The Free Market Lifts All Boats

By Don Mathews
June 01, 1997

"In the free market, the rich get richer while the poor get poorer." How often we read or hear such a statement! What it asserts is familiar. But is it true? Does the free market really leave the poor behind?

A good way to determine how the poor fare in the free market is to examine how the standard of living of the poor has changed over time. One factor is real income. Between 1900 and 1990 in the U.S., the growth in real (inflation-adjusted) income generated by the free market was enormous: Real national income in 1990 was 15 times greater than it was in 1900. Real per capita income was over four and one-half times greater in 1990 than in 1900.

Another important measure of income is real money earnings from employment. Real earnings were almost four times greater in 1990 than in 1900. But statistics on real earnings mask significant changes in work hours and the way workers are compensated. In 1900 nonfarm workers toiled 60 hours a week; by 1990 they worked 39.3 hours a week, a decrease of over one third. By our current definition of poverty, 56 percent of families in the United States were poor in 1900. By 1947, even after the economic shocks of the Great Depression and World War II, the percentage of families in poverty had been reduced by more than one half, to 27 percent. By 1967, the percentage was halved again, to 13 percent. Notably, the decrease in poverty between 1900 and 1967 occurred before the advent of the greatly expanded welfare state. In other words, it was the free market, not government welfare, that caused the poverty rate to fall from 56 percent in 1900 to 13 percent in 1967.

Obviously, what happened to real incomes and poverty rates demonstrates that the free market does not leave the poor behind. Another measure of the standard of living is the level of goods and services consumed. Real per person spending on consumer goods rose dramatically between 1900 and 1990. Health is another important component of the standard of living. Life expectancy at birth was 47.3 years in 1900, and 75.4 years in 1990. Deaths from once-common diseases have dropped dramatically since 1900. It was not primarily medical advances, but improved water and sewer systems and housing, that lowered mortality rates and helped the poor far more than the rich.

By the official definition of poverty, a household of four is classified as poor if its annual income is less than $14,400. But, as noted earlier, living standards depend on the goods and services consumed, so a family should be classified as poor on the basis of its level of consumption, not income.

Households officially now counted as poor are as likely to own a host of major consumer goods as was the general population just two decades ago.

In the United States today a household which owns a washer, dryer, refrigerator, stove, microwave, color TV, VCR, and car might still be considered poor. The point is, the free market has not only dramatically improved the material well-being of the poor; it has generated so much wealth that it has completely transformed what we consider poverty to be.

What has happened to the living standards of the poor in our predominantly free-market economy shouldn't surprise us. The soul of the free market is not wealth creation but liberty and private property, and it is liberty and private property which allow entrepreneurs to create more efficient production methods that yield better goods and services. The free market does not leave the poor behind; it makes them, as well as everyone else, richer. Much richer.

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Topics: Culture , Economics

Don Mathews

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