14 November 2017

The recipe for prosperity

By Richard M. Ebling

The free enterprise, or capitalist, system has done more to improve the material condition of humanity than any other economic arrangement in all of recorded history. Yet, “Capitalism” is constantly condemned and accused of being the cause of humanity’s woes, while in reality, nothing is further from the truth.

In a mere two hundred years, the economic condition of humankind has dramatically transformed. In 1820, the world population was barely one billion people and had only grown to 1.5 billion by 1900. Now, in 2017, the global population has increased to over 7.4 billion people.

Has this huge increase in world population led to abject material misery and human despair? Not at all; instead, it has been very much the opposite. In 1900, global Gross Domestic Product stood at around one billion dollars, while today it stands at nearly $80 trillion.

In 1820, world per capita GDP was estimated to have been about $1,000; by 1900 it doubled to $2,000 per person on average. By 2017, per capita GDP is approaching $16,000, an eight-fold increase in little over a century and with a world population seven times larger than a little over a hundred years ago.

The Escape from Poverty Due to Capitalism

Now, of course, this growth in material betterment based on the global per capita benchmark has not impacted on all people, everywhere, to the same degree or at the same time.

But this is because not all countries evolved or introduced many of the essential institutional ingredients that are necessary to foster such amazing economic improvements.

It began in parts of Europe and then North America in the eighteenth and nineteenth centuries, and from there it spread to other corners of the globe in various degrees. Even today, capitalism has barely touched some parts of the world.

Yet, wherever the institutions of individual freedom, private property, the rule of law, and restrained government exist, the human engine of creativity and entrepreneurship has opened the way to a potential horn-of-plenty, replacing the poverty, disease, and cruelty of pre-capitalist political systems that were almost everywhere a few centuries ago.

As economic historian Deirdre McCloskey said, “The real sustenance of the poor has been economic growth, the Great Enrichment, which raised real incomes in the past two centuries by a factor of thirty. Look again at the figure: a factor of 30, or about 3,000 percent.”

This transformation of the human condition is slowly but surely enveloping the world. This is an improvement that carries within it the possibility for the end to human poverty in its most appalling forms before the close of the twenty-first century. Yet, Capitalism is blamed for whatever the critic finds intolerable on this planet.

One of the burning issues of our time is the challenge of income inequality and the fact that some are “rich” while others are “less well off” and still others are “poor.” The fact is, the competitive free market system has done more to rid humanity from “unnatural” inequalities than any other system.

Before Capitalism “the Few” Plundered “the Many”

Throughout most of human history, political power, economic privilege, and social status have been the result of the physical prowess of conquest and control. Plunder of the productions of others and the enslavement of them were the methods for possession of the means for wealth and luxury in those earlier times. It was truly the case that “the few” were able to rule over “the many” and live off what they produced through the threat of physical force.

Superstitions and crude ideologies served as the complementary rationales for systems of enslavements and compulsory servitude. Kings and princes, pharaohs and priests used psychological and cultural tools to manipulate the minds of others to accept the rule of the power-lusting few as pre-ordained and inescapable.

These were societies of a persistent “one percent” living and lionizing over the rest of the population. Of course, by our standards of living, the politically privileged and powerful lived lives of unimaginable material poverty; yet, their lives were better than most of their slaves and subjects. I would suggest that very few of us would be willing to trade places, no matter how humble our current economic position, for the rough and short lifespans of the monarchs and noblemen of just a few hundred years ago.

Such political and economic social orders were grounded in “unnatural” inequalities based on political power and privilege. Most individuals were coercively kept in a caste or class position in society that had nothing to do with innate characteristics that might have enabled them to attain a better circumstance for themselves if they had had the freedom to better their lives through peaceful and voluntary interaction with others.

Liberal Capitalism Brought Freedom and Betterment

This all began to change with the emergence of political and economic liberalism in the eighteenth and nineteenth centuries; government power was increasingly restrained. There emerged the idea of “the rights of man,” under which, those who held governmental positions were to be “servants” for protecting the individual rights of each human.

A new ideal gained influence, that of equality before the law for all. This ideal was reflected in the words of the American Declaration of Independence. It implied that, when each individual stands with equal individual rights, with political privileges and favors for none, each person is at liberty to try to find his place in society. He or she may then rise to that unequal circumstance to which his inclinations guide him, in free and voluntary association with others who also all possess the same rights to their life, liberty, and property.

A growing number of people were increasingly liberated from the government controls that, up until that time, hindered freedom of commerce for the benefit of the elites.

Each individual was becoming freer to pursue his own interests and purposes as he defined them. However, the “rules of the game” are such that each person could only improve his circumstances by applying his unique talents and resources to serving others as the means of earning an income and bettering his life. As Adam Smith said, as if by an “invisible hand,” though each individual pursues his own interests, the institutional setting cumulatively results in the mutual and growing material and cultural betterment of all.

The Middle Class Emerges from “the Poor”

From the nineteenth century and into the twentieth, there emerged in modern Europe something that was very limited in the preceding centuries: a “middle class.”

From where did this emerging and growing middle class come? It came from the “lower classes,” from those who in earlier ages were the servants and slaves of kings, from the bottom of economic existence. With secure property rights, relatively low taxes, and reduced government regulation of commerce, those with an entrepreneurial spirit could take their chance by opening and running enterprises. The nineteenth century was a great period of innovation, industrial experimentation, and mass production.

Free enterprise enabled savings to be put to work in industry. Capital investments in new and better forms of machinery needed more human hands to run them to produce the growing number and types of products that were flooding to the market. The demand for labor grew; workers were drawn to the cities where the new industries were taking root, away from the age-old forms of work in the countryside. Wages slowly but surely rose in the industrial centers, enabling a man or a woman to earn income never imagined in the rural areas under the eyes of the landed nobility that “lorded” over them.

As incomes rose for a growing number of people, the need for skills and education motivated these new industrial workers to improve their talents. Private institutions of learning arose, offering to teach both basic literacy and “mechanical” training in the form of, what today we call, vocational schools. Economic historian E. G. West, in his book, Education and the State (1965) estimated that, between 1790 and 1830, about two-thirds to three-quarters of the entire British population was made fully literate through for-profit and non-profit private schools.

This, in turn, generated the market demand for what became known in Great Britain as the “penny press,” inexpensive newspapers to quench the growing thirst for knowledge and information about world events, as well as the scientific and technological advances that were popping up in rapid succession like mushrooms under a gentle rain.

Gains from Investments in Physical and Human Capital

The demand for workers in the industrial and manufacturing enterprises in the nineteenth century raised wages from their stagnant, rural levels. The profits that these enterprises earned by supplying goods that this expanding workforce desired in their role as consumers created the financial means to increase investment in better machinery.

Investing in tools and equipment (the physical “capital” of the market) generated greater productivity that reinforced the upward movement of wages. Productivity increased per man hour – what the economist calls the “marginal product of labor,” the increment of additional output by one additional worker within a firm, increased.

Thus, capital formation that was raising labor productivity, as well as worker investments in “human capital” (the employee’s knowledge, skills, and abilities) combined to lift more people out of poverty as the worker’s productivity increased. A growing number of industrial workers were, indeed, competing for jobs with an increasing population; but capital formation in better equipment brought about an increase in labor productivity at a faster rate than the growth in the working-age labor force. The net effect was to raise wages and a reduce the “gap” between the living standards of the rich, the expanding middle class, and the poor.

Rather than poverty versus plenty separating “the many” from the “the few,” over the last two hundred years the distinction has increasingly been reduced to degrees of wealth, comfort, and luxuries among people in society. This has been the cumulative outcome of the competitive process within the market economy. The horn-of-plenty produced by private enterprise provides a vast and growing variety of goods and services available to all, a great equalization in the quality and standard of living.

The Past’s Material Inequality vs. Growing Equal Availability for All

Three or four hundred years ago, the housing accommodations that separated the nobility from the “commoner” were castles with servants versus thatched huts that the occupants usually shared with livestock. Queen Elizabeth I in the 1500s had a luxurious wardrobe that consisted of a small handful of dresses, while the multitude mostly wore rags handed down from the dead to the living that too frequently carried vermin that could spread plagues.

The landed lords’ diets were limited to whatever was grown or raised on their estates, while the “tenants” who were tied to the land ate a much smaller amount of monotonous meals, often verging on starvation, depending upon the luck of the seasons. Both nobleman and commoner rarely traveled during their lives and certainly not much further than the narrow confines of the regions in which they had been born.

Today, in the more market-based economies, the differences between the wealthy, the middle class, and “the poor” often lie in how many rooms are in one’s house or apartment, with usually more than one television around the home; household kitchen appliances all have the same basic qualities and features. Most households possess one or more cars to transport family members wherever they desire to go.

Travelling is now a common practice, with over 3.6 billion people – a number equal to almost half of the world’s population – moving about the globe by commercial airliners in 2016. Also, a huge majority of the world’s people – rich or poor or those somewhere in the middle – have access to the Internet and cell phones (except where oppressive governments attempt to interfere).

A wide variety of food is available within a narrow range of prices for virtually everyone in widely market-based societies. The rich may be seen at supermarket-discount stores, and the middle class and the poor can be seen leaving the checkout counters with carts full of items at the higher-end food stores. All have the same items at fairly reasonable and reachable prices from suppliers encompassing the world, so seasonal availability of various perishable goods is almost a thing of the past.

Market Competition as the Great Positive Social Leveler

The British economist, William H. Hutt (1899-1988), pointed out in, Economists and the Public (1936),

As a matter of fact, to the economist studying society, competition appears, prima facie, to be the great leveling force. One would have thought that the onus would have been on its opponents to show that this was not so.”

Over a few generations, competitive capitalism has raised a vast number of people into material and financial comfort, especially those who otherwise would have remained in the depths of the poverty that had prevailed for thousands of years. This has come about through rising incomes and the lowering of the real costs of goods and services brought to the doorstep of almost everyone in the West and increasingly more and more billions of people around the rest of the world.

This has been made possible to the extent that societies have been fairly free, so secure individual rights under equality before the law has allowed the “natural” inequalities among people to more fully emerge. Given these differences – heredity and circumstances of birth, inclinations, and motivations for self-improvement – every individual implicitly tries to do the best they can in the context of their comparative advantage in the division of labor.

The competitive market process places the talents, abilities, and the drive of each person at the service of everyone else. Those who end up in a more modest place in the market in terms of income, benefit from all the successes of their financial “betters” in the marketplace, since the latter’s  financial rewards are dependent upon the extent to which they have satisfied the wants and desires of others in society.

Private Charity and Assistance to Those Less Well Off

But must an individual’s potential go to waste or be less fulfilled because of the accidents of birth? If only that individual had been born into a different family and social setting, he or she might have been able to achieve so much more, both as a contributor and as a recipient of all a free market economy has to offer.

The ethics of a free society and a capitalist economic system are based on recognition and protection of individual rights to life, liberty, and honestly acquired property, all within a social order of voluntary association and mutual agreements. Compulsion and force in human relationships are reduced to a minimum consistent with a peaceful society of free men.

This means that the “helping hand” to assist the needy must also be based on free choice and voluntary giving. Not only is this essential to the principles of a free society, but it also puts to work the same advantages of competition for “raising up” the less well-off.

Private, decentralized decision-making about charity opens the door to many different methods to be tried and experimented with to find the most desired results in helping others. Rather than delegating the task to a handful of minds in government-appointed positions that crowd out private-sector alternatives, many individual minds work to solve these “social problems.” 

Furthermore, in the voluntary arena, those organising charitable and philanthropic endeavours are dependent upon the voluntary giving of benefactors. This means that the charitable organisers and administrators must demonstrate their successes with the voluntary dollars contributed to them, if the donations are to continue to be forthcoming in the months and years ahead.

In government bureaucracies, responsibility for failure is difficult to pinpoint and, in spite of which, tax-based revenues continue to flow in, maintaining a failed redistributive status quo. In a system of private sector charity and philanthropy, failure is easier to identify, and donors can demonstrate their disappoint by withdrawing support and transferring their voluntary dollars elsewhere, to ways of raising up those who are too far behind in society.

For a dramatically growing global population, one of the benefits of a capitalist economic system is the great escape from poverty. Equal individual rights for all enable each to apply their unequal skills to better themselves but result in material improvements for a growing number of people. The material differences among people, and the contrasts between wealth and poverty, are becoming less stark, with more comfort, convenience, and opportunity for all.

Market economies have successfully provided for the betterment of mankind. This stands as a rebuttal to all those who condemn the capitalist system based on a misconception of what a market-based society is really all about.

This article was originally published on FEE.org. Read the original article.

Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.