Poverty, Capitalism, and Class

Answered by William Thomas

June 19, 2009—When Objectivists speak of capitalism, we mean laissez-faire capitalism, a political system based on the individual rights to life, liberty, property, and the pursuit of happiness. Capitalism is a dynamic system that is full of “creative destruction,” as Joseph Schumpeter described it: its social system is fluid, ever-changing, and rests more than anything on productiveness and rationality. It is a system where each person is free to achieve and succeed and privilege has no stronghold.

Remind your brother that the industrial economies of the world today are mixed economies: the government has its hands deep into the private economy, and today's businesspeople have to be nearly as good at managing the government as they are at producing goods. But that's not the fault of capitalism: government control of the economy is a policy that socialists favor. We have to isolate the effects of freedom to see them.

Two excellent annual reports do just that: the Economic Freedom of the World Report and the Index of Economic Freedom. If you take a look at these, you’ll see that the freest countries are also the richest, and that economic freedom and economic growth are strongly correlated.

In recent decades, the freest countries in the world have included Chile, Ireland, and South Korea. All three were impoverished countries 50 years ago. The latter suffered devastation during World War II and in the Korean War in the early 1950s. Today all three are prosperous countries with living standards approaching those of England. 

Compare, especially, prosperous South Korea with socialist North Korea, which is the poorest country on Earth. North Korea saw perhaps a million people starve to death over the past decade because of the inability of the socialist system to produce food. Or look at the living standards of East versus West Germans, back in the days of communism in the Soviet bloc.

My colleague Ed Hudgins did a study in 1990 comparing four economically successful Asian countries with sub-Saharan African countries. He showed how much more prosperous the average African would have been in a free economy. You can read an update about it here: www.atlassociety.org/cth--2023-Why_Africa_Needs_Economic_Freedom.aspx.

Notice also that relative poverty doesn't change much internationally across different economic systems and over time. What does change is absolute poverty: under free markets, poor people are much more likely to be able afford the necessities of life and many comforts as well. To be poor in a highly productive economy means having a worse car, a smaller home, fewer television sets, and less ability to travel, than wealthier people have. It is a temporary condition for most who are willing to work. To be poor in an unproductive economy is to face starvation and infectious disease daily; it is the permanent social condition of the peasant.

In free market societies, individuals are highly unlikely to remain in the same economic position as their grandparents. So poor families don’t tend to stay poor and rich families don’t tend to stay rich: capitalism is the opposite of a class-based system. The simple reason for these continual changes in social status is that while one can inherit wealth, holding onto it isn't so easy. Other contributors to social status, like making friends and earning a reputation for virtue or talent, can’t be inherited at all. Why do you think the Kennedys have gone into politics? They can't hack it in business, that's why. How well is the Ford clan doing holding onto the wealth Henry Ford created? The Fords are one of the most successful wealthy families, yet their firm is nearly bankrupt, with a negligible stock value, and it has burned up tens of billions of their dollars over the last two decades. Has the Picasso clan been dominating the art world lately?

America's immigrant experience is evidence of the way capitalism breaks down class barriers. The poor of the world have come to America throughout our country’s history because it is better to be poor and hardworking in America’s relatively free economic system than to be back in the immigrants’ home countries. America's economic opportunities have allowed them and their children to work their way into the middle class and beyond, and that process continues today.

Another important point to remember is that in a free society, the rich do not create poverty. Although of course there are a few exceptions (like the occasional rich thief), generally the rich become so and stay so by producing value in the marketplace. They must make things and provide services other people want, and do it better than other people can. The problem the poor have in rich countries is that the rich have nothing to do with them—it isn't that the rich exploit the poor, it's that they don't. Look at any ghetto in the U.S.: you don't see sweat shops; you see no shops. You don't see developers tearing down poor people's homes; you see no one building any homes.

Remember: wealth is something that must be created. If you are poor in a free society, it is up to you to develop the skills to succeed in creating wealth. Without government regulations stifling you and punitive taxes crushing you—and without social-service programs subsidizing idleness—the limit of what you can do will come down to you and your choices.