By Guest Blogger Ryan Lewenza
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As a financial analyst (and someone with a curious mind) I read quite a bit. This includes research reports, financial articles, newspapers, books, etc. One recent article really caught my attention and I was taken aback by the findings.
The article referenced an annual survey called the Edelman Trust Barometer, which measures the public’s trust in different institutions like governments, businesses and the media. What really stood out for me was one of the key findings from their 2020 survey that 56% of respondents now believe that capitalism does more harm than good.
This to me was shocking given all the incredible benefits that have, and continue to accrue as a result of this economic system. Of course there are critical issues that exist today like climate change, poverty, and income inequality that capitalism can do a better job of addressing, but in totality, capitalism continues to do much more good than harm, contrary to the survey results. So this week I review some of the benefits that capitalism has given the world and our society, and why the alternative – socialism and planned economies – are inferior systems for addressing issues of job creation, higher standards of living, and our overall quality of life.
Percent Who Agree Capitalism Does More Harm Than Good
Source: Edelman Trust Barometer 2020
Let’s start big picture. Capitalism started to emerge around the 16th and 17th centuries in Europe and slowly replaced the existing economic system at the time, feudalism. The early foundations of capitalism included money lending, the rapid development of trade and commerce, and the establishment of chartered companies. The first chartered stock company was Muscovy Company, an English trading company that was established in 1555.
Capitalism then got a big boost from Adam Smith, an economist and philosopher from Kirkcaldy, Scotland (same city my grandfather was from). In his seminal book, Wealth of Nations, he expounded on the key principles of capitalism including minimizing government intervention, our human tendency towards self-interest and free trade.
What did this new system accomplish? Well, only the greatest human achievement since the creation of man. Without capitalism, human progress would have been materially stunted and we would have a lower standard of living. Capitalism helped to address famine and poverty and to combat deadly diseases like smallpox. Capitalism led to the greatest advancements in human history including things like the light bulb and electricity, the steam engine, the internal combustion engine, airplanes, vaccines, computers, and smartphones. Socialism didn’t create the iPhone! Capitalism (and a maniacal genius) did!
Below is a great chart that really hits home the point that the world is better off today as a result of capitalism. It charts world GDP per person over the last 2000 years and you can see how our standard of living exploded over the last few centuries as capitalism became the prevailing economic system. Indeed, under capitalism our standard of living has risen by over 10,000 percent!
World GDP per Person
Source: Angus Maddison
You might be saying, “Well Ryan you’re just cherry picking the data to make your point, and other factors could help explain that growth”.
Ok, let’s get a little deeper and contrast the US (the paragon of capitalism) with more socialist and planned economies like Russia and China.
Below I chart GDP per capita for the US, Russia and China since the early 1990s. According to the IMF, US GDP per capita has risen from US$25,392 in 1992 to US$67,426 today and dwarfs that of Russia and China currently at US$11,305 and US$10,872, respectively. While these two countries are now starting to embrace market reforms, the difference in GDP can largely be attributed to capitalism, in my view.
GDP per Capita for US, Russia and China
Source: Bloomberg, Turner Investments
Another example of the benefits of capitalism is the big decline in poverty rates. Below I show a chart of the global poverty rate and it has been declining steadily since 1990 as capitalism continued to grow and be adopted by other countries and regions. In 1990, 36% of the world’s population lived in “extreme poverty”, which the World Bank Group defines as someone living on less than US$1.90/day. Today 10% of the world’s population are living below poverty. Put another way, over 1 billion people have been lifted out of poverty since 1990.
Global Extreme Poverty Rate and Headcount
Source: World Bank Group
Lastly, I believe and it’s been shown, that there is a linkage between capitalism and personal freedom. George W Bush once declared that “political liberty is the natural byproduct of economic openness.”
In Benjamin Friedman’s book, The Moral Consequences of Economic Growth, he argues that economic growth is essential to “greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy.” He believed that economic stagnation veers toward authoritarianism, and essentially that economic growth leads to higher standards of living, liberalization and increased human rights.
Below is an interesting visual that hits home this point. It comes from the Frasier Institute where they calculate the Human Freedom Index (HFI) for every major country. This index measures a number of different indicators of personal and economic freedoms including the rule of law, security and safety and size of government. The dark blue countries have more freedom based on this index and it’s pretty obvious that these countries are the leading supporters of capitalism.
The Human Freedom Index
Source: The Fraser Institute
Now capitalism is not perfect. Far from it. That’s one reason why governments exist to oversee and protect against unlawful and immoral corporate behavior. Purely focusing on profit will lead to bad decisions and inevitably cause harm to people and the planet. This is never acceptable. But big picture, capitalism remains the single best economic system that exists today as it helps foster economic advancement and improves our way of life.
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.