Capitalism Remains the Best Way to Combat Extreme Poverty, Both in America and Abroad

By Luka Ladan of Catalyst.

"The 2020 election is heating up, and with it, so are the criticisms of free-market economics. Concerns about “income inequality” have become a common theme on the campaign trail (yet again), as presidential candidates blame the wealthy for being too wealthy and blame “the system” for making the poor so poor.

But just how common is extreme poverty in America? Are extreme poverty rates high and rising, as many claim?

Last year, the United Nations published a report suggesting there are more than 18 million Americans living in extreme poverty—roughly the equivalent of Chile’s entire population. As Philip G. Alston, the author of the report, put it: “[America’s] immense wealth and expertise stand in shocking contrast with the conditions in which vast numbers of its citizens live. About 40 million live in poverty, 18.5 million in extreme poverty, and 5.3 million live in Third World conditions of absolute poverty.”

Say it ain’t so! Well, it ain’t really so.

More recent research paints a much rosier picture. According to a May 2019 study co-authored by University of Chicago professors and Census Bureau researchers, the American experiment may not be perfect, but extreme poverty remains a statistical anomaly. Specifically analyzing $2-a-day poverty—that is, the number of Americans living on $2 or less per day—the study’s co-authors found that only 0.11 percent of Americans live in extreme poverty.

That comes out to roughly 336,000 people—still too high, but nowhere near 18 million. Moreover, the study concludes that the extreme poverty rate for parents—whether single or married—is virtually zero.

Again, America is not perfect. Poverty lingers, even here. But the status quo could be a whole lot worse: It may be difficult to become a member of the top “one percent,” but it is even harder to fall into extreme poverty.

The good fortunes of most can be traced to the free exchange of goods and services for mutual gain. While an imperfect system, capitalism remains our most effective weapon in fighting extreme poverty. As we’ve seen across continents, the freer an economy becomes, the less likely its people are to become entrapped in extreme poverty.

This can be corroborated by tracking the rise of “economic freedom,” which is related to the openness of a country’s markets and corresponding increases in living standards.

Over the past 25 years, the global average economic freedom score—as calculated by the right-leaning Heritage Foundation—has increased by 3.2 percentage points, with many countries joining the ranks of at least the “moderately free.”

Indeed, global economic freedom has experienced a nearly six percent increase since 1995—after the Soviet Union’s collapse. Capitalism is more commonplace now than ever before.

And how have extreme poverty rates fared in that time? Trending down—way down.

During the early 1980s, more than 42 percent of the world’s population lived in extreme poverty (earning less than $2 a day). In the Soviet Union, for example, 20 percent of the population—over 43 million people—lived on less than 75 rubles a month (roughly $120).

Fast forward to the 21st century, and less than 10 percent of the world’s population is extremely poor—a 33 percent decrease. The left-leaning Brookings Institution estimates that someone escapes extreme poverty every 1.2 seconds.

Consider it this way: Even though the world’s population has increased by more than two billion people since 1990, the net number of extremely poor people has been slashed by nearly 1.2 billion. In today’s era of globalization, about 130,000 people rise out of poverty every single day. That’s like the entire city of New Haven, Connecticut leaving extreme poverty in a day’s time.

Or take China, which has opened many sectors of its economy in recent decades. Since 1995 alone, the Asian country’s economic freedom score increased from 52 to 58.4 points—outpacing the rest of the world. In roughly that same period of time, the Chinese economy lifted 800 million people out of extreme poverty. That’s right: 800 million Chinese people—nearly three times the U.S. population.

While still far from a “free economy,” China’s newfound openness to free-market principles is correlated with the most substantial example of poverty reduction in the history of the world. Even if correlation does not always equal causation, that accomplishment is difficult to ignore.

Granting people the freedom to voluntarily make mutually beneficial exchanges of goods and services has been the most effective anti-poverty solution to date. As more of the world allows the exercise of such freedom, expect poverty to decline even further."