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.
