One of the biggest and most pernicious myths about economic development is that capitalism or, as I prefer to call it, economic freedom, benefits the few, while impoverishing the many. The origins of this myth go back to Karl Marx, who thought that, under capitalism, competition would drive down profits, thus necessitating greater exploitation of the workers.
The mistaken theorizing of the German economist – in fact, real average global income per person rose by factor of 10 over the last 200 hundred years – was then updated by Vladimir Lenin.
The update was necessary because by Lenin’s time, the workers in the western industrialized countries were unambiguously better off than in Marx’s time. And so, in his Imperialism, the Highest Stage of Capitalism, the first dictator of the Soviet Union invented a new thesis. Contra Marx, the living standards of the western workers continued to improve because of the riches that flowed to the West from the exploited colonies. Lenin’s thesis had a profound effect on generations of African nationalists, who rejected capitalism and embraced Soviet socialism instead.
But economic freedom not only continued to improve the lives of the workers in capitalist countries, it also improved the lives of the workers under socialism. Freedom, in other words, benefits everyone – even people who don’t have it.
Here is how the Nobel Prize-winning Austrian economist Friedrich Hayek put it in his 1960 magnum opus, The Constitution of Liberty:
When Hayek wrote those words, the struggle between the communist and capitalist worlds was at its height, and the developing “third” world was caught in the middle of that contest.
Let us now look at a concrete example of what Hayek meant when he wrote that “unfree societies benefit from what they obtain and learn from free societies.”
In 2002, Stephen Van Dulken, an expert curator in the Patents Information Service of the British Library, published a well-reviewed book called Inventing the 20th Century: 100 inventions that shaped the world. The Wall Street Journal described it as “remarkable”, while the Boston Globe credited the author with assembling “a panoramic snapshot of the century”. In his book, Van Dulken identified the 100 most important inventions of the 20th century. One per year. Almost all have originated in the free countries.
Looking at the birthplace of the inventor, I counted 47 Americans, 30 Britons, 4 French citizens, 3 Canadians, 3 Germans, and 2 Swedes. Argentina, Austria, Denmark, Finland, Hungary, Ireland, Israel, Italy, Japan, Soviet Union, and Switzerland produced one inventor each.
Looking at the jurisdiction where these inventors decided to patent their inventions, the picture changes somewhat, but not too much. The United States has patented 46 inventions, Great Britain 29 and World Intellectual Property Organisation patented 11. Germany patented 5, France 2, and the European Union as a whole patented 2. Canada, Denmark, Hungary, Japan, and Switzerland patented one each.
Some readers might object that Van Dulken’s choices were, by necessity, subjective. True, but I suspect that the airplane, air conditioning, the electric washing machine, tarmac road surfacing, the vacuum cleaner, neon lighting, stainless steel, rapid freezing of food, television, traffic lights, Nylon, Radar, Teflon, bar codes, the computer, the ballpoint pen, the microwave oven, the microchip, Kevlar and so on would have made anyone’s list.
In other words, it is unlikely that, looking back at the 20th century, others would pick a dramatically different list of the most important inventions. Needless to say, Van Dulken’s innovators did not only benefit their native countries. The benefits of their inventions spread across the globe and improved the lives of all people – including many of those who live or lived under tyranny.
Once again, consider a concrete example. Between 1960, the year of African independence, and 2015, the income gap between sub-Saharan Africa (SSA) and the United States has actually widened. In 1960, average GDP per person in SSA amounted to 6.31 percent of the same in the United States. Conversely, an average GDP per person in the United States amounted to 1,586 per cent of that in SSA.
Over the next 55 years, incomes in SSA adjusted for inflation grew by 55 per cent. But, they grew by 203 per cent in America. That meant that in 2015, SSA amounted to 3.21 per cent of American income and American income amounted to 3,111 percent of SSA income. Or, to put it in terms of dollars and cents, SSA income rose from $1,075 to $1,660. American income rose from $17,037 to $51,638 (all figures are in 2010 dollars).
However, the gap in life expectancy, which is the best indicator of the overall standard of living, between the two has shrunk! In 1960, SSA life expectancy was 58 per cent that of the United States. The converse percentage is 174. Over the next 55 years, SSA life expectancy grew by 47 per cent, while American life expectancy grew by 14 per cent. So, in 2015, SSA life expectancy rose to 75 per cent that of the United States, while American life expectancy fell to 134 per cent that of SSA. To put it in terms of years, SSA life expectancy rose from 40.17 years to 59 years, while US life expectancy rose “only” from 69.77 years to 79.16 years.
Africans, in other words, did not have to become rich in order to start experiencing longer and better lives. Indeed, it would be surprising if they did get wealthier, considering that since independence, many African countries have experimented with socialism and other forms of protectionism. Some, like Zimbabwe, still do.
Instead, all of Africa benefited from the technological advances that occurred in free, which is to say, capitalist countries. The airplane, an American invention, flies life-saving medicines into the deepest Congo. Synthetic insulin, a Canadian invention, saves lives in South Africa. The photocopier, another American discovery, is making it easy for poor kids to learn how to read in Angola.
Over the last few years, signs have emerged of a small, but ominous, decline in political and economic freedom in the world. Was Francis Fukuyama wrong when he predicted the triumph of liberal democracy and capitalism in his thesis, The End of History? I certainly did not think so, when I defended it in 2014.
I am still hopeful that Fukuyama is right and that the recent negative trends will be reversed. That said, what matters most for the continued progress of humanity is, as Hayek put it, that at least a minority of people on this planet remain free. And that, I think, remains a pretty safe bet.
This first appeared in CapX.