Politics

Capitalism is the Cure for Poverty

| by NCPA

The Left's version of recent economic history boils down to one
terrible fact: The distribution of income has gradually become more
unequal. Within the United States, that fact is incontrovertible. It
is not clear, however, that increased inequality has been bad, says
economist Kevin A. Hassett.

Inequality is, after all, the
foundation of a capitalist society. When individuals work hard, or
innovate, they receive outsized rewards. When others see those
rewards, they are motivated to work hard and innovate. As the
lottery-ticket market has demonstrated, the bigger the prize, the
bigger the motivation, explains Hassett.

A landmark new study by
economists Maxim Pinkovskiy and Xavier Sala-i-Martin set out to study
changes in the world distribution of income by gathering data from many
different countries. As a byproduct of their work, they are able to
count the number of individuals who live on $1 per day or less, a key
measure of poverty. According to their calculations:

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  • The
    number of people living in poverty so defined has plummeted, from
    967,574,000 in 1970 to 350,436,000 in 2006, a decrease of a whopping 64
    percent.
  • The biggest factor in the reduction was the emergence of middle classes in previously poverty stricken China and India.
  • The
    spread of capitalism to other countries has similarly been followed by
    prosperity; the trend is even more impressive if one considers that the
    world population skyrocketed over that time, increasing by 3 billion.

If
the trend continues for just 40 more years, poverty will have been
essentially eradicated from the globe. And capitalism will have done
it, says Hassett. Socialism offers itself as an alternative to
capitalism that is more just to the poor. To test that view, the
authors reconstruct the distribution of income for the countries of the
former Soviet Union. Back in the Communist days, poverty was much,
much higher in the Soviet Union than it is today.

There are those
who have argued that the current financial crisis has served as proof
that capitalism is a failed ideology. The work of Pinkovskiy and
Sala-i-Martin suggests that there are about a billion people whose
lives prove otherwise, says Hassett.

Source: Kevin A. Hassett,
"The Poor Need Capitalism," National Review, November 23, 2009; based
upon: Maxim Pinkovskiy and Xavier Sala-i-Martin, "Parametric
Estimations of the World Distribution of Income," National Bureau of
Economic Research, Working Paper No. 15433, October 2009.