Why Free Market Capitalism Creates Prosperity

Capitalism is a paradox, on one hand it drives competition and innovation, on the other hand it causes selfish behavior which often leads to inequality. However I'm a realist, so when I look at the nations of the world I ask myself which have the highest average standard of living and how did they achieve it. What matters for me isn't necessarily a large gap in wealth between the rich and middle class, because if the average income of everyone is high and increasing over time then everyone is benefiting.

Which nation has embraced capitalistic ideals more than virtually any other nation? And which nation is a super power with the highest GDP on Earth? It's very easy to sit there and complain how much life sucks and how expensive everything is when you live in one of the most prosperous nations on Earth. As I've stated several times before I don't live in the U.S. and I'll admit I often get jealous when I look at the low prices and vast range of products in your stores, maybe it's easy to take for granted when you have a mega-store on every corner.

More and more posters on ATS seem to be expressing frustration about how hard it is to meet the cost of living and how the rich get richer while the rest of us never seem to get anywhere, and they see this as a fundamental failing in capitalism. This view is perfectly understandable, some time ago I held very similar beliefs. Is this really true though, does anyone besides the top 1% ever benefit under capitalism? Well lets take a look at the hard facts. The following chart shows the change in average income of the top 1% vs the bottom 99% over time:



What we see is that there's actually been a similar amount of growth in both groups, and people are earning more now than in the past. It seems a lot of people got rich around the 90's, presumably due to the explosion of the tech industry and dot-com era. People often show small portions of this chart to point out how the rich are earning more while the middle class is getting nothing. In fact, the article in which I found that chart is critical of capitalism and the very next chart shows the changes in income between 1979 and 2006, how convenient.

At this point you're probably thinking "but everything is more expensive and wages don't rise fast enough". Well that first chart apparently shows real income, meaning it is adjusted for inflation, but lets get more precise and take a look at another chart which shows the change in income adjusted for the Consumer Price Index, which is essentially another way of accounting for inflation (because it causes prices to rise over time). We can clearly see an upward trend even with these adjustments, the dip at the end is due to the 08 financial crisis.



So if people are earning more why are they finding it hard to live? There are multiple reasons for this, first there are a many more expenses in this modern world, second it's harder to get a job because there are more people competing for positions and more automation. Capitalism certainly isn't perfect and it can be abused by people in power but can anyone show me a system which has proven to work better in practice? Once again the facts quite clearly indicate that economic freedom is directly correlated to quality of life and economic output:



Hong Kong stands out as an outlier in that chart, so what makes it so special? Hong Kong has the highest degree of economic freedom in the world with very low taxes for businesses and individuals, but also has one of the highest levels of income inequality in the world. However the average income per household is very high and the average standards of living are extremely high, which is what really matters at the end of the day. Wikipedia states "It has a very high Human Development Index ranking and the seventh-highest life expectancy in the world".

My core issue with socialist thinking is that they believe the way to improve a nation is through the collective power of the government rather than the private sector, when it's very clear the private sector spends money much more effectively than the government because there are real consequences if they don't. This thinking justifies their ever-increasing taxes in order to cover the cost of all their social programs, while in the process forcing businesses to cut costs and making their life harder, thus damaging the economy in the process.

Of course individuals should also pay minimal taxes and most of the governments tax revenue comes from corporations and super rich individuals anyway because they are earning so much more. But overtaxing the most productive entities in an economy is never a good idea, entire books such as Atlas Shrugged are dedicated to this very subject. A government which gets too large always gets out of control and that's why I agree with libertarians who say we should limit the government to a manageable size and not let it trample our freedom or liberty.

My other related threads:

On The Expansion of Government
Debunking Post Capitalism
Electric Dreams S01E07 - A Short Analysis
A Wonderful World

a reply to: ChaoticOrder

Income is irrelevant. How much you pay in taxes is irrelevant. What does matter is the purchasing power of your take home pay.

Here's a really cool insight into poverty and wealth and the importance of culture:

a reply to: ChaoticOrder

Free market Capitalism lasts as long as farting in a gale. We end up with the TPP and other agreements that curry to special interests...other than the nation's interests.

Just as 'socialism' and gov't need to be reined in, so does Capitalism. Otherwise, like the other two, they grow for their own sake and no one else's.

Balance, sir, balance.

a reply to: ChaoticOrder

Good post.

As for the “but everything is more expensive and wages don't rise fast enough” argument, we could always ask how much a smart phone, a computer, the internet, GPS, google, wikipedia, genetic sequencing, electronic word processing, etc, cost back in the more prosperous times they have in mind.

a reply to: dfnj2015

And the only way purchasing power changes is through inflation or changing commodity prices which is why I showed charts adjusted for inflation and CPI. Once again, inequality does not translate directly into poverty. It's very possible to have equality with high levels of poverty if everyone is equally poor, and it's possible to have high levels of inequality yet also have high levels of prosperity, as Hong Kong shows. Also, if a bunch of people suddenly get rich, levels of inequality will increase because it will increase the gap between rich and poor, yet all that really happened was that some people increased their wealth, nothing really got worse.

a reply to: LesMisanthrope

Great point but I do think people were much better at saving money back then too. I grew up in the 90's but even then parents seemed to be much more frugal with their money, at least mine were. Kids these days seem to get everything and parents get trapped in debt, despite having a low skill job they still think they should be able to raise several kids and afford everything to live a high quality of life.

Good luck with that MBA....


Capitalism works best when it's not crony capitalism driven by insider info and speculation; which isn't real Capitalism any way. A corporate Oligarchy squashes democracy like a bug. Like what we are experiencing currently with the trickle down approach. What could possibly go wrong?

Keep drinking the koolaid baby.

From The American Conservative:

Look, most of us conservatives in the West are to some degree supporters of the free market.

What we missed for a very long time was that it is hard to support a fully free market while at the same time expecting our social institutions — the family, the church, and so forth — to remain stable.

This is an insight of Marx’s that we conservatives — and even conservative Christians — ought to absorb. I write about this a lot, though not in specific Marxist terms.

The thing is, Christian Democratic parties throughout Western Europe have largely absorbed this truth. Catholic social teaching is based in these insights as well. They aren’t necessarily against the free market, but rather say that the market must be tempered for the common good.

www.theamericanconservative.com...

From a marxist economist:

you are not a capitalist if you do not get your income predominantly from surplus-value (profit or dividends, interest and rent) .

And only a very tiny percentage of people of working age do.

Indeed, Marxist economist Simon Mohun has shown that less than 2% of income earners in the US fit that bill.

Nearly 99% of us have to work (sell our labour power) for a living. Even if some of us get some dividends, or rent, or interest from savings, we cannot live off that alone. Yes, we workers ‘interact’ in the capitalist system but only through the exploitation of our value-creating (for capital) labour power. We are not a ‘full participant’ in capitalism, except in that sense.

thenextrecession.wordpress.com...

Let's face it; since the 1980's all the gains in worker productivity have been realized as corporate/owner profits. Had the income percentages stayed at 1980 levels the middle class would be booming and the banks wouldn't have the stranglehold on government they do now. The middle class could afford their own lobbyists.

originally posted by: Asktheanimals
Let's face it; since the 1980's all the gains in worker productivity have been realized as corporate/owner profits. Had the income percentages stayed at 1980 levels the middle class would be booming and the banks wouldn't have the stranglehold on government they do now. The middle class could afford their own lobbyists.

I would just like to reiterate that wages haven't gained in purchasing power since the 80's yet my cost of living has more than doubled since the 08 crash, same wage double the cost of living

first the OP needs to convince me that we have actually have here is capitalism

The US has the most robust economy in the world because Hitler and Churchhill destroyed the worlds manufacturing base in Europe

in 2003 I was a bus boy making $600 a week in 32 hours worth of work and paying all of my bills and saving tons of money as an 18 old totally on my own with no help from anyone

try that now see where it gets ya, now you can barely survive working the trades

originally posted by: olaru12
Good luck with that MBA....


Capitalism works best when it's not crony capitalism driven by insider info and speculation; which isn't real Capitalism any way. A corporate Oligarchy squashes democracy like a bug. Like what we are experiencing currently with the trickle down approach. What could possibly go wrong?

Exactly, what could go wrong... Well take a look at the POTUS for starters...

a reply to: olaru12

Capitalism works best when it's not crony capitalism driven by insider info and speculation; which isn't real Capitalism any way. A corporate Oligarchy squashes democracy like a bug. Like what we are experiencing currently with the trickle down approach. What could possibly go wrong?

And why exactly does some regulation automatically mean it's not capitalism? I never said some regulation wasn't necessary, so what other system has been shown to create more prosperity in practice? Here's a quote from my other thread about the expansion of government:

Over the last few years socialist ideals have become very popular amongst the younger generations. They look around and see a huge gap between the rich and the poor, so it's not surprising they would seek out philosophies which seem to reduce inequality and appeal to their humanity. I should make it clear I don't necessarily disagree with any type of socialist policy, there are many public services which are paid for using tax payer money and they are socialist systems.

I also believe that socialized health care can work well because I live in a nation where it actually works very well and people don't have to worry about losing their life savings if they get sick or hurt. The problem, I believe, arises when society at large decides that socialist policies work so well we should totally abandon free market philosophies and give the government a huge amount of power over the way we live our lives, power over business, finance, etc.

Can you define exactly what trickle down economics is? A lot of people seem to believe giving any sort of tax cuts to businesses is trickle down economics, when in reality it's a very reliable way to boost economic activity and reduce government spending, and if the middle class gets similar tax cuts there is no real reason to complain. When the economy is healthier we all do better, when it's held back by excessive taxes and excessive regulations everyone suffers because businesses suffer. If there's less jobs and businesses cannot afford to pay the same high wages as in the past then what else do you really expect? You think that if the government can just tax everyone enough they'll have enough money to solve all our problems? And that's the fundamental problem here, this misplaced and naive faith in the nanny state.

a reply to: FyreByrd

Yes, we workers ‘interact’ in the capitalist system but only through the exploitation of our value-creating (for capital) labour power. We are not a ‘full participant’ in capitalism, except in that sense.

This is a completely ridiculous argument, no one is "exploiting" your labor unless you're a slave or they have a gun to your head. If you freely choose to trade your labor for some money then you absolutely are a full participant in the capitalist system. There is absolutely no reason you need to own stock and make money from dividends to be a capitalist, one must simply participate in the capitalist system through the act of exchanging resources and services using some form of currency.

a reply to: ChaoticOrder

And why exactly does some regulation automatically mean it's not capitalism?And why exactly does some regulation automatically mean it's not capitalism?

Well, there is no such thing in practice as pure capitalism... thankfully! Pure capitalism is brutal!

What we have, and what most other developed countries have, is a mix of socialism and capitalism. The Post Office is a great example of this mixture: one must pay for one's use of it (capitalism) but that cost is controlled by the government and there is a Post Office in every zip code, regardless of how profitable it is to have one. The Interstate Highway System is another example. It's not that socialism is bad and capitalism is good, but rather what ratio of the two works best for the most people.

Can you define exactly what trickle down economics is?

Trickle down economics is a term that was coined, I believe, by Ronald Reagan. It describes a reality of economics that many people do not want to believe. That is, the majority of the people in a society, the working class, do not completely control their financial destiny. They rely on the selling of labor/time/skills to generate enough income to survive. Their only customer base is companies who have profit incentive to expand and grow. Thus, it makes no sense to demonize the very people one it trying to sell to, yet people do it all the time.

That is also why those who complain so loudly have so much to complain about. There are two types of workers: those who understand and accept the relationship, and those who don't. Those who don't will hit a glass ceiling during their careers. They will never understand why they can't progress farther. The reason is that they have demonstrated very poor business sense, and that folks don't like to be around people who hate them. You don't see many black folk mingling in the middle of a KKK rally, you don't see many Jewish folk travelling to Iran for a relaxing vacation, and you won't see many folks who hate corporations in high-level positions making big bucks.

That's not even economics... it's just common sense.

TheRedneck

The countries with the highest standards of living are generally well balanced mixed economies that make the best use of both private and public provision.

There is no perfect one size fits all solution to economic problems. Just because the 'free market' works best at providing televisions or cars didn't mean it is best at providing health care or street lighting.

The concentration of more and more of the world's wealth into fewer hands creates not just economic problems but social and political ones as well. The market economy is a system like any other and we are no more obliged to accept the outcomes than in any other.

Atlas Shrugged is work of fiction (and not particularly good fiction) not a work on economics or sociology.

originally posted by: Asktheanimals
Let's face it; since the 1980's all the gains in worker productivity have been realized as corporate/owner profits. Had the income percentages stayed at 1980 levels the middle class would be booming and the banks wouldn't have the stranglehold on government they do now. The middle class could afford their own lobbyists.

That first chart indicates you are probably correct, but we can also see that the industrial age benefited the middle class greatly and a lot of middle class people moved into those upper brackets during the 90's because they were able to come up with a good tech idea or create that video game which sold millions of copies. And there is still certainly no lack of jobs in the tech industry, especially when it comes to technical jobs like programming. I didn't have to get myself into debt to become a programmer, I taught myself through actually practicing and building real applications. Capitalism doesn't force you do to anything, the question is do you have the motivation to go out and do what needs to be done in order to make yourself wealthy, assuming that's really what you want from life.

a reply to: ScepticScot

There is no perfect one size fits all solution to economic problems. Just because the 'free market' works best at providing televisions or cars didn't mean it is best at providing health care or street lighting.

The money for government subsidized healthcare and public infrastructure comes from tax paying individuals and corporations, if excessive regulations and taxes cause businesses to move over seas or fire employees then it's not good for the economy at the end of the day and it's not good for the government because tax revenue decreases as a result. You're right it is about balance, and as I stated when society at large decides to tip the balance in favor of socialist policies and encourage the formation of a nanny state it does enormous amounts of damage to an economy and if people are really scared about losing their quality of life then that's what they should truly fear because history has shown it can dismantle empires with ruthless efficiency.

Atlas Shrugged is work of fiction (and not particularly good fiction) not a work on economics or sociology.

It may not be the best story in the world but there is most certainly a moral or message in the novel which highlights the risks of excessive government interference in a free market.

The book depicts a dystopian United States in which private businesses suffer under increasingly burdensome laws and regulations. Railroad executive Dagny Taggart and her lover, steel magnate Hank Rearden, struggle against looters who want to exploit their productivity, including Dagny's brother and Hank's wife. As Dagny and Hank fight the looters' efforts to control their business operations and confiscate their production, they realize a mysterious figure called John Galt is convincing other business leaders to abandon their companies and disappear.

The theme of Atlas Shrugged, as Rand described it, is "the role of man's mind in existence". The book explores a number of philosophical themes from which Rand would subsequently develop Objectivism.[2][3] In doing so, it expresses the advocacy of reason, individualism, and capitalism, and depicts what Rand saw to be the failures of governmental coercion.

Atlas Shrugged

a reply to: TheRedneck

Trickle down economics is a term that was coined, I believe, by Ronald Reagan. It describes a reality of economics that many people do not want to believe. That is, the majority of the people in a society, the working class, do not completely control their financial destiny. They rely on the selling of labor/time/skills to generate enough income to survive.

More generally I would say it describes an economic system where corporations and rich individuals are treated preferentially compared to the middle class, because they generate more wealth for the economy and it "trickles down" to the middle classes, benefiting everyone. However, richer people actually get taxed far more and if I made the rules there would be one flat tax rate for all individuals and a slightly higher but flat tax rate for corporations, that is what you would call truly fair for everyone. A relatively small percentage of people get very wealthy under capitalism because businesses are structured so that the owners decide how the profits are distributed, and if you think the owners are exploiting your labor then there's no reason you should stay there. If you believe your destiny is in the hands of corporations then it will be, but in this day and age there are many creative ways to make a living and many paths a person can take to build a career which gives them the quality of life they desire.

Here's a perfect example of Capitalism working against the American working man. Trickle down at it's most obscene.... You ok with that?

fortune.com...