EIGHT WONDERS OF FREE ENTERPRISE SOCIETIES
From the Legatum Institute's #ProsperityForAll report
(1) CAPITALISM: A POVERTY-BEATER
The last few decades have been the greatest economic event in history – as the proportion of the world's population living on less than $1 per day has fallen to just 5%. That's still 5% too many but it’s a massive drop.
World Bank data suggested that for most of the last two decades the number of poor people was falling by 120,000 each and every day. The total number of people in absolute poverty dropped by 700 million even as the global population rose by 2 billion.
The Brookings Institute projects that the percentage living on $1.25 per day (currently 15% of the population) will also be down to 5% by 2030. And why? It’s the advance of free markets – including free trade – that has accelerated since the global retreat of Chinese and Soviet socialism but also predated it.
You don’t have to take a plutocrat’s word for it – or even an analysis from a libertarian or US-headquartered think tank. Will an Irish rock icon do? U2’s Bono gave the credit to "entrepreneurial capitalism" in an address at Georgetown University:
"Rock star preaches capitalism—wow. Sometimes I hear myself and I just cannot believe it. But commerce is real. That’s what you’re about here. It’s real. Aid is just a stop-gap. Commerce, entrepreneurial capitalism takes more people out of poverty than aid -- of course, we know that."
Watch Bono below:
And by way of postscript it’s not just China: absolute poverty is down from 63% to 37% in Ethiopia; from 32% to 10% in Cambodia; and from 40% to 2% (yes, 2%) in Vietnam.
(2) CAPITALISM: A FORCE FOR GLOBAL EQUALITY
Not only is absolute poverty being conquered we are seeing a lot of progress on global equality too. For all of the real concern about rising inequality within some advanced nations the international picture is encouraging. Although the incomes of the richest 1% are pulling away from the rest of the top 10% (with heavily state-regulated housing markets being one explanation) the biggest gainers are the emerging middle classes in countries like Brazil, China and India:
The above chart comes from Max Roser's World In Data project.
(3) CAPITALISM: FOR HEALTH AND HAPPINESS
With material progress we have also benefited from a form of super evolution. Life expectancy hasn’t just increased dramatically we have seen diseases of old age pushed back too as a result of healthier eating, sanitation schemes and advances in medical science. "Technophysio evolution” was for the University of Chicago’s Robert Fogel, an economic historian and scientist, the biggest story in human history. Taking just one example: “The average adult man in 1850 in America stood about 5 feet 7 inches and weighed about 146 pounds; someone born then was expected to live until about 45. In the 1980s the typical man in his early 30s was about 5 feet 10 inches tall, weighed about 174 pounds and was likely to pass his 75th birthday.”
Our wealth is finally helping more and more citizens of the world to realise John Adams’ dream, set out in a letter to his wife, Abigail:
"I could fill Volumes with Descriptions of Temples and Palaces, Paintings, Sculptures, Tapestry, Porcelaine, &c. &c. &c. -- if I could have time. But I could not do this without neglecting my duty… I must study Politicks and War that my sons may have liberty to study Mathematicks and Philosophy. My sons ought to study Mathematicks and Philosophy, Geography, natural History, Naval Architecture, navigation, Commerce and Agriculture, in order to give their Children a right to study Painting, Poetry, Musick, Architecture, Statuary, Tapestry and Porcelaine."
This expansion of opportunity has not just occurred because of the growth in leisure time. Economists at the Deloitte consultancy have studied census results in England and Wales since 1871 and found that technology has not only created more jobs than it has displaced, it has replaced more arduous, muscle-powered jobs with cleaner, safer, more caring and more knowledge-intensive work. The full report is here. It is a trend that is as likely to continue, as stop – despite what modern day Luddites might argue.
(4) CAPITALISM: EQUAL OPPORTUNITY EMPLOYER
Capitalism brings people together and it rewards talent regardless of that talent’s background, gender, sexuality, nationality, skin colour, age and religion. It’s obvious on a football pitch where the leading teams are a great mixture of nationalities, religions and skin colours. The boardrooms – which often have some way to go to become quite so diverse – pay millions for the best strikers, midfielders, defenders and keepers out there. They are blind to someone’s background if they can score goals - or stop them from being conceded. The same is true in the dealer rooms of City of London firms. It’s a heady mix of Russian mathematicians, Indian computer programmers and market savvy traders from the poorest parts of London. Voltaire recognised this strength of capitalism many years ago:
“Enter into the Royal Exchange of London, a place more respectable than many courts, in which deputies from all nations assemble for the advantage of mankind. There the Jew, the Mahometan, and the Christian bargain with one another as if they were of the same religion, and bestow the name of infidel on bankrupts only. There the Presbyterian gives credit to the Anabaptist, and the votary of the establishment accepts the promise of the Quaker. On the separation of these free and pacific assemblies, some visit the synagogue, others repair to the tavern. Here one proceeds to baptize his son in a great tub, in the name of the Father, Son, and Holy Ghost; there another deprives his boy of a small portion of his foreskin, and mutters over the child some Hebrew words which he cannot understand; a third kind hasten to their chapels to wait for the inspiration of the Lord with their hats on; and all are content.”
(5) CAPITALISM: PEACEMAKER
The “McPeace theory” hasn’t quite stood the test of time. It was the idea that countries which had branches of the McDonald’s fast food chain didn’t go to war with other. It was originally suggested by the New York Times columnist Thomas Friedman and rested on the idea that McDonald’s only established franchises in nations with prosperous, educated middle classes – middle classes that also had the political clout to stop their governments going to war. “People in McDonald's countries,” he wrote, “don't like to fight wars; they like to wait in line for burgers”. The conflicts between NATO and Yugoslavia in 2000 and then between Russia and Georgia in 2008 challenged the theory. Then, more recently, came the dirty war between Russia and Ukraine – two other “McDonald’s countries”. Despite the difficulties with the theory it has proved much more true than false.
Through trade we get to know each other. We become mutually dependent. Capitalism is so good at reducing the cost of goods it becomes cheaper to buy them from another country than to fund an army to steal them from it. The McPeace theory is really only a fashionable update of the “capitalist peace” theory that Montesquieu and Adam Smith advanced centuries ago - and which appeared to flounder in World War I.
Nonetheless: there is considerable evidence that free markets are more effective at preventing war than democracy – partly because evidence suggests that poor democracies behave like non-democracies. “If goods don’t cross borders, armies will” – is what Frédéric Bastiat is supposed to have said. Let’s keep the goods flowing so that protectionist trade wars don’t have any opportunity to become actual wars.
(6) CAPITALISM: A SOURCE OF ECONOMIC STABILITY
Claiming that free markets are a source of social tranquillity might seen like an over-reach given the awfulness of the Great Depression of the 1930s and the financial crash that began in 2007 and 2008 but as Paul Ormerod has pointed out, those are the only two global crashes of the last 150 years. There have been many ups and downs in financial markets but 70% of all recessions last less than a year. Ormerod also points out that unemployment has averaged 6% to 7% since the 1970s in most advanced nations – not much more than the 3% minimum level of unemployment that John Maynard Keynes said would always exist.
Markets do produce instability because they are characterised by innovation and competition. They also produce instability because they are human – full of people who are greedy. Markets certainly confounded Issac Newton - who as well as a great physicist and mathematician was also Britain’s Master of the Royal Mint from 1699 to his death in 1727. Sir Isaac lost the equivalent of $3 million from trading in South Sea Company shares in the 1720s. He was left to ruefully conclude that he could “calculate the motions of the heavenly bodies, but not the madness of people”.
So, while capitalism can be unstable, let’s never forget that the longest and deepest forms of instability often come from government projects. The creation of long-term youth unemployment across the Mediterranean states of southern Europe – because of the Eurozone and well-intentioned but counter-productive employment legislation - being the latest and most obvious example.
(7) CAPITALISM: A PROBLEM SOLVER
The greatest reason why dirty ol’ coal is increasingly being left in the ground isn’t because of global conferences of jet-setting environmentalists. It’s technological advance and, most particularly, fracking. This innovative technique has meant that huge quantities of gas and oil can be extracted from shale rock. Although the technique is controversial it did something that no one thought possible: it produced an energy source that was and is cheaper than coal. In the space of ten years coal went from providing over 50% of the USA’s energy to under 40%. It was a way of cutting carbon footprints that, unlike the immature renewable technologies that government attempts to mandate, was and is affordable.
And what about that other spectacularly successful recent innovation: e-cigarettes? Initially opposed by health bureaucrats who didn’t like something they weren’t in control of, some of those same bureaucrats now want government to subsidise a technology that is doing more to reduce smoking-related illnesses than any recent government prohibition or public health campaign.
The growth of free enterprise isn’t just about material growth. It’s about the growth of knowledge, science and technology, too. It’s about recognising that entrepreneurs are necessary to take a great idea out of a laboratory and into the high street. “Behind the activities of the businessman,” writes Robert W Tracinski, “there is a process of rational inquiry every bit as important as that of the scientist or inventor. The businessman has to figure out how to find and train workers who will produce a quality product; he has to discover how to cut costs to make the product affordable; he has to determine how best to market and distribute his product so that it reaches its potential buyers; and he has to figure out how to finance his venture in a way that will best feed future growth.”
You crush entrepreneurialism and you crush that growth, too. Edward Heath understood as much. During the 1970s when the green movement was in its first spring and recommending an end to growth he was appropriately dismissive:
"The alternative to expansion is not, as some occasionally seem to suppose, an England of quiet market towns linked only by steam trains puffing slowly and peacefully through green meadows. The alternative is slums, dangerous roads, old factories, cramped schools, stunted lives.”
Zero growth equals stagnation and the suppression of human creativity. If growth had stopped (as Ernst Schumacher, author of “Small is Beautiful”, had suggested it should in 1973) or stalled (as the 1972 “Club of Rome” suggested it needed to) we wouldn’t have the personal computer, the internet or the first vaccine for meningitis. We need more capitalist innovation as the likes of Bill Gates recognise. With the “right environment for innovation” he believes we can develop carbon free energies but innovation rather than the compulsory use of immature technologies is the key. Often – it must be said – with government support. There was public-private collaboration behind George Mitchell’s fracking breakthrough in Texas. Government directly and indirectly can be an important partner in innovation. Friends of capitalism may wanted limited government but they should not advocate a minimalist night-watchman state.
(8) CAPITALISM: GUARANTOR OF FREEDOM
The free market is more than a mechanism for delivering practical benefits. It is a guarantor of freedom. So long as the church or state or other powerful authority controls the economy people can be limited in where they can travel, what they can read or who they can be. From 1849 to his death in 1883 the capitalist London of Queen Victoria even provided a home to Karl Marx. He wrote his greatest works, including “Capital”, in the Reading Room of the British Library. The communist societies inspired by his dogmas have never been so tolerant of accommodating alternative worldview.
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