Imagine you live in a society where taxes are admittedly a little high, but all the main services are provided for free: health care, education, pension, unemployment benefits, and you will even receive some little extra if you are extremely poor or if you have children. And then there is another society where taxes are quite low. However, you do not get everything for “free” – you have to pay for each and every service yourself. Which of the two societies should be preferred? And is it true, as often asserted, that the poor would be worse off in the second society? Is it true that only the rich would benefit and that the poor were harmed by these policies?
No, it is not true. For many decades, the myth that in a capitalist country the rich become richer while the poor become poorer has been spreading all over the world – despite the fact that a quick glance over the facts would show that the economically freer the country, the less poor it is. It actually is no news that countries that have more economic freedom are richer and its citizens live better than those states which isolate themselves from the world, tax high, and regulate heavily. According to the Heritage Foundation’s Index of Economic Freedom, the five countries with the most economic freedom are in fact Hong Kong, Singapore, New Zealand, Switzerland, and Australia, while the bottom five are (of course known as being paradises incarnate) Yemen, North Korea, Venezuela, Cuba, and the Republic of Congo. An easy way to figure out where it is better to live no matter the social class is to see where people move to: Are people moving to North Korea, or to Australia? Exactly.
Usually countries with a small government, low taxes and free markets make both poor and rich people richer. Sure enough, as Kuznets emphasized, when some countries begin to develop, there will be a wealth gap between the rich and the poor – but usually after a bit, the gap will shrink again. In pro-market countries everybody will be better off.
In reality, many people’s envy is why they despise capitalism and its consequences so much. In his book Liberalism, Ludwig von Mises referred to this as the Fourier Complex:
Resentment is at work when one so hates somebody for his more favorable circumstances that one is prepared to bear heavy losses if only the hated one might also come to harm. Many of those who attack capitalism know very well that their situation under any other economic system will be less favorable. Nevertheless, with full knowledge of this fact, they advocate a reform, e.g., socialism, because they hope that the rich, whom they envy, will also suffer under it.
Or as Margaret Thatcher said:
What the honorable [Parliament] member is saying is that he would rather have the poor poorer, provided that the rich were less rich. So long as the gap is smaller, they would rather have the poor poorer. You do not create wealth and opportunity that way.
So why is it anyway that economic freedom makes both the rich and the poor richer? Concerning free trade policy, when a country has no tariffs, imports will make an uptick, and by that, many products enter and increase competition – thus, the variety of products increases, while prices drop. In consequence, many more people will be able to afford products that they were not able to afford before and can buy stuff that they could not find in their country. This applies to every sector, even health: hospitals and clinics for instance will be able to acquire machines that before it was impossible to purchase. In countries like Cuba or North Korea, most of the population cannot buy products that we often have in other countries such as mobile phones, cars, food or even soda – or better said, only those in power can acquire those products. In capitalist countries it does not matter who you are, everyone can find the products they want – as long as they can afford it.
Despite the fact that the vast majority of countries have nowhere near something akin to a free market, wherever capitalism was started to be implemented at least a little bit, astonishing numbers have resulted. According to data from the World Bank published in 2016, in 1981 half of the world population was living with less than $1.25 a day – this number has declined to 21 percent in 2010. The latest survey in 2013 showed that 10.7 percent of the world’s population lived at or below $1.90 a day. This is 35 percent less than in 1990 and 44 less than in 1981 – now the target is to have no more than 3 percent of the world population living under $1.90 a day by 2030. Capitalism is the only economic system that has been able to lift as many people out of poverty.
In the meantime, with lower taxes you will also receive more from your salary, and by that, be able to decide for yourself what you want to do with your money and where to put it. With low taxes and fewer regulations it is much easier for entrepreneurs to start their own businesses and to become successful. Their achievements are only dependent on whether the consumers are satisfied with the product or not (or as Mises would say, in a market economy there exists a “consumer sovereignty”). As Johan Norberg wrote in 2005 in In Defense of Global Capitalism: “Capitalism has given people both the liberty and the incentive to create, produce, and trade, thereby generating prosperity.” This is why the countries with these policies are the ones which bring forward a tremendous amount of innovations. The five most innovative countries are: Switzerland, Sweden, Netherlands, the US, and United Kingdom. All these countries have low taxes compared with the rest of the world – with the exception of Sweden, but they in exchange have only a minute amount of regulations.
That is why most of the time countries with high taxes and regulations usually do not have many entrepreneurs or start-ups, because it’s very hard and unprofitable. With the companies that are successful, it is frequently because they received help from the government.
In conclusion, it seems that in the economically free countries the rich become richer while the poor also become richer. If a system only shares what it has but does not produce anything, that country is doomed. But capitalism meanwhile is a system where you are able to create wealth, bring forth innovations, all the while retaining individual freedom. It does seem pretty clear which society is preferable.
Estanislao Fuentes Benítez is an intern at the Austrian Economics Center and a law student at the Universidad de San Andrés in Argentina.
The AEC’s fundamental goal is to promote a free, responsible and prosperous society. Through education and improving public understanding of key economic questions, the AEC promotes the idea of a free market economy and the ideal of a free society.