Why Poverty Reduction Under Capitalism is a Myth

by Richard D. Wolff

 August 27, 2024

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Abandoned building in downtown Detroit. Photo: Jeffrey St. Clair.

From its beginnings, the capitalist economic system produced both critics and celebrants, those who felt victimized and those who felt blessed. Where victims and critics developed analyses, demands, and proposals for change, beneficiaries, and celebrants developed alternative discourses defending the system.

Certain kinds of arguments proved widely effective against capitalism’s critics and in obtaining mass support. These became capitalism’s basic supportive myths. One such myth is that capitalism created prosperity and reduced poverty.

Capitalists and their biggest fans have long argued that the system is an engine of wealth creation. Capitalism’s early boosters, such as Adam Smith and David Ricardo, and likewise capitalism’s early critics such as Karl Marx, recognized that fact. Capitalism is a system built to grow.

Because of market competition among capitalist employers, “growing the business” is necessary, most of the time, for it to survive. Capitalism is a system driven to grow wealth, but wealth creation is not unique to capitalism. The idea that only capitalism creates wealth or that it does so more than other systems is a myth.

What else causes wealth production? There are a whole host of other contributors to wealth. It’s never only the economic system, whether capitalist or feudal or slave or socialist. Wealth creation depends on all kinds of circumstances in history (such as raw materials, weather, or inventions) that determine if and how fast wealth is created. All of those factors play roles alongside that of the particular economic system in place.

When the USSR imploded in 1989, some claimed that capitalism had “defeated” its only real competitor—socialism—proving that capitalism was the greatest possible creator of wealth. The “end of history” had been reached, it was said, at least in relation to economic systems. Once and for all, nothing better than capitalism could be imagined, let alone achieved.

The myth here is a common mistake and grossly overused. While wealth was created in significant quantities over the last few centuries as capitalism spread globally, that does not prove it was capitalism that caused the growth in wealth. Maybe wealth grew despite capitalism. Maybe it would have grown faster with some other system. Evidence for that possibility includes two important facts. First, the fastest economic growth (as measured by GDP) in the 20th century was that achieved by the USSR. And second, the fastest growth in wealth in the 21st century so far is that of the People’s Republic of China. Both of those societies rejected capitalism and proudly defined themselves as socialist.

Another version of this myth, especially popular in recent years, claims capitalism deserves credit for bringing many millions out of poverty over the last 200 to 300 years. In this story, capitalism’s wealth creation brought everyone a higher standard of living with better food, wages, job conditions, medicine and health care, education, and scientific advancements. Capitalism supposedly gave huge gifts to the poorest among us and deserves our applause for such magnificent social contributions.

The problem with this myth is like that with the wealth-creation myth discussed above. Just because millions escaped poverty during capitalism’s global spread does not prove that capitalism is the reason for this change. Alternative systems could have enabled an escape from poverty during the same period of time, or for more people more quickly, because they organized production and distribution differently.

Capitalism’s profit focus has often held back the distribution of products to drive up their prices and, therefore, profits. Patents and trademarks of profit-seeking businesses effectively slow the distribution of all sorts of products. We cannot know whether capitalism’s incentive effects outweigh its slowing effects. Claims that, overall, capitalism promotes rather than slows progress are pure ideological assertions. Different economic systems—capitalism included—promote and delay development in different ways at different speeds in their different parts.

Capitalists and their supporters have almost always opposed measures designed to lessen or eliminate poverty. They blocked minimum wage laws often for many years, and when such laws were passed, they blocked raising the minimums (as they have done in the United States since 2009). Capitalists similarly opposed laws outlawing or limiting child labor, reducing the length of the working day, providing unemployment compensation, establishing government pension systems such as Social Security, providing a national health insurance system, challenging gender and racial discrimination against women and people of color, or providing a universal basic income. Capitalists have led opposition to progressive tax systems, occupational safety and health systems, and free universal education from preschool through university. Capitalists have opposed unions for the last 150 years and likewise restricted collective bargaining for large classes of workers. They have opposed socialist, communist, and anarchist organizations aimed at organizing the poor to demand relief from poverty.

The truth is this: to the extent that poverty has been reduced, it has happened despite the opposition of capitalists. To credit capitalists and capitalism for the reduction in global poverty is to invert the truth. When capitalists try to take credit for the poverty reduction that was achieved against their efforts, they count on their audiences not knowing the history of fighting poverty in capitalism.

Recent claims that capitalism overcame poverty are often based on misinterpretations of certain data. For example, the United Nations defines extreme poverty as an income of under $1.97 per day. The number of poor people living on under $1.97 per day has decreased markedly in the last century. But one country, China—the world’s largest by population—has experienced one of the greatest escapes from poverty in the world in the last century, and therefore, has an outsized influence on all totals. Given China’s huge influence on poverty measures, one could claim that reduced global poverty in recent decades results from an economic system that insists it is not capitalist but rather socialist.

Economic systems are eventually evaluated according to how well or not they serve the society in which they exist. How each system organizes the production and distribution of goods and services determines how well it meets its population’s basic needs for health, safety, sufficient food, clothing, shelter, transport, education, and leisure to lead a decent, productive work-life balance. How well is modern capitalism performing in that sense?

Modern capitalism has now accumulated around 100 individuals in the world who together own more wealth than the bottom half of this planet’s population (over 3.5 billion people). Those hundred richest people’s financial decisions have as much influence over how the world’s resources are used as the financial decisions of 3.5 billion, the poorest half of this planet’s population. That is why the poor die early in a world of modern medicine, suffer from diseases that we know how to cure, starve when we produce more than enough food, lack education when we have plenty of teachers, and experience so much more tragedy. Is this what reducing poverty looks like?

Crediting capitalism for poverty reduction is another myth. Poverty was reduced by the poor’s struggle against a poverty reproduced systemically by capitalism and capitalists. Moreover, the poor’s battles were often aided by militant working-class organizations, including pointedly anti-capitalist organizations.

This adapted excerpt from Richard D. Wolff’s book Understanding Capitalism (Democracy at Work, 2024) was produced by Economy for All, a project of the Independent Media Institute.

Richard Wolff is the author of Capitalism Hits the Fan and Capitalism’s Crisis Deepens. He is founder of Democracy at Work.

Awareness of Capitalists’ Use of Colonialism 

Encourages International Solidarity

by W. T. Whitney

AUGUST  27, 2024
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Image by L’Odyssée Belle.

Studying capitalism, Karl Marx examined the Industrial Revolution in Europe. He explored conflict between worker and employer. In their book Capital and Imperialism (Monthly Review Press, 2021), authors Utsa Patnaik and Prabhat Patnaik emphasize that Marx’s followers believed that, with the onset of capitalism, “accumulation [has] occurred only on the basis of the generation of surplus value.” (Surplus value signifies that part of a product’s commercial yield which labor generates and employers keep.)

The Patnaiks recall that Marxists mention another kind of accumulation of wealth, one that “occurred only in the prehistory of capitalism.” According to the authors’ reckoning, however, so-called “primitive accumulation occurred throughout the history of capitalism,” along with surplus value. The term primitive accumulation refers to expropriation, plunder, or stealing.

Many U.S. political activists oppose the overseas wars and interventions their government uses to maintain worldwide political and economic domination. More than a few know about stealing in the peripheral regions of the world at the hands of capitalism. They are aware of U.S. imperialism.

The stolen goods include: land, bodies, raw materials, food crops, forests, water, extractable underground resources, exorbitant interest on debt, and funding owed the world’s poor for subsistence. Non-payment for social reproduction is a kind of stealing.

The more these activists learn that capitalism from its start did call for oppression in the undeveloped regions of the world, the more likely might be their inclination to build an anti-capitalist international solidarity movement. The book authored by the Patnaiks contributes to this end by documenting that colonialism and, implicitly, imperialism have been essential to the development of capitalism.

In describing India’s colonial experience, their book – by no means reviewed here in its entirety – provides an explanation taken from Marx as to why capitalism needed colonialism. It details the workings of capitalist-inspired colonialism in India.

The Patnaiks declare that, “not only has capitalism always been historically ensconced within a pre-capitalist setting from which it emerged, with which it interacted, and which it modified for its own purposes, but additionally that its very existence and expansion is conditioned upon such interaction.” Capitalists sought “appropriation of surplus by the metropolis, under colonialism.” (“Metropolis” is defined as “the city or state of origin of a colony.”)

They explain that “Marx’s basic concept of capitalism [as expressed] in Capital is of an isolated capitalist sector … consisting only of workers and capitalists,” also that an isolated sector implies a capitalism “stuck forever in a stationary state or a state of simple reproduction … [and] with zero growth.” They insist that “a closed self-contained capitalism in the metropolis is a logical impossibility.”

There is “nothing within the system to pull it out of that state.” The economy “will necessarily get to that state in the absence of exogenous stimuli.”

The Patnaiks envision three kinds of exogenous stimuli: “pre-capitalist markets, state expenditure, and innovations.” The first of these represents the colonialism that would be essential to capitalists as they built the economies of European industrial centers.

Inflation a concern

Outlining how British capitalism dealt with colonial India, the authors highlight money as a device for holding and transferring wealth. The object has been to preserve its value. The system had these features:

* Officials in London used the surplus derived from Indian exports of primary commodities to finance the export of capital to other capitalist countries.

* British officials taxed the land of small producers in India, using the revenue to pay the colony’s administrative expenses and purchase commodities for export to Britain; some were re-exported to other countries.

* Britain exported manufactured goods. The flood of them arriving in India led to “deindustrialization of the colonial economy.” Displaced artisan manufacturers became “petty producers” of commodities.

* British officials dealing with “increasing supply prices” for commodities exported from the colonies, faced “metropolitan money-wage or profit margin increases.” Seeking to “stabilize the value of money,” they imposed “income deflation … [on Indian] suppliers of wage goods and inputs to the capitalist sector.”

* The claims of heavily-taxed agricultural producers in India were “compressible” especially because they were located “in the midst of vast labor reserves.”

Colonialism provided British capitalists the option of cutting pay or jobs in India so as to carry out the currency exchanges the system required and to “accommodate increases in money wages” in Britain, both “without jeopardizing the value of money.”

Global economy

The book outlines post-colonial developments. Colonial arrangements persisted throughout the 19^th century and collapsed after World War I, due in part, say the authors, to a worldwide agricultural crisis that peaked in 1926. The circumstances gave rise to the Great Depression. Spending for World War II led to recovery, mostly in the United States.

These were “boom years” for capitalism. The United States, confronted with increasing military expenses, turned to deficit financing. Western European countries took up social democracy and the welfare state. Some former colonies, now independent nations, sponsored agricultural and industrial initiatives aimed at relieving economic inequalities.

At that point, the centers could no longer impose income deflation on working people in the periphery to ward off loss of monetary value. Bank holdings increased and lending pressures mounted. In 1973 “the Bretton Woods system collapsed because of the emergence of inflation.” “The capitalist world of the stable medium of holding wealth …[through] the gold-dollar link” took a hit.

Next came worldwide take-over by global finance capital and neoliberalism. The Patnaiks explain that, with “barriers to capital flows” down, “state intervention in demand management becomes impossible.” “[A] regime of income deflation on the working people of the periphery” returned in order to “control inflation and stabilize the value of money.”

Concluding

This story is of continuities. One is capitalism at its start taking up with colonialism. Another is capitalism using colonialism to preserve the value of money in cross-border commercial and financial dealings. One more is the oppression and beggaring of the world’s working people to prevent inflation.

Karl Marx may have found data and other information on colonialism scarce as he studied capitalism. Additionally, his life of research and political activism may have been so full as to distract him from investigation of the colonial connection. Even so he championed international worker solidarity.

He and Engels supported India’s independence struggle. Marx defended “heroic Poland” beset by Czarist Russia. He writes to Engels that, “In my view, the most momentous thing happening in the world today is, on the one hand, the movement among the slaves in America, started by the death of [John] Brown and on the other the movement of the serfs in Russia.”

Addressing the International Working Men’s Association – the First International – in 1864, Marx reported that events “have taught the working classes the duty to master themselves the mysteries of international politics; to watch the diplomatic acts of their respective governments.”

The wreckage of people’s lives caused by capitalism now extends widely. The venue of capitalism is global, by its nature. Political support for workers and their political formations in the Global South hits at the essence of capitalist power. The promise of basic change lies in that direction, and that’s so too with alternatives to the capitalist system.

Those struggles for social justice and equality that are confined to the world’s industrial centers do target aspects of capitalism, but without far-reaching expectations. The full effort consists of: pushing for reforms that ease burdens placed upon working people, building mass opposition, and – crucially – advancing the international solidarity movement.

W.T. Whitney Jr. is a retired pediatrician and political journalist living in Maine.