Is Capitalism Good for the Poor Gary Wolfram William Simon Professor of Economics and Public Policy Hillsdale College

What is Capitalism? System based on: 1. Private Property Rights 2. Voluntary Exchange 3. Limited Government 4. Rule of Law

Key Characteristics of Capitalism 1. Voluntary Exchange 2. All Parties Benefit 3. Must Please Others To Get Wealthy 4. Incentive to Innovate

Most Efficient System Voluntary Exchange Pay Opportunity Cost for Resources ◦ Value of Next Best Alternative Produce Something Consumers Value More ◦ Profit or Out of Business Profit Measure of Efficiency

Central Planning Not Good for Poor Incentive Problem ◦ Profit Information Problem ◦ Prices

Why Poor Benefit Incentive to Make Things for Poor ◦ Industrial Revolution ◦ Cell Phone Incentive to Make Them More Productive ◦ Add Physical Capital ◦ Add Education ◦ Outsourcing is really moving capital to poor

Does It Work? Dharavi-Mumbai India 1.4 billion people live on less than $1.25 per day 27% all children in developing countries underweight or stunted primarily South Asia and Sub-Saharan Africa 1980 one out of every 10 poor lived in Sub- Saharan Africa—2000 one of every 3 Life expectancy in Sub-Saharan Africa fell from 50 to 46 form 1990 to 2002 Number of poor increased from 41% to 46% million to 314 million

Poverty in Capitalism 40% own home—3 bedroom with one and one-half baths, garage, porch or patio 80% have air conditioning Two-thirds have more than 2 rooms per person More living space than average individual in Paris, London, Vienna, Athens 78% VCR or DVD Player 97% Color Television 89% Microwave Oven

China and East Asia 1978 China Started Special Economic Zones more than 400 million people escaped poverty GDP per capita increased 5 times Those less than 70 cents per day fell 64% of population to 17% 1980 East Asia poorest region in world now leading in economic growth and poverty reduction China Growth Rate GDP 13.0% 2007, 9.0% 2008, 8.7% 2009 India began market process early 1990s India Growth Rate GDP 9.0% 2007, 7.4% 2008, 6.5% 2009

History Lesson During 1000 years monarchy mankind average income rose about 50%. Since 1820 rose by more than 1000% In last 100 years created more wealth, increased life expectancy more, and reduced poverty more than in prior 100,000 years 2004 expenditures of lowest 1/5 U.S. household equaled median household expenditure 1972

Most Free and Least Free 2010 Index of Economic Freedom Most Free ◦ Hong Kong ◦ Singapore ◦ Australia ◦ New Zealand ◦ Ireland ◦ Switzerland ◦ Canada ◦ United States ◦ Denmark ◦ Chile ◦ United Kingdom Least Free ◦ Iran ◦ Republic of Congo ◦ Solomon Islands ◦ Turkmenistan ◦ Democratic Republic of Congo ◦ Libya ◦ Venezuela ◦ Burma (Myanmar) ◦ Eritrea ◦ Cuba ◦ Zimbabwe ◦ North Korea

Cross Section Evidence