Economic Growth

The impact of capitalism on poverty maybe isn’t what you assume

Willie Bassie, 58, sits next to his tent on Skid Row in Los Angeles, California, October 14, 2019. REUTERS/Lucy Nicholson

A new study on capitalism and poverty makes a case for treating employees with dignity. Image: REUTERS/Lucy Nicholson

John Letzing
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Stakeholder Capitalism

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  • A new study delves into the historical impact of capitalism on poverty.
  • It suggests the effect was negative until workers were empowered and treated fairly.
  • Treating employees with dignity and respect is a tenet of stakeholder capitalism.

The historical record is a bit fuzzy, but we seem to be nearing the 300th anniversary of the birth of Adam Smith, the Scottish philosopher lionized and villainized as the father of modern capitalism.

In truth, capitalism in various forms existed long before Smith put quill pen to paper. A sweeping new study delves deep into this history, exploring five centuries of data to question the assumption that prior to the broad proliferation of capitalism, most people had to endure extreme poverty.

Its findings, according to one author, are “troubling but also inspiring”.

Instead of focusing on more traditional measures like GDP per capita, the study examined trends around the world in terms of real wages, mortality and height (a physical manifestation of relative prosperity).

Initially, things didn’t go well for most people under the early free-market systems that started walling off formerly shared land in the late 15th century. They generally earned less, got shorter, and tended to die earlier. Sure, GDP per capita increased sharply in India in the late 19th century, but at the same time colonial policies led to famines and a decline in life expectancy, according to the study.

It took a few centuries until things started to change, at least in some places (as early as the 1880s in north-west Europe). Anti-colonial movements, political efforts to invest in public services, and increasingly organized labour all seem to have been key – effectively, workers gained a greater sense of security and well-being.

That turning point strikes at a nagging problem that generations of economists and politicians have tried to solve. The disconnect between what owners want and workers need has undermined social stability for centuries.

A tenet of stakeholder capitalism, a model that’s gained momentum despite sometimes misplaced opposition, is that treating employees with dignity and respect will ultimately serve everyone better.

Situations where workers’ interests are not being looked after, and where their ability to collectively bargain is undermined, have been clearly linked to increases in poverty.

Defining poverty, new and old

The concept of poverty isn’t exactly straightforward. For the World Bank, extreme poverty means living on less than $2.15 per day. In the US, “deep poverty” is a family of four making less than $13,123 a year. The newly published study measures poverty in terms of the ability to access basic human needs like food, clothing and shelter.

That ability plummeted in Europe during the 16th century, according to the study. In north-west Europe, real wages didn’t start rising above 15th-century levels until the 1880s. Meanwhile, the average European born in the 1850s was considerably shorter than a 16th-century German. Recovery from this deprivation didn’t occur until the 20th century.

In Mexico, real wages cratered by 1810, according to the study, and wouldn’t improve until the 1940s – as labour unions grew in strength. In China, average adult male height fell by 2.2 centimetres after the mid-19th century Opium Wars established the local commercial dominance of Western powers, and didn’t make substantial progress until after 1949.

The average inhabitant of these places is now probably notably taller than they would’ve been hundreds of years ago. In many ways, their lives are far more comfortable. In other ways, though, they might be even more precarious.

Trade union membership has been in steady decline globally. In the US, unionization is about half what it was in 1983. In Europe, some countries have seen a similar rate of deterioration, and there are comparable trends in Latin America. Whether via a union or other means, an essential backstop for workers is vanishing.

Modern factory work often isn’t as treacherous as the 19th-century variety that spurred union mobilization in places like Pennsylvania. But a different kind of factory work, increasingly related to warehousing and logistics for online transactions, can also expose employees to hardship – particularly when things like financial crises, inflation and pandemics hit.

If the people doing this kind of work are increasingly left behind, even places with very rich people can become poor societies.

As the authors of the new study on capitalism and poverty wrote, if extreme poverty is a sign of severe social dislocation, it should concern us that it “remains so prevalent”.

Even Adam Smith probably wasn't as hard-nosed on the issue as imagined. He seems to have believed in shared prosperity – even for workers.

More reading on poverty and workers’ rights

For more context, here are links to further reading from the World Economic Forum's Strategic Intelligence platform:

  • California’s Inland Empire is a massive expanse east of Los Angeles dotted with logistics warehouses. According to this researcher, a form of “racial capitalism” there has resulted in low pay, injury risk, and an undermining of the basis for “lives to thrive” for Latinx workers. (LSE)
  • Capitalism and the Queen – according to this piece, the late Elizabeth II, known to love the rhythm of country life and the rigour of service to the state, exemplified the “stoic model of duty” extolled by Adam Smith. (Project Syndicate)
  • Tougher transition to a market-based economy? These researchers analysed relative outcomes for former pro-democracy protestors and one-time socialist party members in East Germany after the fall of the Berlin Wall. (LSE Business Review)
  • Some big companies committed to stakeholder capitalism have faced pushback recently from activist shareholders. According to this piece, a way to avoid similar dustups is to “stop fishing” for easy money and cultivate investors focused on long-term returns. (Harvard Business Review)
  • “I was wrong about capitalism.” According to this opinion piece, sometimes the articles of faith that inform one economic era can seem tragically shortsighted in the next. (New York Times)
  • Where does capitalism go next? This economics professor says creative destruction can hasten social mobility, and is therefore a “good” source of income inequality. (Kellogg School of Management)
  • Despite the decline of unions there are many signs of “worker resistance”, according to this analysis – stemming from rising inequality and recent union inroads into seemingly impenetrable industries. (Australian Institute of International Affairs)

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