The Road to Freedom Page 7
Modern Americans tend to take for granted that our lives will become more prosperous as we age, and that our kids will enjoy even better lives than we do. And for good reason: The average American enjoys 35 percent more real income today than thirty years ago, and every income bracket has benefited.8 Americans think that material progress is, if not the natural order of things, at least a natural right. But this faith in economic progress is a new phenomenon, historically. Before 1800, children could not expect a better life than their parents, grandparents, or any ancestors, for that matter. World GDP per capita actually fell slightly from AD 1 to AD 1000, and grew just 47 percent from 1000 to 1820.9
So for all of history until about 200 years ago, the world was desperately poor. But then something happened: the Industrial Revolution, and what economist Gregory Clark has termed the “Great Divergence.” In one set of countries, average prosperity in the 19th century began to rocket upward. In these lucky countries, income, standard of living, health, literacy—in short, every measurable aspect of well-being—saw a dramatic increase, unparalleled in history. In the unlucky countries left behind by the Industrial Revolution—the rest of the world—incomes and quality of life stayed more or less where they had been for centuries.
America was one of the lucky countries. The explosion in better living standards can be illustrated with a handful of statistics. In 1850, life expectancy at birth in the United States was 38.3.10 By 2010, it was 78.11 The literacy rate in the United States rose from 80 percent in 1870 to 99 percent today.12 And real per capita GDP increased twenty-two-fold from 1820 to 1998.13
The primary beneficiaries of the Industrial Revolution were the poorest members of society, not the richest. It is easy to think of the misery portrayed in Charles Dickens’ novels and imagine that the Industrial Revolution had made life worse for people who might have happily lived an agrarian life. In truth, after the early 1800s, living standards for the poorest Americans and Europeans began to rise to levels unimaginable a few years earlier. Until the Industrial Revolution, for example, formal education was reserved for the wealthy who could afford to pay and who could afford to keep their children out of the workforce. There was no education for the poor in America until the first public school opened in Boston in 1817. With the Industrial Revolution, public schools quickly spread to educate the masses. Within a century from the construction of the first public school, laws mandated primary education in most of the United States, and 72 percent of children had completed grade school.14 To be sure, there was much progress still to be made, and during the Industrial Revolution, life for the working class was hard. But compared to what had come before, the Industrial Revolution’s accompanying economic and social benefits were the greatest antipoverty program ever known.15
After more than a century, the Industrial Revolution’s blessings ultimately began to spread beyond Europe and America. As the twentieth century progressed, the number of lucky countries around the world grew. As a result, global poverty is decreasing radically, with real world GDP per capita today many times larger than it was in 1820.
Figure 4.1. The percentage of the world’s population living on less than $1 per day has fallen dramatically. (Source: Maxim Pinkovskiy and Xavier Sala-i-Martin, “Parametric Estimations of the world distribution of income,” NBER Working Paper 15433, http://www.nber.org/papers/w15433.pdf.)
The improvements have been massive even in recent decades. The number of people in the world living on a dollar a day—a traditional poverty measure—has fallen by 80 percent since 1970, from 11.2 percent of the world’s population to 2.3 percent.16
How did the Industrial Revolution happen? How did the world become, if not rich, at least dramatically less poor than it had been two centuries earlier? The answer is free enterprise, or what philosopher Michael Novak calls “democratic capitalism.”17 During the last two hundred years, there has been an unprecedented emergence of free societies and markets, accumulation of capital, and expansion of trade. The sudden emergence of free enterprise unleashed human creativity and ingenuity and brought about a previously inconceivable surge in living standards. Free enterprise is the reason that in two centuries, the world has progressed from an almost universally impoverished one to a world that is not.
Of course, there is still great poverty around the world. And here’s the reason: free enterprise still has not spread widely enough. If you look at where poverty is disappearing fastest in the world, you’ll find capitalism on the rise. According to the World Bank, China alone has accounted for more than 75 percent of poverty reduction in the entire developing world over the past two decades. How? This occurred not through communism, but through China’s economic gains since Mao’s death and its entry into world markets. From 1990 to 2006, just sixteen years, the inflation-adjusted value of Chinese exports to the United States increased by more than 1,000 percent.18 According to the World Bank, 400 million Chinese were lifted out of absolute poverty between 1981 and 2001.19 China has a long way to go to become a truly free and prosperous country, but the gains it has made have come from its experiments with capitalism.
Where has free enterprise been most elusive? In sub-Saharan Africa, home to the world’s most impoverished countries. Africa’s poorest countries include Burundi and the Democratic Republic of the Congo.20 In these countries, citizens live on less than $1 per day.21 Neither of these countries has a functional free enterprise system. Trade is restricted, property rights are weak, and markets are subverted by the government. Economists have shown again and again that this lack of economic freedom keeps people in poverty.22 People have difficulty establishing private ownership of property, and bureaucratic systems make starting enterprises difficult or impossible. Low borrowing and investment mean little or no accumulation of capital, weak business formation, low job creation, and virtually no economic progress.
That is the real reason that misery persists in Africa, despite at least $1 trillion in foreign aid over the last fifty years.23 Foreign aid—even if it were administered in an efficient, noncorrupt way—cannot lift up more than a small percentage of a country’s poor. To raise up a whole nation, a system that creates wealth, like America’s, is needed. That system is free enterprise.24
William Easterly, a professor of economics at New York University and one of the leading experts on international development, spent years researching how and why economies develop. He concluded that capitalism is the “good guy,” not the “bad guy.” He writes, “The number of poor people who can’t afford food for their children is a lot smaller than it used to be—thanks to capitalism. Capitalism didn’t create malnutrition, it reduced it.” Easterly adds that “profit-motivated capitalism is still the best case for the poor.”25
The most compelling evidence for free enterprise comes from comparing similar countries that took different paths. Consider the case of North Korea and South Korea. One country embraced capitalism, while the other rejected it. Both Koreas were poor, and had the same GDP per capita just sixty years ago. Many socialists in the West believed that the North’s Stalinist system of central planning would prove more effective than the South’s market-based approach.
We all know how things turned out on the Korean peninsula. Today, North Korea is horribly poor and its people are starving. It also has the distinction of being the least free country in the world.26 Meanwhile, South Korea is both the thirty-seventh freest country in the world and the thirteenth richest.27 South Korea’s GDP per capita is sixteen times that of North Korea.28
Free enterprise means richer, healthier, and happier people worldwide. Each year, the “Economic Freedom Index” by The Fraser Institute (a Canadian think tank) ranks countries along forty-two dimensions, from personal choice in goods and services, to ease of voluntary exchange, to freedom to compete economically, to the security of privately owned property.29 The index measures a country’s degree of free enterprise. It finds that average citizens in economically free countries are prosperous, by world standards. In cou
ntries that are not free, people are poor.
Figure 4.2. Comparative economic performance on the Korean Peninsula. (Source: Angus Maddison, “Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD.” Groningen: The Groningen Growth and Development Centre. Available at http://www.ggdc.net/MADDISON/Oriindex.htm.)
In the freest nations (the top fifth), the average annual income is eighteen times that in the least-free nations (the lowest fifth). The problem is not that there is unequal distribution of money in the world. The problem is that there is unequal distribution of free enterprise.
But freedom doesn’t just correlate with income; freer people are healthier too. In the freest countries, people live about twenty years longer, on average, than people in the least free countries. There’s no surprise here, of course. Richer countries have better health care than poorer countries. Nevertheless, it is still worth pointing out that free enterprise and prosperity have huge human consequences.
Figure 4.3. GDP per capita and life expectancy vary dramatically according to economic freedom between countries. (Source: James Gwartney, Joshua Hall, and Robert Lawson. Economic Freedom of the World 2010 Annual Report. Fraser Institute, http://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/publications/economic-freedom-of-the-world-2010.pdf; GDP per capita and life expectancy data are from the World Bank World Development Indicators. http://data.worldbank.org/indicator [accessed 2011].)
Skeptics say that all this tells us nothing about whether free enterprise helps poor people within countries. Maybe capitalism raises the income for the top 1 percent significantly, while leaving the poor in desperate straits. That would still make the “average” citizen look richer, but it would make no difference for the poor. For example, if you and I start out with salaries of $50,000 and then you double your salary to $100,000 and I don’t, our average salary rises to $75,000, but I’m no better off than I was.
However, if we look at the numbers a little more closely, the true picture emerges. The data show that the poorest 10 percent of citizens in the freest twenty countries earn about six times more than the poorest 10 percent in the least-free countries.
Figure 4.4. The poor are best off in economically free countries. (Source: James Gwartney, Joshua Hall, and Robert Lawson, Economic Freedom of the World 2010 Annual Report. Fraser Institute. http://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/publications/economic-freedom-of-the-world-2010.pdf.)
These data show correlation, not causation, but there is no sleight of hand here. Many economists have proven that free enterprise causes prosperity by taking into account other explanations (like natural resources) and isolating the effects of free enterprise policies on economic growth. They have also indicated that growth follows freedom over time. And they have shown exactly how free enterprise rewards people for working hard and taking risks and, in turn, how this leads to wealth accumulation and prosperity for everyone.30
FREE ENTERPRISE creates growth and lifts up the rich and poor alike by giving entrepreneurs an incentive to create, earn their success, and keep the rewards. The prosperity passes to others because entrepreneurs generate jobs and growth, compete for workers, and raise wages. Alternatively, when regulations are too harsh, the police are too corrupt, and the taxes are too punitive, there is little incentive to innovate and create. Poor people stay poor.
Rather than looking at the massive gains that free enterprise has created for the poor, critics complain that capitalism allows some people to get much richer than others, leading to the kind of economic inequality here in the United States. They’re right; economic inequality is higher in America than it is in a country like Cuba. But surely this argument can’t stand against the free enterprise system. Would you rather live in a place where everyone is very poor (except, maybe, a handful of kleptocrats who run the government)? Or in a place where everyone has a fairly high, basic standard of living, a handful of people have a lot more than others, and if you work hard and get lucky, you can join them?
Moreover, measures of income inequality radically overstate the true difference between economic classes in free societies. In 2009, the top fifth of American households had an average pretax income of $170,844, while the bottom fifth had an average income of $11,552.31 This is a significant difference: The average income of the top fifth is sixteen times the average income of the bottom fifth. But let’s look at consumption, what people actually do with the money they have. When we look at the money people actually lived on in 2009, we see that the wealthiest fifth of Americans spent less than five times what the poorest fifth spent.32
Even more important than the equality in the amount of consumption is the equality in the type of consumption. One recent study of the American poor found that the average American household in poverty (as defined by the government) had air conditioning, cable television, multiple TVs, and, if they had male children, an Xbox or PlayStation video-game console.33 These modern conveniences are unthinkable in other parts of the world, but they are commonplace in America, even among lower-income groups.
Consider also that virtually everybody in America has a car. A few people own $200,000 Porsches, and many people own $10,000 used Kias. One may be more fun to drive, but both will get people to work. The cars are functionally nearly the same. In America and many other prosperous, free countries, both the billionaire and the manual worker own their own cars and have the freedom to travel around. That is the true miracle, and free enterprise—not government edict—made it so. Or, as the late Andy Warhol commented back in 1975:
What’s great about this country is that America started the tradition where the richest consumers buy essentially the same things as the poorest. You can be watching TV and see Coca-Cola, and you know that the President drinks Coke, Liz Taylor drinks Coke, and just think, you can drink Coke, too. A Coke is a Coke and no amount of money can get you a better Coke than the one the bum on the corner is drinking. All the Cokes are the same and all the Cokes are good. Liz Taylor knows it, the President knows it, the bum knows it, and you know it.34
Here’s the bottom line: Capitalism and free enterprise have lifted everyone up. It is truly galling to see the 2011 Occupy Wall Street protesters demonstrate with signs that read, “We are the 99%,” as if they were somehow treated unfairly by any objective world standard. These protesters, as privileged Americans, are part of the world’s 1 percent.
Some people live in a materialistic world of “keeping up with the Joneses,” and inequality is all they’re worried about. In that case, then communism, authoritarianism, totalitarianism may be the best systems, because they keep almost everyone poor. But if quality of life matters to you, then you should support free enterprise unequivocally. It pulls millions of people out of poverty every year, increases their health and life expectancy, and gives them the possibility of something even greater.
In dealing with poverty here and around the world, welfare and foreign aid are a Band-Aid. Free enterprise is a cure.
FREE ENTERPRISE has eradicated poverty all over the world for billions of people. But does that mean that free enterprise is a moral system—or simply that it happens to have beneficial effects? On the surface, free enterprise can seem like a pretty passive kind of virtue: I pursue my own self-interest, this creates value, and other people—especially poor people—reap the rewards of a more prosperous society. Is it possible that ethically neutral—or even selfish—behavior just happens to have happy side-effects in the case of free enterprise? Lots of people—even some who call themselves libertarians and conservatives—think that for society to get richer, it automatically must adopt Gordon Gekko’s famous creed in the movie Wall Street: “Greed is good.”
The second charge that opponents of free enterprise levy against it is that it rewards rotten people. The more I work for myself, the argument goes, the more the free enterprise system enriches me personally. If I take time out to actively help others, I sacrifice time that I could h
ave spent further enriching myself (economists call this an opportunity cost). Therefore, the more I can keep the rewards of my own productivity, the less charitable I will tend to be. So, opponents say, capitalism naturally makes people rapacious.
A counterargument is that free enterprise actually makes people more virtuous. The line of reasoning here is more complex and requires a bit more concentration, but, in summary, is this: The free enterprise system requires a culture of optimism and trust to function correctly—a positive-sum, win-win mentality, and a desire for everyone to be better off. For many people, it produces more prosperity than they need to meet their daily requirements, a surplus that many will choose to direct to charitable purposes.35 Moreover, people who believe in free enterprise reject the idea that the government is responsible for solving all social problems. For this reason, people who believe in the free enterprise system are more likely than others to take responsibility for the neediest members of their communities.
So does free enterprise make people self-absorbed and morally corrupt? Or does it make people better, more socially responsible human beings? The data show unequivocally that the latter answer is correct.
THE UNITED STATES is a very generous country. Seventy to eighty percent of American households donate money every year; the average household contributes more than $1,000 annually. About one-third of these charitable gifts go to religious causes to support churches, synagogues, and so on. The rest goes to secular activities, such as education, health, and social welfare. Also, money isn’t all that Americans give: Between 50 and 60 percent of Americans formally volunteer their time each year, giving an average of almost fifty hours.36