoarding it in effect that reduces the working monthly pot of that hoarded money so our tax take is never going to produce enough to afford our needs! We need money for an exchange of work. But their work gets do much money it takes years to return those extra earnings back to the normal tax earning pot. Keeping our pot devoid of its rotation in our monthly system thus making our pot devoid of the very fuel it needs to work at its possible optimum. So what do we do? Well at this moment and since Thatcher we are seeing our system fail. The system is skewed to favour the few in an Oligarchy style getting richer. While the majority getting poorer within the system that can produce do much wealth. It’s obvious in say Russia or Venezuela with riches galore but mega poor! But now we see it being played out in our economy as the result of recessions crashes and austerity! A rich man can live just as good as a poor man. So doesn’t need all his money to live. Yet when we need to pay bills we borrow like the government but their killer is we have to pay back more plus interest! So we never get out of that cycle. That’s why we are in debt to £2.8tn and USA $30tn. They hold that wealth. We hold the debt. It’s totally undemocratic! So we need a capitalist earning capacity with a fairer democratic autonomous and perpetual economy with the help of a modern banking system to track and trace all money! My view is be rich from what you spend your money on not from the money itself! It’s a very simple and fairer system. Now possible. But not be able to hold onto the money itself which is needed to rotate and exponentially clock up tax revenue without borrowing anything! Let and make the money flow and move by making money move by date just as we expect bills to be paid by a date, wages paid by a date, taxes paid by a date, so money should flow back by a date! It will need no real policing. As if money is not spent and remains unspent then that should be taken by the exchequer to be revolved and recycled. So my answer is simple. Earn as much as you want. But you have to spend it all every month! We all do now anyway, except the rich! They don’t! And do pay no tax that us triggered by spending! Unless it’s spent no tax is collected. So either DLL the spending possible the exchequer will overflow with tax take! Do I feel we can rely on VAT alone. Imagine, no tax except vat. No more income tax or duty. We will and can expect increased wages, increased benefits, full government investment, no more overtly and a highly successful economy based on work that pays well, no one bring neglected and all because all the money us made to revolve. More tax revenue from less taxation and increased snd turbo charged success from spending all our money all of the time! Be rich off stuff not money! It’s rather simple and reduces the argument over politics. Less snd more simple government. Let money flow snd revolve autonomously and perpetually this system will prevent the oligarchy and will level the playing field for all citizens in charge of the politics snd governments.