The Results Are In: Free Market Capitalism Improves Lives

The credibility of free market capitalism is constantly threatened by critics who doubt its propensity for engendering prosperity. Its reputation is battered daily by the venomous pens of left-leaning writers advocating statist alternatives and their conservative allies touting economic nationalism. However, such narratives are frequently punctured by the piercing evidence of empirical data. Anticapitalism offers nothing beyond the appeal of emotional rhetoric.

When tested, its assumptions collapse under scrutiny by showing the superiority of free markets. Globalization, for example, is a primary target of antimarket critiques, but instead of harming local economies, as some suggest, research indicates that trade liberalization raises growth rates. Trade openness enables entrepreneurs to access larger markets and benefit from technology transfers. Governments expand business opportunities for citizens by reducing trade barriers thereby making globalization a vehicle for entrepreneurship. Lifting barriers to international commerce increases a country’s potential for growth.

Rather than devastating economies, globalization builds learning capacity by exposing countries to updated business techniques and innovative technologies. Of course, globalization makes some jobs redundant by disrupting protected sectors, but these inefficient jobs are replaced by employment in more productive sectors with better compensation. Contrary to the claims of protectionism, workers in open economies receive higher wages than their counterparts in closed economies. For example, Chileans employed in the most globalized sectors earned on average 25 percent more than those in low-openness sectors.

Another favorable effect of globalization is that it improves working conditions. Because they are under the microscope of public opinion, global companies are incentivized to ameliorate labor conditions and offer competitive wages to employees. Further, the expectations of protectionists that labor rights are infringed by economic openness are contradicted by evidence highlighting a positive association between openness and flexible labor environments. The fables of anticapitalism are also contested by the finding that instead of swelling the ranks of the poor, globalization lowers absolute poverty.

Anticapitalists interpret trade as a zero-sum game, enriching one party to the detriment of another, when the truth is that globalization is leading to income convergence and the rise of developing countries has not crippled growth in the developed world. The rapid economic ascent of a large proportion of developing countries upsets the theory that globalization is designed to elevate Western countries. Due to globalization, developing countries in Western and non-Western regions have been experiencing an economic renaissance. Formerly poor countries that abandoned socialist policies in favor of promarket reforms like Poland and Estonia are now lauded for their astounding economic performance.

Economist Marcin Piatkowski argues that Poland’s success is due to its meticulous approach to economic reforms: “First of all, Poland seems to have been more thorough in introducing market reforms at the beginning of the transition.” This proactive approach sparked a boom in the private sector and laid the foundation for Poland’s resurgence. Furthermore, other observations report that income growth is not limited to a small subset of countries: “Since the mid-1990s, it is not ‘just’ China, India, or a select group of Asian countries that have done well; developing countries on average have outpaced the developed world. And in this era of unconditional convergence, middle-income countries—far from being stuck in the trap—experienced reduced volatility and more persistent growth.”

Anticapitalism initiatives don’t promote human flourishing, and the evidence for promarket policies is accumulating. A popular suggestion of the left is to tax the rich at higher rates so that wealth can be redistributed. However, according to a new study, marginal tax cuts encourage entrepreneurs to stimulate investment by expanding businesses, thus increasing capital intensity and boosting the wages of workers. Similarly, a complementary study finds that progressive taxation reduces growth and income per capita in the United States. If economic progress is the goal, then obviously left-leaning proposals should be abandoned.

Although anticapitalist narratives dominate the airwaves, they are unlikely to enable economic prosperity. Eventually, these platitudes only lead to poverty and stagnation, as the evidence ably reveals.

Originally Posted at https://mises.org/

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