Capitalism in No Way Created Poverty It Inherited It
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Capitalism in No Way Created Poverty, It Inherited It

by Yaron Brook and Don Watkins | February 25, 2013 | Forbes.com

The nineteenth century, many people believe, was an era in American history when workers were forced to toil in sweatshops twenty-eight hours a day for starvation wages. It was only when governments intervened, either directly on behalf of workers or indirectly by empowering unions, that conditions improved.

The facts tell a different story — one that reveals the unmatched power of capitalism to improve human life.

Remember the historical context. As Ayn Rand observed, “Capitalism did not create poverty — it inherited it.” For much of human history, the vast majority of the population was mired in poverty. All too often, the average individual lived in unimaginably wretched conditions. It was only in the nineteenth century, and then only in the West, that the masses started to enjoy prosperity.

Keep that in mind when you hear about living and working conditions during the nineteenth century. Because it’s true — by today’s standards, the living and working conditions of the time were often miserable. But by the standards of everything that had come before, they were not. For the men and women working those jobs, they were often a godsend.

Remember also, the population of the time was growing at a rate never before seen in human history — so fast that early economists like Malthus wrung their hands over whether such growth could be sustainable. How did the West actually sustain those growing numbers? Only through the rising productivity made possible by capitalism. Many of the workers who manned the factories would not have been able to survive at all in the era before capitalism.

Indeed, two basic facts speak more loudly than any statistical study could. First, factory owners did not have the power to force workers to labor in their factories; all they could do was offer work at a given wage to people who were free to accept the offer, or reject it and look for work elsewhere. Second, people flocked to those jobs, emigrating to the cities from America’s farms and from abroad.

How, then, did conditions for workers improve? Just as businessmen had to compete for customers, offering better products and lower prices, so they had to compete for workers, offering them better wages and better working conditions. This process of competition led businessmen to bid wages up to reflect workers’ productivity: the more productive workers became — the more skills they developed, the more efficiently they were managed, the more capital and technology they could employ — the higher their wages tended to rise.

As a result of the era’s mounting productivity, the statistics show steadily rising wages and steadily declining working hours — long before the government intervened to “protect” workers. Real wages more than tripled over the course of the nineteenth century.

In 1870, according to research from Michael Cox and Richard Alm, the average worker worked 3,069 hours a year. But as his productivity increased, by 1913 he could enjoy a much-improved standard of living working only 2,632 hours. Or consider how much easier it got to earn the money for a half-gallon of milk (56 minutes in 1900, down to 31 minutes in 1930) or 100 kilowatt hours of electricity (107 hours in 1900, but only 11 hours in 1930).

What about child labor? Didn’t nineteenth-century capitalism sentence children to hard and dangerous work? Child labor, despite what we’ve heard, was not created by capitalism. It’s a practice that stretches back to prehistory, when children would spend hours toiling in the scorching sun or freezing rain, risking disease, injury, or death, virtually as soon as they could walk.

Why were most children made to work before the twentieth century? Is it because parents were sadistic and governments cruel? Hardly. It’s because, before capitalism made us rich, children had to work if they were to survive at all. When a family lives on the equivalent of a dollar a day, there is no alternative: if you can work, you work.

What eliminates child labor is not government decree but a rising standard of living. That’s what eliminated it in the West during the nineteenth century, and that is what is eliminating it today in countries like China. As parents grow richer, one of the first things they do is use their burgeoning incomes to send their children to school.

If capitalism is what caused the West to grow rich, then it was capitalism, not government intervention, that eliminated child labor in the developed world.

This is not to deny that governments have limited or forbidden child labor by law. But child labor was going away on its own, and the laws were far from benign. By pushing children out of the newer, more visible factories where these laws were easier to enforce, hungry children were forced to seek work at smaller, older, more dangerous factories — or failing that, as economist Ludwig von Mises notes, to “infest the country as vagabonds, beggars, tramps, robbers, and prostitutes.”

To be sure, life during the early days of capitalism was hard (as life had always been), but for anyone willing and able to work, life was better than it had ever been — and getting better.

The lesson for us today? Laissez-faire doesn’t impoverish us, but makes us progressively richer.

About The Authors

Yaron Brook

Chairman of the Board, Ayn Rand Institute

Don Watkins

Former Fellow (2006-2017), Ayn Rand Institute