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Analysis | What is Capitalism’s Historic Impact?

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Last updated on August 14, 2021

UCLA Professor Joyce Appleby defined capitalism as “an economic system that relies on investment of capital in machines and technology that are used to increase production of marketable goods.” Within an incredibly interdependent and hyperconnected world economy, an embrace of personal capital investment has ultimately led to competing interests creating innovation, increasing access to goods and services, and alleviating poverty.

In a capitalist society, individuals have an incentive to incur risk when investing in various capital because that risk may lead to profitable long-term rewards. While there is the possibility of capital investments harming that individual, that incentive fuels competition and a beneficial market response that meets consumer demand. Throughout history, capitalism has benefited nations by advancing its economic systems and allowing the individual to exchange in mutually beneficial transactions to build industries.

Contrary to common misconception, capitalism raises all income levels and is a net positive for nations that embrace free trade and other capitalistic ideas. Adam Smith, often regarded as the father of capitalism, once said, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Smith essentially argued that by acting on their motivation to increase their wealth and other material goals, they provided necessary goods and services to the general population.

Additionally, by understanding their goods and services are essential, they have an added incentive to efficiently manufacture the product and to price the good or service at marketable rates. When products are produced more efficiently, the value of those goods and services increases along with job growth. 

According to the World Bank, in 1981, 42.7 percent of the world population lived in extreme poverty, which constituted a wage of $1.90 a day. Later, the Soviet Union collapsed, the World Trade Organization was formed, and cooperative enterprises rose in impoverished Eastern Asian countries. Within this time, the Heritage Foundation reported a positive correlation between an increase in the global economic freedom average and a global GDP rise.

The Economic Freedom Index bases its calculations on 12 factors including “rule of law, government size, regulatory efficiency, and open markets.” Similarly, the Fraiser Institue argued that economic freedom is based on four concepts: personal choice, voluntary market exchange, market competition, and property rights protections. All of which meet or support the provided definition of capitalism.

To support this positive correlation, the economic report from the Heritage Foundation found the average score in the economic freedom index increased from 57.6 percent in 1991 to 61.6 percent in 2021 while the global GDP increased from 39.1 trillion dollars in 1992 to 84.9 trillion dollars in 2019. While this transpired, the previously mentioned impoverished 42.7 percent of the global population decreased by over 33 percent in three decades. Furthermore, the United Nations Development Programme’s Multidimensional Poverty Index studied 80 developing countries and found the impoverished population of countries with significantly little to no economic freedom was 27.4 percent more than countries with more economic freedom. 

Looking at a specific country, South Korea is one of the most notable examples of capitalism dramatically increasing the national GDP and reducing poverty. Recently, the Bank of Korea reported their economy increased by 5.9 percent in the second quarter of 2021 because of “an increase in private consumption of both goods and services.” This present trend is indicative of the incredible historic increase in South Korea’s GDP due to its strong embrace of a capitalist economy. In the 1960s, South Korea was primarily an agriculture-based economy with a GDP of 3.9 billion dollars.

Now, sixty years later, South Korea has a highly industrialized and robust capitalistic economy with the tenth-largest GDP in the world, standing at 1.67 trillion dollars. According to the Federal Reserve, South Korea embraced free trade with exports as a percentage of GDP increasing by 30.4 percent in the past three decades and devoted significant shares of the GDP to research and development to advance technology and innovation, making them one of the largest economic powers on the planet. 

While not a perfect system, capitalism is the ultimate key to alleviating poverty in historically poor countries by presenting greater economic opportunities and investments. 

Works Cited: 

Federal Reserve Bank of St. Louis. “How Did South Korea’s Economy Develop so Quickly?” St. Louis Fed, Federal Reserve Bank of St. Louis, 21 Aug. 2020, www.stlouisfed.org/on-the-economy/2018/march/how-south-korea-economy-develop-quickly

Miller, Terry, et al. “2021 Index of Economic Freedom.” Heritage Foundation, www.heritage.org/index/pdf/2021/book/index_2021.pdf

Writer, Staff. “South Korea LOGS Fastest GDP Growth in Decade at 5.9% for Q2.” Nikkei Asia, Nikkei Asia, 27 July 2021, asia.nikkei.com/Economy/South-Korea-logs-fastest-GDP-growth-in-decade-at-5.9-for-Q2

“Economic Freedom Basics.” Fraser Institute, 27 May 2019, www.fraserinstitute.org/economic-freedom/economic-freedom-basics.

“Ending Extreme Poverty.” World Bank, www.worldbank.org/en/news/feature/2016/06/08/ending-extreme-poverty

“Poverty Headcount Ratio at $1.90.” The World Bank, data.worldbank.org/topic/poverty

“The 2020 Global Multidimensional Poverty Index (MPI).” OPHI, Human Development Report Office of the United Nations Development Programme, ophi.org.uk/multidimensional-poverty-index/global-mpi-2020/.

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