Capitalism Wins

Capitalism Wins

Posted on January 17, 2020 by

I’ve always been puzzled by those who criticize capitalism (“it’s unfair!” and “it’s coercive!”) and urge its overthrow or replacement.

I actually agree with them that markets can be harsh, especially in the short run (think of the damage to the typewriter industry when personal computers exploded on the scene).

But the critics are unable to suggest a successful alternative to capitalism.

This is why I keep reissuing my challenge for them to identify a single nation that has ever become rich because of big government.

Needless to say, my left-wing friends have never provided an answer.

(Some of them say the Nordic nations and other countries in Western Europe are relatively rich, and that’s true, but I point out that those jurisdictions became rich in the 1800s and early 1900s when government was very small.)

By contrast, we have lots of evidence that modern prosperity is the result of free markets.

And so long as we give capitalism enough breathing room to function, we’ll get even more prosperity in the future.

Michael Strain of the American Enterprise Institute, in a column for Bloomberg, debunks the notion that capitalism is failing.

Use of the term “late capitalism” has exploded during the past decade… Capitalism may have once delivered broad prosperity, the critics argue, but now the system serves to entrench the elite. …Now is an odd time to argue that capitalism is broken. Only 35 U.S. workers out of every 1,000 are looking for jobs but unable to find them — the unemployment rate is lower than it has been in a half-century. The rate at which people in their prime working years hold jobs is higher than it has been in over a decade. …The level of inequality is high, but this is an odd decade to bemoan its rise. …from the beginning of the Great Recession, when criticism of capitalism became much more common, to 2016 (the last year data are available), inequality actually decreased by 7 percent.

Here’s the part of the column that is most interesting.

…critics of modern capitalism seem to be confused about the market’s ability to distribute benefits. …In a 2004 paper, the economist and Nobel laureate William Nordhaus concluded that “most of the benefits of technological change are passed on to consumers,” not the innovators themselves. Using data from 1948–2001, his model suggests that innovators capture only 2.2 percent of the total social value they create. Applying a back-of-the-envelope calculation using Nordhaus’s result to Bezos suggests he has created $5.4 trillion in value for the rest of society. A team of economists…recently attempted to measure the benefit of several new digital services that are free to consumers. …The typical U.S.-based Facebook user in their study values the social networking site at $42.17 per month. …Because they are free, these services are not well captured in current national income statistics. Brynjolfsson and his coauthors calculate that the benefits from Facebook alone would have added between 0.05 and 0.11 percentage points to the annual growth in U.S. gross domestic product growth starting in 2004. …Capitalism has delivered significant increases in purchasing power for typical households. The phrase “late capitalism” suggests that capitalism is spent and exhausted. It isn’t.

Interestingly, the academic researchers confirmed the insights provided in this video.

Though it is helpful to have some rigorous evidence to confirm how free enterprise has made our lives better.

The Wall Street Journal recently editorialized about the blessings of capitalism.

…deregulation and tax reform unleashed a surge of business investment…which has drawn workers off the sidelines and raised wages. …wages for the bottom 10% of earners over age 25 rose an average 5.9% annually compared to 2.4% during Barack Obama’s second term, according to the latest demographic data from the Bureau of Labor Statistics. …Less educated workers have also seen the strongest gains. Wages have risen at a 6.1% annual clip for workers over 25 without a high school degree and 3.9% for those with some college—both about three times faster than during the second Obama term. …Socialism-loving young people are getting the biggest pay raises. Wages have increased on average 5.8% annually for teens, 4.4% for 20 to 24-year-olds and 4.8% for 25 to 34-year-olds during the Trump Presidency. …Forty million fewer people last year lived in households receiving government assistance than in 2016, and the food-stamp rolls have shrunk by 9.5 million over the past three years. Reduced government dependence is a social good far beyond the lower costs to taxpayers. …Between 2016 and 2018 the number of taxpayers earning less than $25,000 declined 5% while increasing 8% for those making between $100,000 to $200,000 and 13.9% for those making more than $200,000, according to IRS data.

Here’s the graphic that accompanied the editorial.

By the way, I always warn never to over-rely on short-term economic data.

Yes, the recent numbers look good, but what if they are – at least in part – the result of a monetary policy-driven bubble?

That wouldn’t be an argument against better tax policy and better regulatory policy, of course, but it might mean some of the gains are illusory (much as the good economic news in 2006 now looks rather hollow considering we now know the country was in the midst of a Fed-created bubble).

This is why I prefer to look at multi-decade comparisons. And when you compare market-oriented nations with statism-oriented countries, it becomes very obvious that capitalism is the only way to deliver broadly shared prosperity.

P.S. Regarding capitalism vs. statism, here’s the best-ever tweet.

P.P.S. And here’s the best-ever counter-tweet.

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Image credit: Jacob Bøtter | CC BY 2.0.


Dan Mitchell is co-founder of the Center for Freedom and Prosperity and Chairman of the Board. He is an expert in international tax competition and supply-side tax policy.

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