Inequality, Poverty, “The Free Market” and Capitalism: the story of a wonderful success

By Giovanni Caccavello for the Austrian Economics Center

In these last few years, an increasing number of professors, scholars, commentators and journalists widely (and wildly) claimed that capitalism and “free-market policies” have failed; that poverty is still a huge economic and social phenomenon; that income and wealth inequality – hence, economic inequality – is on the rise, it will continue to increase dramatically over the whole “twenty-first century” and that we are entering a new “gilded age”.

The idea behind such a largely accepted conventional wisdom (even – very unfortunately – at academic levels) can be well-summarized citing Thomas Piketty, author of the recent bestseller “Capital in the Twenty-First Century” (2014, 571): «…a market economy based on private property, if left to itself, […] contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based».

However, all of these beliefs could not be further from the truth.

Just to be very clear from the beginning, the history of capitalism and “the free market” is the story of a wonderful success. Since the late XVIII and the early XIX century, our “mid-modern” and “contemporary” society has become richer, wealthier and healthier than ever and, if the ideas of liberty, freedom (both economic and individual) as well as the economic, social and political concepts of democratization, liberalization of markets and globalization are protected and defended (we should not taken the progress done so far for granted), future generations will be even more fortunate than us.

When looking at the last two centuries – the historical period in which our current economic system fully emerged and developed – we can immediately realize how, quoting a witty expression by Ludwig von Mises (1949, 841-842), the «welfare propagandists» have got it completely wrong.

In fact, as Austrian economists and thinkers teach since the early XX century following the classical liberal root, the paradigm of «more state, more taxes, more rules» is not the right answer to our social and economic problems, but is – instead – the central part of those problems itself.

Despite daily claims, Government is no God at all and, as modern history tells us, the essence of government is to be selfish (we are still waiting for Plato’s or Seneca the Younger’s “enlightened despot” or “wise monarch”), to oppose competition and free-market, to promote the interests of the few, to fund and push for war and to encourage protectionist policies.

To sum up: too much often, the government does more harm than good to the poor and to the middle class (hence, in Piketty’s terms, government action does very, very little to help the bottom 90% of the population).

This is the main reason why we should all cheer at capitalism, at globalization, at the liberalization of markets.

The most powerful forces which individuals have at their disposal and can use to fight the government back is to promote libertarians values such as entrepreneurship, liberty, peace, responsibility, justice, tolerance and cooperation. Moreover, the best economic environment in which this worthy battle can take place is the market economy. Only a market economy based on private property can help free-trade, democracy and prosperity to flourish and developed harmoniously. Only a market economy based on private property can lift the poor up.

To put things into prespective, just look at these numbers.

According to the United Nations, in 1800 the world population was less than one billion (0.98 millions) while today, in 2015, there are more than seven billions (around 7.3 billions) people worldwide. At the same time, as University of Oxford economist Max Roser has recently highlighted, in the early decades of the XIX century, over 90% of the world population was living in absolute poverty, while today the share of people living in absolute poverty has declined to 14%.

What a great progress! Nothing of the kind happened in previous economic eras. The more we are, the wealthier, the heathier and the happier we are.

If you still have some doubts, look at these other data.

If we take into account income and wealth inequality in the very-long run (since the High Middle Ages, an era which saw the first early emergence of Capitalism), we can actually understand how economic inequality has drastically decreased over time and we can learn the following story: despite the normal ups and downs of the “Gini Coefficient”, in the long-run our society has got even less unequal.

In light of this, we can undoubtedly state that Capitalism and the free-market are the two best tool a tour disposal for fighting economic inequality and poverty.

As Deirdre McCloskey would put it: «In the UK since 1800, or Italy since 1900, or Hong Kong since 1950, real income per head has increased by a factor of anywhere from 15 to 100 […]

In relative terms, the poorest people in the developed economies and billions in the poor countries have been the biggest beneficiaries. […] The poor have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travel, rights for women, low child mortality, adequate nutrition, taller bodies, doubled life expectancy, schooling for their kids, newspapers, a vote, a shot at university and respect.

Never had anything similar happened. […] What I call The Great Enrichment [the full development of Capitalism and the global affirmation of an higher degree of liberty, ideas and technology] is the main fact and finding of economic history».

 So, there is only a big, marvellous and incredible truth: we are all richer, healtier, better fed, cleverer, kinder, more peaceful and more equal than in the past. For these reasons we should all thanks capitalism and free market policies. That’s that.