Marx was wrong: Free markets brought prosperity, not poverty, for masses

Paul MacRae

Jan. 24, 2005

Under my tree this Christmas was a book by William J. Bernstein called The Birth of Plenty. It’s a fascinating study of what it takes for a society to move from bare subsistence to affluence.

Bernstein makes the point that mass affluence is, historically, a very recent occurrence. For almost all of humankind’s history, the global gross domestic product per person was stagnant. There would appear to be occasional blips of prosperity, such as the Roman Empire, but these were fleeting and the good life was mostly for the elite; it didn’t trickle down to the masses.

For most of human history the problem with creating economic growth was this: An agricultural society, say, begins to achieve some prosperity. With a bit more wealth, more people are born. There are more mouths to feed, but all the best farmland is already taken, so the newcomers have to work land that isn’t as productive. But because there’s been no improvement in farming technology, that means there is less food per person, and a downward economic spiral begins.

This flat-lined GDP per person didn’t begin to go on the uptick until the Middle Ages, and even then the rise was very gradual. Around 1820, however, a mere 185 years ago, global GDP/person zoomed upward, propelled largely by the Industrial Revolution in Europe.

In other words, the prosperity that Canada and the other advanced economies enjoy — a prosperity that, I think, most of us take for granted — is actually an historical anomaly.

It didn’t have to happen. For Bernstein, four rather rare factors have to come together for sustained economic growth: private property (including a legal system that protects property rights), scientific rationalism, capital markets, and developed transportation and communication networks. If any of these factors is missing, prosperity doesn’t happen.

Two of the four factors — private property and capital markets - - are integral features of capitalism, so Bernstein is saying that national and global prosperity is based on, and can only be based on, capitalism.

Those who believe otherwise, such as the left-wing opponents of globalization, argue that some form of socialism will make the average man and woman better off — otherwise, why do it? The reality is quite the opposite, according to Bernstein’s data.

Take property rights, for example. “Worse than war,” Bernstein says, “is the corrosion of property rights. Twice in the twentieth century, eastern Germany recovered within a few decades from the physical effects of devastating world war. It will take her generations to recover from communism.”

The historical record gives much support for Bernstein’s theory. Communist Russia in the 1920s and ’30s had transportation and communication networks and a measure of scientific rationalism; it lacked private property and capital markets. As a result, the Soviet economy was a disaster.

Further, thanks to communist policies, millions of Soviets died of starvation during the 1930s. Advanced economies, as Bernstein and others have noted, do not have famines.

Similarly, the billions of dollars in aid to the Third World over the past decades have barely made a dent on poverty in most of the recipient countries. If Bernstein is right this aid cannot produce economic growth because the four basic conditions are lacking.

It is the freeing of capital markets and greater respect for private property that have made China the fastest-growing economy in the world, and this is true even though it remains a dictatorship.

Curiously, democracy isn’t on Bernstein’s list of necessary factors for prosperity. For him, sustainable democracy follows from sustainable economic prosperity, not the other way around. Happily, this means that China will, once it finds its economic feet, move toward democracy. Sadly, the outlook is not so bright for U.S. efforts to export democracy to Iraq and Afghanistan, where the underlying prosperity does not yet exist.

Of course, as Bernstein notes, money doesn’t necessarily buy happiness. But at least, he suggests, you can suffer in comfort.

Capitalism and globalization get a bad rap these days from many quarters, and not just the left. However, there is (dare I use the term?) a wealth of evidence that prosperity for the average person, even in the Third World, is actually increasing with globalization, not decreasing, despite many problems.

What Birth of Plenty impressed upon me is the fragility of the prosperity we enjoy, how incredibly difficult it was to achieve, and how easily it could be destroyed by those who want to abolish capital markets and private property in the name of socialist “plenty.”

Karl Marx believed that capitalism would bring with it increasing poverty and misery for the working person. As it turned out, the historical reality has been quite the opposite. If Bernstein is right — and I think he is — the barrier to creating greater global prosperity is not too much capitalism, but too little.