Production, income and welfare under capitalism

When we take a detached long term look at human history, it is impossible not to be impressed by the global economic growth experienced since the rise of capitalism in the early XIX century. This was achieved despite two destructive world wars and the subjugation of half of the world population under communism throughout most of the 20th century.

In his history of economic growth Angus Maddison (2005) shows that: “Over the past millennium, world population rose 23-fold, per capita income 14-fold, and GDP more than 300-fold. This contrasts sharply with the preceding millennium, when world population grew by only a sixth, with no advance in per-capita income”.

Yet, during the first eight centuries of the last millennium economic growth barely matched population growth, while life expectancy only rose from 24 to 36 years. However, from 1820 onwards, per-capita income rose twenty-four times as fast as in 1000–1820, population grew six times as fast and life expectancy increased to seventy-nine years in the West and sixty-four in the rest of the world.

Nevertheless, this was not an even process and it is interesting to recall the various phases identified by Maddison as:
1. The “golden age,” 1950–73, when world per capita income grew nearly 3 percent a year, by far the best performance.
2. Our age, from 1973 onwards (henceforth characterized as the neo-liberal order), is the second best.
3. The old “liberal order” (1870–1913) was third best, only marginally slower in terms of per capita income growth.
4. In 1913–50, growth was well below potential because of two world wars and the intervening collapse of world trade, capital markets, and migration.
5. The slowest growth was registered in the initial phase of capitalist development (1820–70), when significant growth momentum was largely confined to European countries, Western offshoots, and Latin America.

This historically unprecedented growth, the result of a combination of science and capitalism, was more pronounced in the West during the post-world war II period. However, since the collapse of communism we have more examples to show the power of capitalism as a production machine. In particular, when we compare the recent experiences of China, Russia and India, we note that Russia and India are lagging significantly largely because they have been more reluctant to endorse capitalism.

Nevertheless, the fact that large populations still live in poverty raises the question of whether they have been left behind by capitalism. This is not a failure of capitalism. On the contrary, it was often the result of misguided pursuits of alternative systems and the slow take-off under capitalism. Indeed, given the recent moves in Africa towards capitalism, one expects that this continent will progressively begin to recover and will accelerate its growth in the next decades.

Likewise, for those who expected the liberation of half the humankind from communism and the recent surge in technological developments to automatically create another era of unprecedented growth, the early history of capitalism from 1820 to 1870 is an important reminder that take-off is usually a slow process.

The transition to capitalism from subsistence, feudal or communist economic systems faces many resistances and the economic cycles of capitalism may slow down such transition. Both need to be assessed separately, as well as the risks of political turmoil. Otherwise, we risk letting such setbacks obscure the remarkable efficiency of capitalism to eradicate poverty and promote economic growth.