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As scary as it might sound, we already know that evidence doesn't matter much in the context of politics. So, even when there is clear evidence of a certain idea being factually true, many people don't have any problem ignoring the facts and stating the contrary.

Welcome to the world of capitalism.

Capitalism is one of those ideas that many love to hate, while others are sad that their "heaven on earth" idea that "a capitalist economy can support a socialist welfare state is collapsing before our eyes." As this research paper points out, the data seem to be clear and consistent: capitalism increases incomes, increases life expectancy, improves education, and increases freedom.The data seem to suggest that everything we love we owe to capitalism.

I consider the trajectory of capitalism and four "core" development indicators in countries that have embraced and rejected capitalism over the past quarter century. These categories are average income, life expectancy, years of schooling, and democracy. I selected these indicators for two reasons. First, they are "big" and basic ones that capture the main categories of development that most people are concerned with: wealth, health, education, and political freedom. Second, these categories comport with those I imagine Berger had in mind when he identified the development criteria he laid out in Pyramids of Sacrifice. These were, recall, the avoidance of human suffering (hence, the wealth and health indicators) and respect for the self-determination of the indigenous population (hence the education and democracy indicators). My indicators are imperfect proxies of these categories. Arguably, all of them are relevant to both categories. If the reader has other categories in mind that she believes would better capture what Berger had in mind and would better evaluate the number of cheers that capitalism deserves, she's encouraged to collect the relevant data, depict the relationship, and report the results to us.

My data are drawn from several sources. The first is the Fraser Institute's Economic Freedom of the World Project (2008), which provides data on the extent of capitalism across countries and over time. Fraser measures countries' economic freedom every five years and assigns points to countries on the basis of five equally weighted categories related to government's size and activeness in the economy. Together these categories create a composite measure of capitalism, or "economic freedom," that ranges from zero (completely unfree) to ten (completely free).

The five categories this index includes are: 1) Size of government, which considers the share of government's expenditures, level of taxes, and the degree of state ownership in an economy. 2) Legal structure and security of property rights, which measures the quality and effectiveness of a country's legal system, such as how independent its judiciary is, the impartiality of courts, military interference with the legal system, and how well government protects private property rights. 3) Access to sound money, which measures the extent of inflation, and freedom to own foreign currency domestically and abroad. 4) Freedom to trade internationally, which measures the extent of tariff and non-tariff trade barriers, international capital market controls, exchange rate regulation or other regulation on the ability to trade internationally. And 5) Credit, labor, and business regulation, which covers government control of credit markets, minimum wages, price controls, time to start a new business, the number of licenses, permits and other bureaucratic approvals involved with starting and operating a business, and restrictions on hiring and firing workers.

I get data for my development indicators from Shleifer (2009), who collects his information from several standard sources. His data on countries' GDP per capita and life expectancies are from the World' Bank's World Development Indicators (2006). His data on education and democracy are from the Barro-Lee (2000) dataset and the Polity IV Database (2000) respectively.

...Although most countries became more capitalist over the past quarter century, not every country did. Many of the "backsliders" already enjoyed very high levels of economic freedom and backslid only minimally. For example, between 1980 and 2005 the United States became less capitalist by 0.09 points on Fraser's index. But it remained the 7th-most capitalist country in the world. Such countries have significant "surplus funds" built up through decades of capitalism. These funds allow them to consume part of their surplus in the form of increased government intervention with little negative effect on their developmental growth.

Things are very different for countries that have very low levels of economic freedom and became significantly less capitalist over the past 25 years. These countries have no "surplus fund" to consume and became considerably, not minimally, less capitalist. For them, becoming less capitalist has meant foregoing the benefits of developmental growth that countries that became more capitalist have enjoyed.

The evidence that becoming significantly less capitalist results in stalled and reversing development is as obvious to anyone who bothers to look at it as the evidence that growing capitalism has dramatically improved global development. There's no reason to pretend we don't know what becoming significantly more socialist means for development. We do know: the results are as sad for growing socialism as the results are happy for spreading capitalism...

A cousin of the classic two cheers for capitalism view goes something like this: "Capitalism is necessary, but within some bounds. If economic freedom becomes excessive, capitalism becomes a liability to development instead of a potential contributor to progress." This is fun to claim and makes social scientists' job appear complex. Its major shortcoming is that the data completely contradict it and support an "extreme" three cheers for capitalism: the more capitalist a country is, the better its development is. The less capitalist it is, the worse its development is...

...Capitalism has earned all three of our cheers. It's time that we give them.

Two Cheers for Capitalism?


Original posting by Braincrave Second Life staff on Aug 17, 2011 at http://www.braincrave.com/viewblog.php?id=625

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