Capitalism and Economic Growth

The following is a presentation given at the San Jose Tax Day Tea Party on April 15, 2010.

Recent events and the words of our politicians have popularized the idea that while markets can be important to economic growth and prosperity, they can also undermine it. It is fashionable to give a nod to the forces of entrepreneurship but in the same breath assert that the power of markets must be tamed by regulation. It is complacently accepted that somehow, these regulators—the men and women in Washington—know what’s best for American consumers.

When the current administration talks of entrepreneurship, they speak of politically favored businesses and privileged recipients of the taxpayers’ dollars. To be clear, that is not entrepreneurship. It has become conventional to say that those who openly embrace capitalism, free markets and free trade are dogmatic, ideologues, idealistic, or market fundamentalists. And if you look to the media and our leaders, you get the impression that being in favor of free markets is somehow an unreasonable position.

Unless one is ashamed of unprecedented increases in income, rising life expectancy, greater education, and more political freedom, there is no reason to be a fair-weather fan of capitalism. Sprawling free markets in countries that became more capitalist over the last 25 years have meant many more people enjoy improvements in well being and opportunities to advance human capabilities.

There is no evidence that countries that eschewed freer markets and embraced substantially greater state control performed better on any of these major indicators. On the contrary, those countries that adopt increased taxation, increased regulation, fiscal mismanagement and enormous public debt have performed demonstrably worse.

From a global perspective, we have witnessed remarkable progress of mankind through the increased acceptance of free market policies in both rich and poor countries. Before the industrial revolution, 80% of the world’s population lived in abject poverty. By 1980, that number has fallen to 34.8% and by 2000, less than 20% of the population lives on less than $1 a day. In five years, the number is expected to fall to 10% if free trade is allowed to flourish.

In just the past 25 years increased private ownership, increased free trade, and lower taxes all came at the hands of politicians like Deng Xiaoping in China, Margaret Thatcher in England, and Ronald Reagan in United States. In the years following the adoption of these policies by these global leaders, per capita income nearly doubled from 1980 to 2005; Tariffs fell and trade increased; Schooling and life expectancy grew rapidly, while infant mortality and poverty fell just as fast.

In the average country that became more capitalist over the last 25 years, the average citizen gained a 43% increase in income, nearly half a decade in life expectancy, and a 2-year increase in the average years of schooling. In my lifetime alone, freer markets have improved the lives of billions of people from all walks of life.

When we look back at our own history, the tremendous economic growth that Americans experienced from the time of the original Tea Party up to 1914 was the result of economic freedom from government regulation, open boarders for free immigration, and very few trade restrictions on the global flow of goods, services, and capital. Anyone could get on a boat, land on Ellis Island and become an immigrant and this benefited both domestic Americans and the immigrant alike. Business and labor were free to be entrepreneurial—and entrepreneurship created wealth. But we don’t want wealth for wealth’s sake. Wealth allows for the improvement of the human condition.

For example, in 1905, our average life expectancy in the U.S. was 47. Today it is 78. A hundred years ago only 14% of homes had a bathtub; 8% had a phone; 95% of all births took place at home; most women washed their hair once a month; and the average worker made about $300 per year.

As recent as 1984, it took the average American wage earner 456 hours of labor to earn enough to purchase a cellphone. Today, it takes the average American 4 hours. A computer has fallen from costing 435 hours of labor to less than 20. None of this accounts for the tremendous improvements in technological capacity. There are several reasons that the costs of goods have dropped so drastically, but perhaps the biggest is increased international trade.

Simply put, the free market means the poor are less poor. Globalization extends and deepens a capitalist system that has for generations been lifting American living standards—for high-income households, of course, but for low-income ones as well. When the world embraces free market reforms, the world economy expanded greatly, the quality of life improves sharply for billions of people, and dire poverty was substantially scaled back. This is not a coincidence.

It is a well-established fact that when people are free to buy from, sell to, and invest with one another as they choose, they can achieve far more than when governments attempt to control economic decisions. Widening the circle of people with whom we transact—including across political borders—brings benefits to consumers in the form of lower prices, greater variety, and better quality, and it allows companies to reap the benefits of innovation, specialization, and economies of scale that larger markets bring. Free markets are essential to prosperity, and expanding free markets as much as possible enhances that prosperity.

Voluntary economic exchange is inherently fair and does not justify government intervention. When two free people come together on terms they have agreed upon to exchange peacefully, both benefit. Government intervention in voluntary economic exchange on behalf of some citizens at the expense of others is inherently unfair. One person is coerced in order to privilege another. It really is that simple.

When goods, services, labor and capital flow freely across U.S. borders, Americans can take full advantage of the opportunities of the international marketplace. They can buy the best or least expensive goods and services the world has to offer; they can sell to the most promising markets; they can choose among the best investment opportunities; and they can tap into the worldwide pool of capital. Study after study has shown that countries that are more open to the global economy grow faster and achieve higher incomes than those that are relatively closed. This is capitalism.

Growth is not guaranteed. It seems obvious that the central challenges facing America have to do with the with predatory regulatory and tax policies conducted by governments domestic and abroad. From an economic perspective, then, the case for unilateral trade liberalization—that is reducing our own trade barriers and subsidies without preconditions or reciprocal commitments from other countries—is the best policy to promote peace and prosperity globally.

Politically, however, the concentrated and organized beneficiaries of protectionism are powerful relative to the much larger, disorganized, beneficiaries of free trade. Politicians tend to be most responsive to the loudest interest groups and are therefore inclined to view free trade unfavorably. But we as Americans must be clear—capitalism is not evil. It has done more good for more people than any acts of state, any stimulus spending, any health program or welfare initiative. Americans can no longer afford to fear freedom.

Finally, acknowledging the relationship between free markets and economic prosperity does not make someone “dogmatic”. It is unreasonable to continue to ignore these facts. Capitalism’s superiority for economic growth and development deserves the unqualified support of everyone who believe that wealth is better than poverty, life is better than death, and liberty is better than oppression.

References

Leeson, Peter. Forthcoming. Two Cheers for Capitalism? Society.

Shleifer, Andrei. 2009. The Age of Milton Freedman. Journal of Economic Literature