Is Capitalism Good for the Is Capitalism Good for the PoorPoorGary WolframWilliam Simon Professor of Economics and Public PolicyHillsdale College

What is Capitalism?What is Capitalism?

System based on:1.Private Property Rights2.Voluntary Exchange3.Limited Government4.Rule of Law

Key Characteristics of Key Characteristics of CapitalismCapitalism1. Voluntary Exchange2. All Parties Benefit3. Must Please Others To Get

Wealthy4. Incentive to Innovate

Most Efficient SystemMost Efficient SystemVoluntary ExchangePay Opportunity Cost for

Resources◦Value of Next Best Alternative

Produce Something Consumers Value More◦Profit or Out of Business

Profit Measure of Efficiency

Central Planning Not Good Central Planning Not Good for Poorfor PoorIncentive Problem

◦ProfitInformation Problem

◦Prices

Why Poor BenefitWhy Poor BenefitIncentive to Make Things for Poor

◦Industrial Revolution◦Cell Phone

Incentive to Make Them More Productive◦Add Physical Capital◦Add Education◦Outsourcing is really moving capital

to poor

Does It Work?Does It Work?• Dharavi-Mumbai India• 1.4 billion people live on less than $1.25

per day• 27% all children in developing countries

underweight or stunted primarily South Asia and Sub-Saharan Africa

• 1980 one out of every 10 poor lived in Sub-Saharan Africa—2000 one of every 3

• Life expectancy in Sub-Saharan Africa fell from 50 to 46 form 1990 to 2002

• Number of poor increased from 41% to 46% -- 164 million to 314 million

Poverty in CapitalismPoverty in Capitalism• 40% own home—3 bedroom with one

and one-half baths, garage, porch or patio

• 80% have air conditioning• Two-thirds have more than 2 rooms per

person• More living space than average

individual in Paris, London, Vienna, Athens

• 78% VCR or DVD Player • 97% Color Television• 89% Microwave Oven

China and East Asia China and East Asia • 1978 China Started Special Economic Zones• 1980-2001 more than 400 million people

escaped poverty• GDP per capita increased 5 times• Those less than 70 cents per day fell 64% of

population to 17%• 1980 East Asia poorest region in world now

leading in economic growth and poverty reduction

• China Growth Rate GDP 13.0% 2007, 9.0% 2008, 8.7% 2009

• India began market process early 1990s• India Growth Rate GDP 9.0% 2007, 7.4%

2008, 6.5% 2009

History LessonHistory Lesson• During 1000 years monarchy

mankind average income rose about 50%. Since 1820 rose by more than 1000%

• In last 100 years created more wealth, increased life expectancy more, and reduced poverty more than in prior 100,000 years

• 2004 expenditures of lowest 1/5 U.S. household equaled median household expenditure 1972

Most Free and Least FreeMost Free and Least Free2010 Index of Economic 2010 Index of Economic FreedomFreedomMost Free

◦ Hong Kong◦ Singapore◦ Australia◦ New Zealand◦ Ireland◦ Switzerland◦ Canada◦ United States◦ Denmark◦ Chile◦ United Kingdom

Least Free◦ Iran◦ Republic of Congo◦ Solomon Islands◦ Turkmenistan◦ Democratic Republic

of Congo◦ Libya◦ Venezuela◦ Burma (Myanmar)◦ Eritrea◦ Cuba◦ Zimbabwe◦ North Korea

Cross Section EvidenceCross Section Evidence