If you are passionate about ending poverty, you should support capitalism. You should also hope — and try to ensure — that socialism doesn’t undergo a popular resurgence. Most people don’t appreciate that the world is already on a promising trajectory. Capitalism is working. For the first time in humanity’s long and brutal history, the end of poverty is in sight. Since 1990, the number of people living in extreme poverty — defined as living on less than $1.90 per day — has fallen by about one billion globally. That is staggering. In the next two decades, that number is projected to continue to rapidly decline, possibly falling as low as 200 million by 2030, compared to almost two billion in 1990. Incomes are rapidly rising in the world’s poorest countries.
It seems that we are barrelling toward a world with minimal drudgery, where every person’s basic needs are guaranteed — the end of poverty in every sense
In the world’s wealthiest countries, what we consider as poverty is not at all comparable. Extreme poverty means being too poor to afford a toothbrush. It means losing your child to a disease that costs a few dollars to prevent. In the United States, by contrast, 84 percent of people under the poverty line own an air conditioner and 100 percent own a refrigerator. But we don’t need to draw a false equivalence to recognize that wealthy countries’ version of poverty creates real suffering, and to take heart that rising incomes and better social programs are raising the income floor here too.
Looking ahead to the rest of this young century, it seems that we are barrelling toward a world with minimal drudgery, where every person’s basic needs are guaranteed — the end of poverty in every sense. This astonishing development is thanks to the convergence of revolutionary progress in science and technology, the breakout success of the capitalist economic system, the accumulation of knowledge and experience around public policy and poverty interventions, and a global consciousness that is increasingly moving toward a belief in full human equality. When people say that capitalism isn’t working, I see this as a fundamental misdiagnosis of the state of the world.
The terms ‘capitalism’ and ‘socialism’ are so often used imprecisely. I define capitalism as an economic system with capital markets — like venture capital and the stock market — that allow investment in companies and partial ownership of companies by investors. I define socialism, by contrast, as an economic system without capital markets in which investment is controlled by the government and in which companies are owned by the government or by their employees.
Handing over control of investment from decentralized, meritocratic capital markets to a centralized process of deliberative democracy is sure to inhibit innovation, visionary ambition, risk-taking, and the diversity of ideas
The two fundamental variables that determine whether poverty exists are the creation of wealth and the distribution of wealth. Obviously, the less wealth is created, the less wealth is distributed. That is the fatal flaw of socialism: it fails to create, and even destroys, wealth. Capitalism, on the other hand, has a phenomenal ability to create wealth. From 1820 to 2013, the percentage of the world living in extreme poverty has fallen from 94 percent to 10 percent thanks to capitalism.
Handing over control of investment from decentralized, meritocratic capital markets to a centralized process of deliberative democracy is sure to inhibit innovation, visionary ambition, risk-taking, and the diversity of ideas and thereby hinder the creation of wealth. If there is dramatically less wealth to distribute, even a perfectly equal distribution of wealth would leave poor people even poorer. In fact, what occurred when capital markets were abolished in the Soviet Union, and during Mao’s attempts at central planning in China, was economic collapse followed by mass starvation.
The good news is that the creation of wealth and the distribution of wealth are somewhat separable. An economy can have both vibrant capital markets and generous redistribution of the wealth those markets create through government programs like universal healthcare, welfare, and free or subsidized post-secondary education — maybe even a guaranteed minimum income someday. Cities in Alberta are eliminating homelessness by offering guaranteed housing, and even expect to save money in the process. Governments can raise the income floor and redistribute poverty out of existence without changing the way capital markets operate.
A common criticism is that even if capitalism is producing good social and economic outcomes now, it is producing bad environmental outcomes that will leave us worse off in the long term. However, there is no inherent reason why an economy without capital markets would be better for the environment than one with them — except perhaps that the poorer people are, the smaller environmental footprint they have. A socialist economy could be just as environmentally unsustainable, or more so, than our current capitalist economy.
There is also no inherent reason why a capitalist economy has to be unsustainable. One powerful tool to gear our economy towards sustainability is a carbon tax, which factors the environmental cost of carbon emissions into the market price of fossil fuels. I’m thrilled that Canada is now implementing a carbon tax, and I hope that the idea will catch on worldwide.
Another overlooked factor is that transitioning from fossil fuels to sustainable energy requires the market-driven innovation of a capitalist economy. This is best exemplified by one of the world’s fastest growing manufacturing companies, the electric carmaker and solar energy company Tesla. The culture and thought process that has enabled Tesla’s success emerged in the capitalist hot house of Silicon Valley, the global epicentre of venture capital and technology startups.
Tesla is currently gearing up to produce the world’s first mass-market electric car later this year. With over 370,000 pre-orders internationally, Tesla’s Model 3 sedan is on track to be one of the best-selling cars of any kind. By comparison, the best-selling car in the United States in 2015, the Toyota Camry, sold 360,000 units. Tesla is also building the world’s largest factory, which will soon singlehandedly double global battery production relative to 2013 levels. At the same time, Tesla is scaling up rooftop production of solar energy and attempting to bring down the cost of solar panels. More than perhaps any other organization on the planet, Tesla is spearheading the fight against climate change.
This kind of technological innovation and commercial application of existing technologies — which requires as much creativity and intelligence as the original invention — is something that decentralized, meritocratic markets full of diverse, risk-taking, and controversial companies can uniquely deliver. Markets allow ideas to be tested in the most direct, brutal way. Tesla stands victorious on a heap of failed electric car companies, and no one knew at the beginning which, if any, would succeed.
Capitalism is much maligned, but unfairly. It’s pulling off incredible feats, and far outperforming any previously tested economic system. It’s ending poverty and solving climate change. For fundamental, structural reasons — the inability of a centralized democracy to replicate the function of decentralized markets — socialism is incapable of doing either of those things. The system isn’t flawed at its root. The solution we need is not to abolish capital markets, but to implement a carbon tax, improve social programs, redistribute more wealth to poor countries (and do so more cost-effectively), and to undertake other reforms like these that can improve life on our planet without sabotaging economic stability and prosperity. Put down the sledgehammer of socialism. Pick up the chisel of capitalism.
Disclosure: I own Tesla stock.