NCPA - National Center for Policy Analysis


November 17, 2009

The Left's version of recent economic history boils down to one terrible fact: The distribution of income has gradually become more unequal.  Within the United States, that fact is incontrovertible. It is not clear, however, that increased inequality has been bad, says economist Kevin A. Hassett.

Inequality is, after all, the foundation of a capitalist society.  When individuals work hard, or innovate, they receive outsized rewards.  When others see those rewards, they are motivated to work hard and innovate.  As the lottery-ticket market has demonstrated, the bigger the prize, the bigger the motivation, explains Hassett.

A landmark new study by economists Maxim Pinkovskiy and Xavier Sala-i-Martin set out to study changes in the world distribution of income by gathering data from many different countries.  As a byproduct of their work, they are able to count the number of individuals who live on $1 per day or less, a key measure of poverty.  According to their calculations:

  • The number of people living in poverty so defined has plummeted, from 967,574,000 in 1970 to 350,436,000 in 2006, a decrease of a whopping 64 percent.
  • The biggest factor in the reduction was the emergence of middle classes in previously poverty stricken China and India.
  • The spread of capitalism to other countries has similarly been followed by prosperity; the trend is even more impressive if one considers that the world population skyrocketed over that time, increasing by 3 billion.

If the trend continues for just 40 more years, poverty will have been essentially eradicated from the globe.  And capitalism will have done it, says Hassett.  Socialism offers itself as an alternative to capitalism that is more just to the poor.  To test that view, the authors reconstruct the distribution of income for the countries of the former Soviet Union.  Back in the Communist days, poverty was much, much higher in the Soviet Union than it is today.

There are those who have argued that the current financial crisis has served as proof that capitalism is a failed ideology.  The work of Pinkovskiy and Sala-i-Martin suggests that there are about a billion people whose lives prove otherwise, says Hassett.

Source: Kevin A. Hassett, "The Poor Need Capitalism," National Review, November 23, 2009; based upon: Maxim Pinkovskiy and Xavier Sala-i-Martin, "Parametric Estimations of the World Distribution of Income," National Bureau of Economic Research, Working Paper No. 15433, October 2009.

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