Arguments about Capitalism and Poverty

There is an argument about capitalism and poverty you see from time to time that goes like this. Capitalism is the greatest economic system for poverty reduction. Just look at developing countries like China or indeed the history of developed countries. Where capitalism flourishes, poverty plummets. Thus, those anti-poverty campaigners who criticize capitalism have it all wrong and should not be advocating other forms of economic organization — whether socialist, social democratic, or otherwise — as solutions to poverty.

One can certainly quibble with this basic presentation, especially when made in its most simplified form. Russia and Eastern Bloc countries have, for the most part, not fared better under more liberal economic institutions. Most of the poverty reduction we’ve seen of late has come in China, and their odd amalgam of authoritarian, one-party Communist rule with significant foreign direct investment is hardly a liberal capitalist poster child. Historically, increases in national income per capita are driven, obviously, by improvements in productivity, which is made possible by the discovery of new technologies (such as those of the industrial revolution), not by writing capitalist rules into law books. After all, the Soviet Union was able to massively ramp up productivity by adopting industrial technologies, at least for a time.

But putting all of that aside, there is a more obvious problem with this whole line of argument. The problem is that there is no necessary tension between the views that 1) market capitalist institutions can cut down a lot of poverty by increasing labor income levels, and 2) there are many populations of people that market capitalist institutions will fail to lift out of poverty. Specifically, increasing labor income levels will provide only limited help to those who are not able to receive labor income. As it turns out, this describes around half of the population in a given society. Children, elderly, disabled, students, caretakers, and the unemployed are typically not in a position to pull down labor income directly and are thus left out of capitalism’s touted poverty-reduction mechanism, at least to a significant degree.

According to my own research, these populations — children, elderly, disabled, students, caretakers, and the involuntary unemployed — make up 85-90% of those living beneath the official US poverty line at the market distribution of income.

The capitalist partisan who argues in this manner seems to be saying “look at how much poverty I reduced, I took the poverty rate from 90% to 15%.” Then the socialist says “we need different institutions to go below 15%,” at which point the capitalist points back to the reduction from 90% to 15% as if that’s a rebuttal to the socialist’s point. But it is not. That’s not to say there is no way to argue against the socialist’s prescription, only that this is not one of them.

The political spectrum between the far left to moderate social democrat generally maintains, among other things, that the eradication of poverty (and indeed income distribution fairness) requires that non-market incomes be paid to populations that don’t receive labor incomes, such as the aged, the sick, the disabled, children (their parents), and the unemployed. This grows specifically out of the view that capitalism often fails to reach these people and that this failure will lead to significant poverty. This seems exactly correct to me and I’m not sure why certain capitalist partisans think they are rebutting it by pointing back to the poverty reduction that happens during the run-up of labor incomes in poor countries.