Warren Buffett has told us that there’s something magical about American capitalism. This isn’t quite true, because other countries have achieved much the same thing. What is true about it is that it is the system itself which has caused the incredible wealth we all enjoy in this modern world. Buffett writes:
In 1776, America set off to unleash human potential by combining market economics, the rule of law and equality of opportunity. This foundation was an act of genius that in only 241 years converted our original villages and prairies into $96 trillion of wealth.
Other places which did much the same thing — that mixture of capitalism, the rule of law and free markets — achieved much the same end. We generally refer to those places as the developed world, while those that didn’t are still the Third World. There is nowhere at all that has become rich, absent some vast natural resource, without adopting this system.
We can show this, too, with the numbers from Angus Madison. The average GDP per capita over history, all countries, all empires, was some $600 a year or so — That's in today's dollars, meaning history was, by our standards, abject destitution for everyone. This is also why we use $1.90 a day (at modern American prices) as our measure of global absolute poverty. Because that’s just what the past was and we celebrate when people, a country, a nation, rise above that historical existence.
Warren Buffett rightly points out that the U.S. has done very much better than that:
You can describe these developments as productivity gains or disruptions. Whatever the label, they explain why we now have our amazing $59,000 of GDP per capita.
But there’s another way for us to point to such success. Elsewhere there’s a piece telling us about how Appalachia suffers from a 100-year capitalist experiment gone wrong. That reliance upon mining, the absence of any other major industry there, leads to this:
Between 2011 and 2015, central Appalachia’s median household income was just over $34,000 — around 63% of what the typical American household earned.
Agreed, Appalachia and the Mississippi Delta, a place with comparable median income, have been vying with each other to be the armpit of the American economy for some time now.
We do need to be slightly careful with those numbers. Obviously, they’re very different from GDP per capita. They’re family numbers, for a start, they don’t include the capital share of the economy either. They also don’t, and this is important, include the things we do to reduce poverty in the U.S. This is before the effects of almost all of the welfare system (food stamps, the Earned Income Tax Credit, Section 8, and all the rest).
But then think about this in that historical sense, a GDP per capita of $600 a year. Or the current global one, something like $8,000 (depends upon who is doing the counting a bit for that one). That we’re worrying about $34,000 a year, that this is poverty, is exactly the example we need of how well that American capitalism has worked over those centuries.
That the poor of our nation live better than 90 percent of anyone only 100 years ago, better than anyone at all from more than 200 years ago, shows just how fabulous an economic system it is.
Sure, it’s not perfect, it could do with some revisions here and there, but this system — the rule of law, markets, and capitalism — delivers in the one thing that truly matters: raising the living standards of the people, most especially poor people. Even more, no other economic system has managed this at all.
Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
If you would like to write an op-ed for the Washington Examiner, please read our guidelines on submissions here.