In our last post, we explored the distinction between economic inequality (differences in opportunity) and economic inequity (differences in outcomes). We also touched on how trying to force equal outcomes can actually increase inequality of opportunity.
But critics might reasonably ask, “If capitalism is so great, why is there still so much poverty in the world?” It’s a fair question that deserves a thoughtful answer.
Let’s start with some perspective. For most of human history, extreme poverty was the norm, not the exception. As recently as 1820, approximately 90% of the global population lived in extreme poverty. By 1990, that figure had fallen to 36%. And today? Less than 10%.
This dramatic reduction in poverty—arguably the most important humanitarian achievement in human history—coincided with the spread of market economies and trade liberalization around the world.
South Korea provides one of the most compelling examples. In the 1950s, after the Korean War, South Korea was one of the poorest countries in the world. After embracing market reforms and international trade, South Korea transformed into a high-income, technologically advanced economy. Today, it’s one of the world’s largest with living standards comparable to those of Western Europe.
India tells a similar story. After decades of socialist policies that produced a disappointing 3.5% annual rate of growth, India began market liberalization in 1991. Since then, the poverty rate has declined from nearly 50% to less than 20%, lifting hundreds of millions of people into the middle class.
Former Soviet bloc nations offer additional proof. Estonia, Poland, and the Czech Republic all experienced dramatic economic improvements after transitioning from centrally planned economies to market-based systems in the 1990s. Estonia, in particular, embraced digital innovation and free-market policies to become one of Europe’s most dynamic economies.
But correlation isn’t causation, right? What evidence do we have that capitalism actually creates this prosperity rather than just happening alongside it?
Capitalism creates incentives for innovation and efficient resource allocation. When people can own property, start businesses, and trade freely, they’re motivated to create value for others. Entrepreneurs develop products and services that solve problems, while competition ensures they do so at prices people can afford.
This process doesn’t just create wealth for business owners. It creates jobs, improves living standards, and makes goods that were once luxuries accessible to ordinary people. The smartphone in your pocket contains technology that would have cost millions of dollars and needed huge amounts of space to house it just a few decades ago.
Even countries that maintain state-controlled economies have seen dramatic improvements in poverty rates when they adopt even partial market reforms. China and Vietnam, while remaining officially communist, have experienced their greatest poverty reductions precisely when they allowed more market activity and international trade—further evidence that economic freedom, even when imperfectly implemented, improves lives.
None of this means that every country that has embraced capitalism is perfect or that poverty has been eliminated. Hundreds of millions of people still live in extreme poverty globally. But the question isn’t whether capitalism has created a perfect world—it’s whether it has created a better one.
The historical evidence is clear: societies that embrace economic freedom consistently outperform those that don’t in terms of reducing poverty and improving standards of living. And the greatest reductions in poverty have occurred not through redistribution but through the wealth creation that capitalism enables.
If our goal is to continue reducing poverty worldwide, we should focus on extending the benefits of capitalism to more people by removing barriers to participation, ending cronyism that favors established players, and ensuring truly equal opportunity for all.
Learn more about capitalism here.
