Is "Free Market" Capitalism the Best Way to Reduce Poverty?

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Republished with permission.
Source: The Anarchist Library


It is fair to say that supporters of “free-market” capitalism make the claim that their system not only benefits everyone, but especially working class people (indeed, the very poorest sectors of society). This was the position during the so-called “anti-globalisation” protests at the turn of the 21st century, when the issue of global inequality and poverty was forced to the front of politics (for a time). In response, the likes of the Economist portraying itself and the big businesses seeking lower costs and higher profits as the real champions of the poor (particularly in the third world).

In this perspective growth is the key to reducing (absolute) poverty rather than, say, redistribution, struggle for reforms by means of direct action and popular self-organisation or (heaven forbid!) social revolution. The logic is simple. Economic growth of 1% per year will double an economy in 70 years, while 3% does so in just over 23 years and 5% growth takes a mere 15 years. Thus the standard right-wing argument is that we should promote “free market” capitalism as this is a growth machine par excellence. In fact, any form of redistribution or social struggle is considered counter-productive in this viewpoint as it is harms overall growth by either scaring away capital from a country or blunts the incentives of the elite to strive to “produce” more wealth. Over time, wealth will (to coin a well-worn phrase) “trickle down” from the wealthy to the many.

What to make of this claim? Again, it does contain an element of truth. As capitalism is a “grow or die” economy, obviously the amount of wealth available to society increases for all as the economy expands. So the poor will, in general, be better off absolutely in any growing economy (at least in economic terms). This was the case under Soviet state capitalism as well: the poorest worker in the 1980s was obviously far better off economically than one in the 1920s. As such, what counts is relative differences between classes and periods within a growth economy. Given the thesis that free-market capitalism will benefit the poor especially, we have to ask: is this actually true and, of so, can the other classes benefit equally well? This means we need to ask whether the assumption to concentrate on absolute poverty or inequality rather thanrelative values makes more sense. Similarly, we need to question the assumption that “free market” capitalism is the growth machine its supporters assert and whether the benefits of the growth it produces does, in fact, “trickle down.” Questioning these assumptions is essential.

The key problem with evaluating such claims is, of course, the fact that an economy, like a society, is a very complex system which evolves through time. There are few opportunities for “controlled experiments” with which to test differing analyses and theories. This means that any attempt to analysis these claims must be based on looking at different countries and time periods in order to contrast them. Thus we will look at the same countries at different periods (the more social democratic post-war period to the more neo-liberal post-1980s and more neo-liberal countries with those in which free-market “reforms” have not been pushed as far). As we will show, the track record of “free(r) market” capitalism has been, at best, distinctly unimpressive and, at worse, significantly poorer.

However, this appeal to reality will not convince many supporters of capitalism. For the true believer in the capitalist market, this kind of evidence does not create doubt in their ideas, only the conviction that the experiments did not go far enough. Thus, for the ideologue, freer market capitalism handily tell us nothing about free market capitalism — unless, of course, they can be portrayed as an “economic miracle” (regardless of the facts). For “advocates of the market,” the sanctity of private property and private contracts is held as an inalienable natural right. To refute charges that this Will simply benefit the already wealthy they spend much time arguing that unfettered capitalism is also the only economic system which will produce the greatest benefit for the greatest number. In other words, that absolute capitalist markets and private property rights coincides exactly with personal interest. A clearer example of wishful thinking could hardly be asked for. Yet it is not hard to see what function this plays. Few people will be persuaded by their assumptions on property and markets, given the common sense objection that free exchange between the weak and the strong will, obviously, benefit the latter more. Yet more people may be convinced to go along with “free market” proposals by considerations of economic efficiency and the hope that the poor will see their living standards improve over time (particularly if “experts” with economics degrees are involved as people often assume they know what they are talking about).

Now, the empirical track-record of what is called capitalism is decidedly mixed. There are three courses of action open to the market advocate. The first is to embrace the property-rights argument wholeheartedly, and say that we should adopt pure capitalism even if it hurts a large percentage of the population because it is the right thing to do. This would be unconvincing for most people as economic austerity and serf-like working conditions in return for protecting the power and property rights of the few who actually own the wealth would find few (sane or disinterested) supporters. Then it could be argues that the empirical track-record of “actually existing” capitalism should be ignored in favour of economic ideology as reality is simply not pure enough. That, again, would be unconvincing for the obvious reason that we would be being asked to have faith in the validity of economics (as we have noted before, this would not be wise given its surreal assumptions and non-scientific nature). This would have one positive side-effect, as doing this would mean that that “market advocates” would have to stop claiming that all the good things we have are due to something (capitalism) that does not exist. So that option is unlikely to have many supporters or convince many. Finally, it could be argued that contrary to appearances, capitalism really does benefit everyone. While this option is not compatible with intellectual honesty, it is by the far the most popular within the ranks of “market advocates.” This is undoubtedly because the wealth and corporations are always willing to pay well for people happy to defend their power and profits against the reality they produce.

So what of the claim that capitalism is the best way to help the poor, that capitalism will especially benefit working class people? To make sense (i.e. to be more than simply a rhetoric assertion), it must rest on two basic notions. Firstly, that “free market” capitalism will have a higher growth rate than alternative forms of that system (such state capitalism or regulated capitalism). Secondly, that inequality will be less and share of wages in the national income will be more in “free market” than in other systems (this must be the case, otherwise “free market” reforms do not especially help working class people). We will discuss the first claim here, before discussing the track record of neo-liberalism. We then analyse the failings of the equality defence in another article before ending with a discussion on the limitations of looking at income and growth in evaluating how capitalism benefits the working class. As we show, there is substantial evidence to suggest that the standard defences of “free market” capitalism are not up to much. Let us be clear and state there is generally a positive correlation between economic growth and the income of the poor. We are not attacking economic growth as such but rather asking whether neo-liberalism’s own defence actually stands up.

Looking at the historical picture, then, yes, capitalism does produce much more economic growth than previous social systems such as slavery and feudalism. However, defending capitalism on the basis that it better than a slave based economy is hardly a strong foundation (particularly when capitalists are happy to locate to dictatorships which have slave-like labour conditions). The more substantive argument is based on the assumption that “free market” capitalism produces faster economic growth than other forms of that system and that growth of the economic pie is more important than how it is distributed. In other words, the same (or even smaller) share of a bigger pie in the future is better than a bigger share of the existing pie. This means we need to look at the economic performance of capitalist economies, comparing the neo-liberal ones to regulated social democratic ones. We would expect the former to be performing significantly better than the latter in addition to being more dynamic after reforms than before. The reality hardly matches the claims.

The attempt to compare and contrast economies can be found in, say, the works of Milton Friedman to show the superiority of his beloved “free market” capitalism. However, as economist Thomas Balogh notes, to prove that “socialistic policies” had crippled Britain’s economic growth since 1945 Friedman began “by misrepresenting the size of the public sector ... he chooses a ratio which, though irrelevant, gives spurious support to his thesis.” Equally, Friedman compares post-war Britain to post-war Japan and West Germany, conveniently failing to note that both hardly had minimal states (for example, West Germany had approximately the same level of state spending as the UK and Japan had the social planning of its Ministry of Industry and Trade). As Balogh notes, the “consequences of socialism are then illustrated by reference to the weak economic performance of Britain in comparison with Japan and Germany since 1945. This is an odd comparison to choose when judging the impact of ‘socialism’ on Britain. Surely what we need is to compare the British performance during a period of sustained boom under ‘Friedmanism’, e.g. in the period 1900–13, with the record under ‘socialism,’ say 1945–75.” However, to do that would mean noting that the average annual rate of growth per head of GNP between 1900 and 1913 was a mere 0.2%, compared to 2.2% between 1948 and 1975. Even taking other starting dates (such as the slump year 1893) produces a smaller rate of growth that the post-war period. [The Irrelevance of Conventional Economics, p. 181]

Nor do things get better when we look at the Friedman influenced Thatcher government which turned the UK into a poster-child for neo-liberalism. Here, yet again, the facts do not really support the claims in favour of “free(r) markets”. As Ian Gilmore, a moderate conservative MP at the time, points out “[d]uring the Thatcher years growth was lower than in any period of similar length since the war.” He notes “the vast discrepancy between what the Thatcherites claimed for their policies and what actually happened.” Unsurprisingly, there was an “unparalleled rise in poverty,” as “relative poverty grew significantly during the 1980s,” from a nearly a tenth in 1979 to nearly a fifth in 1987. In 1979, the poorest fifth had just under 10% of post-tax income and the richest fifth had 37%. Ten years later, this had fallen to 7% and risen to 43% (“The rich got richer, and the poor got poorer”). “Not only did the poor not share in the limited growth that took place between 1979 and 1990, the poor were relatively poorer than they had been on 1979.” [Dancing with Dogma, pp. 83–4, p. 87, p. 142, p. 138 and p. 172] we will return to this issue in section C.10.3.

Things did not get any better in the 1990s. Growth in GDP per capita was steadily decreased in the UK, from 2.3% per annum between 1950 and 1970, to 2.1% between 1970 and 1979 and to 1.9% between 1979 and 1997. For the US, a similar process was at work (from 2.0%, to 2.3% to 1.5%). At best, it can be said that the growth rates of Germany and France between 1979 and 1997 were worse (at 1.7% and 1.4%, respectively). However, before 1979 their growth was much higher (at 5.1%/4.5% between 1950 and 1970 and 2.8%/3.3% between 1970 and 1979, respectively). Growth in labour productivity per hour worked is hardly impressive, being 2.3% between 1979 and 1997 compared to 0.8% for the US, 2.4% for France and 2.2% for Germany. This is well below the 1950–1970 figure of 3.0% and only slightly better than 2.1% during the strike bound 1970s. In 1979, the UK was 9th of 15 EU members in OECD measures of prosperity. By 1995, it was 11th before rising back to 10th in 1999. In summary, “the idea that Britain has a clearly superior economy to the continent is a delusion.” [Adair Turner, Just Capital: The Liberal Economy, p. 200, pp. 199–200 and p. 196]

The best that can be said of Thatcherism is that during the 1980s, “Britain put an end to three decades of relative decline and caught up some lost ground versus continental leaders ... But Britain’s absolute productivity and prosperity performance is still below the European average and its pace of catch-up has been slow.” Combine this with longer working hours compared to the rest of Europe, we have a situation in the UK where “too many companies relying on low wages and a flexible labour market to remain competitive, rather than on investment in capital equipment and technique.” Looking at the historical picture, it should be stressed that the UK has been in decline since the 1880s, when it remained the only developed nation to embrace free trade and that between the 1950s and 1970s, the “absolute growth rates per capita ... compared well with the inter-war years and with the period of British leadership in the nineteenth century.” This lack of success for neo-liberal reforms can also be seen in New Zealand. The economic results of its liberalisation project were just as poor. Between 1984–98 per capita income grew only about 5.4%, or 0.4% per annum, well below the EU average and one of the lowest rates of increase among the OECD countries. [Turner, Op. Cit., p. 196, p. 212, p. 199 and p. 240fn] Needless to say, because the rich got richer and rebellious workers controlled, both the UK and New Zealand were proclaimed “economic miracles.”

This lack of dynamism is not limited just to the UK or New Zealand. As left-wing economist Andrew Glyn notes, the “fact that there was no general improvement in growth in the 1980s could be explained away by the fact that the ... policies ... were only picking up steam. But the real puzzle is the 15 years since 1990. Why [have these free market policies] ... failed to bring an increase in the growth rate.” In fact, growth per year has steadily fallen since 1973 with 1990–2004 the lowest rate yet for the USA, Europe and Japan. This applies to other economic indicators as well. “The fact that output per head has been growing more slowly since 1990 than it did in the turbulent period 1973–9, never mind the Golden Age, must be a severe disappointment to those who believed that unleashing the free market would restore rapid growth.” He summarises the evidence by pointing out that “economic performance overall has been unspectacular.” [Capitalism Unleashed, pp. 130–1 and p. 151]

As Chomsky summarises, “neoliberal-style programs began to take shape in the 1970s” and since then real wages “for the majority have largely stagnated or declined ... the relatively weak benefits system has declines as well. Incomes are maintained only be extending working hours well beyond those in similar societies, while inequality has soared” (as has personal debt). Moreover, “this is a vast change from the preceding quarter century, when economic growth was the highest on record for a protracted period and also egalitarian. Social indicators, which closely tracked economic growth until the mid-1970s, then diverged, declining to the level of 1960 by the year 2000.” [Failed States, p. 211]

The assumption is that producing free(r) markets and a pure(r) capitalism will result in higher growth and so rising living standards. “So far,” note two experts, “the promises have not been realised. As trade and financial markets have been flung open, incomes have risen not faster, but slower. Equality among nations has not improved, with many of the poorest nations suffering an absolute decline in incomes. Within nations, inequality seems to have worsened ... the trend to towards more inequality.” In the two decades after 1980, “overall income growth slowed dramatically.” For example, the rich countries saw annual per capita income growth fall from 4.8% (1965–80) to 1.4% (1980–95). Medium countries saw a fall from 3.8% to 3.1% (excluding China, this was 3.2% to 0.6% as China rose from 4.1% to 8.6%). For the poorest nations, there was a rise from 1.4% to 2.0% but this becomes 1.2% to 0.1% when India is excluded (India saw a rise from 1.5% to 3.2%). In fact, income dropped by -0.4% a year between 1980 and 1995 for the least developed countries (it had risen 0.4% a year between 1965 and 1980). “In more advanced countries ... income growth was lower in the 1990s than in the 1980s. Over the entire post-1980 period, it was substantially below that of the 1960s and 1970s.” In America, for example, annual growth of per capita income has dropped from 2.3% between 1960–79, to 1.5% between 1979 and 1989 and 1.0% between 1989 and 1996 (per capita income growth up to 1998 was 1.4% per year, still less than the 1.6% per cent between 1973 and 1980 and 1980s and about half the growth over the 1960 to 1973 period). Given that income equality improved during the 1960s and 1970s, before worsening after 1980 for most countries, particularly the USA, this means that even these most increases flowed overwhelming to those at the top of the income hierarchy. In America, the working hours for a middle-class family has increased by 10.4% between 1979 and 1997. In other words, working class people are working more for less. In most advanced nations, there has “not been a sizeable increase in poverty,” the “exceptions [being] the USA and the United Kingdom, where poverty grew, respectively, by 2.4 and 5.4 percentage points between 1979 and 1991.” [Jeff Faux and Larry Mishel, “Inequality and the Global Economy”, pp. 93–111, Will Hutton and Anthony Giddens (eds.), On The Edge, pp. 93–4, p. 96, p. 97, p. 98, p. 101, p. 102 and p. 100]

This lack of rise in growth is a definite feature of neo-liberalism. The promises of the “free market” capitalism have not borne fruit:

“Growth did not accelerate. It slowed down. During the 1960s, the average rate of growth of world GDP per capita was 3.5% per annum ... The average rate of growth of world GDP per capital was 2.1% per annum during the 1970s, 1.3% per annum during the 1980s and 1% per annum during the 1990s. This growth was more volatile compared with the past, particularly in the developing world. the growth was also unevenly distributed across countries ...

“Economic inequalities have increased in the late twentieth century as the income gap between rich and poor countries, between rich and the poor in the world’s population, as also between rich and poor people within countries, has widen. The ratio of GDP per capital in the richest country to GDP per capita in the poorest country of the world rose from 35:1 in 1950 to 42:1 in 1970 and 62:1 in 1990. The ratio of GDP per capita in the 20 richest countries to GDP per capita in the poorest 20 countries of the world rose from 54:1 during 1960–62 to 121:1 during 2000–20002. The income gap between people has also widened over time. The ratio of the average GNP per capita in the richest quintile of the world’s population to the poorest quintile in the world’s population rose from 31:1 in 1965 to 60:1 in 1990 and 74:1 in 1997 ... Income distribution within countries also worsened ... Between 1975 and 2000, the share of the richest 1% in gross income rose from 8% to 17% in the US, from 8.8% to 13.3% in Canada and from 6.1% to 13% in the UK.” [Deepak Nayyar, “Globalisation, history and development: a tale of two centuries,” pp. 137–159, Cambridge Journal of Economics, Vol. 30, No. 1, pp. 153–4 and p. 154]

In fact, between 1950 and 1973 there was a vastly superior economic performance compared to what came before and what came after. If laissez-faire capitalism would benefit “everyone” more than “existing capitalism,” the growth rate would be higher during the later period, which more closely approximated laissez faire. It is not. As such, we should always remember that if anything is proclaimed an “economic miracle” it is unlikely to actually be so, at least for the working class. Looking at the American triumphantism of the late 1990s, it was easy to forget that in the 1980s and early 1990s, despair at the US economy was commonplace. Then people looked to Japan, just as they had looked to Europe in the 1960s.

We must also note that there is a standard response by believers on “laissez-faire” capitalism when inconvenient facts are presented to them, namely to stress that we have not reached the market utopia yet and more reforms are required (“a feature of hard-line free-market analysis [is] that when liberalisation does not work the reason is always timidity and the solution is obvious. Complete the job.” [Glyn, Op. Cit., p. 143]). Another possible defence would be to stress that the results would have been worse if the reforms had not been implemented. These are, of course, possibilities but given the rhetoric used by the defenders of capitalism on the wonders and efficiency of free markets, it seems strange that making them freer would have such negative effects.

Looking at the history of capitalism, it appears that social-democratic capitalism, with strong unions and a welfare state, produces not only more growth but also more equitable growth (as one expert notes, “[i]f the ‘welfare state’ were abolished and taxes reduced accordingly, society would become a great deal more unequal.” [John Hills, Inequality and the State, p. 195]). Movements to more laissez-faire capitalism has resulted not only in lower growth but also growth which accumulates in fewer hands (which makes sense considering the basic anarchist insight that a free exchange benefits the stronger of the two parties). As such, based on its own criteria (namely economic growth), then neo-liberalism has to be judged a failure. Do not get us wrong. It is possible to still advocate laissez-faire capitalism on ethical grounds (if that is the right word). It is simply doubtful that it will produce the boost in economic growth (or employment) that its advocates suggest. It may do, of course, as “actually existing” capitalism is still far from the pure system of the textbooks but it is significant that movements towards the ideal have produced less growth along with greater inequality and relative poverty.

This is not to suggest that anarchists support social-democratic capitalism rather than more laissez-faire forms. Far from it — we seek to end all forms of that system. However, it is significant that the more equal forms of capitalism based on strong and militant unions produced better results than “free(r) market” forms. This suggests that the standard right-wing argument that collective organising and fighting to keep an increased share of the wealth we produce harms the overall economy and so harmful in the long run are deeply flawed. Instead, it is the lack of any struggle for equality and freedom that is correlated with bad overall economic performance. Of course, such struggles are a pain for the capitalist class. Rather than produce a “road to serfdom,” social-democracy created the full employment environment which produced a rebellious population. The move towards “free(r) markets” was a response to this social struggle, an attempt to enserf the population which has proven to be somewhat successful. As such, Kalecki’s 1940s prediction: the ruling class would prefer social peace (i.e. obedience) rather than higher growth (particularly if they get to monopolise most of the gains of that lower growth).

Finally, we should note that there is a slight irony to see right-wingers saying that “pure(r)” capitalism would benefit the poor especially. This is because they usually reject the idea that aggregate economic statistics are a meaningful concept or that the government should collate such data (this is a particular feature of the “Austrian” school of economics). As such, it would be near impossible to determine if living standards had improved any faster than under the current system. Given the history of “actually existing” capitalism, it is probably wise that many “market advocates” do so. Moreover, any subjective evaluation, such as asking people, which resulted in a negative response would be dismissed out of hand as “envy.” Ironically, for an ideology which says it bases itself on “subjective” evaluations, economists are always ready to ignore any which conflict with their ideas. Needless to say, even if it could be proven beyond doubt that “pure(r)” capitalism did not help the poor but rather enriched the wealthy then almost all “free market” capitalists would not change their ideas. This is because, for them, the outcomes of the market are hallowed and if they result in increased poverty then so be it. It just shows that the poor are lazy and not worth higher incomes. That they sometimes utilise the rhetoric of social concern simply shows that most people still have concern and solidarity for their fellows, a concern which capitalism has not managed to totally remove (much to the chagrin of the likes of von Hayek — see chapter 11 of Alan Haworth’s Anti-Libertarianism for a short but relevant discussion of this).



Freedom – Equality – Solidarity


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