Has there been a more effective system in human history that has lifted more people out of poverty than capitalism? Even in its different forms, capitalism has raised global living standards from the vestiges of despair and destitution. Before the coronavirus pandemic paralyzed the planet, the World Bank’s global poverty rate slipped below 8%, down from 10% in 2015.
Because governments around the world have responded to the COVID-19 public health crisis with draconian measures, many gains the international economy has made in improving the lives of the globe’s poor over the last 30 years have been curtailed. Still, billions of people are better off now than they were a decade or a century ago. How and why?
Capitalism: A Primer
In a capitalist society, private individuals and businesses own capital goods. The output of goods and services is created using the market economy’s fundamental aspects: supply and demand. There are two types of capitalism. The first is the purer form of the economic system, known as laissez-faire capitalism, which does not restrain private businesses and consumers. The second is a mixed capitalist system that includes various government regulations and state ownership of resources and business. Today, most nations have adopted the latter.
The term capitalism was popularized by Karl Marx and Friedrich Engels, who referred to the concept in their books: Capital and Theories of Surplus Value. Marx also wrote various forms of the word: “capitalist” and “capitalist mode of production.” What was meant to be a reviled word became embraced by the, well, capitalists.
The Fundamentals of Capitalism
Indeed, there are a handful of principles that make capitalism a successful economic system:
- Private Property Rights: This is based on the Lockean (John Locke) theory of property rights that allows individuals to identify, control, and exercise rights over land and resources.
- Profits: A company that earns more than it spends to manufacture and sell goods and services.
- Losses: A business loses money after investing in labor, materials, production, marketing, and other elements crucial to create goods and services.
- Free Enterprise: The free-enterprise system is the basis of capitalism in which two parties, usually the buyer and the seller, enter a voluntary exchange without government interference.
Why Does Capitalism Work?
But while it is beneficial to point out the principles of capitalism, it is also crucial to understand why the system works. Freedom typically results in riches and advancements, something that capitalism breeds. But the economic concept also promotes cooperation, equality, better outcomes, and value. Ultimately, capitalism relies on the human condition, incentivizing the public to produce, work, serve, and build. From the division of labor to capital investment, the symptoms of capitalism lead to a healthy economy and society because it gives people what they want.
Capitalism’s Rival: Socialism
In a socialist economy, the government owns and manages the means of production, ditching the many principles that enable capitalism to work and to make a society prosperous. Why has it gotten so much support? Socialist proponents promise equity, fairness, and employment. However, as eminent economist Milton Friedman wrote in Capitalism and Freedom: “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”
The End of Capitalism?
In the aftermath of the coronavirus, the government implemented sweeping powers that undermined the free-market economy and liberty as politicians shut down businesses, placed millions under house arrest, and relied on the printing press to stitch the economy together. Essentially, the state’s response to COVID-19 has been a taste of what you could expect to endure under a full-blown socialist or even communist nation. Perhaps job losses, rising poverty, declining mental health, and state largesse will force socialist supporters to reassess their position and understand that the government, not capitalism, is the source of our woes.