Capitalism has a public relations problem. While many will grudgingly admit that capitalism, the economic system based on private property and free trading, yields faster rates of economic growth, higher income levels, and even reduces poverty, they will complain capitalism’s big problem is inequality.
French economist Thomas Piketty has made his professional career by arguing precisely that capitalism engenders more economic inequality. His argument, in a nutshell, is that profits and rents will grow faster than wages and that over time there will be a growing gap between the owners of capital and wage earners. Piketty’s concerns have animated a growing academic debate about capitalism and inequality. Much of this conversation gets deep into the statistical weeds about how we measure inequality and will likely go on for a long time without a resolution.
My interest is simpler. Is it even true? Do more economically free, more capitalist nations actually have more inequality even if using the conventional data? If Piketty is right, surely more capitalist nations will report higher inequality, right?
I, along with Vincent Miozzi, a Ph.D. student at Texas Tech University, and my SMU colleague Meg Tuszynski, have recently examined the academic literature on capitalism and inequality. Specifically, we looked at journal articles using the Fraser Institute’s Economic Freedom of the World (EFW) index that I co-author. The EFW index provides a rating for 165 nations measuring how close they come to the capitalist ideal of low taxes, secure private property, stable money and prices, free trade, and limited regulations. Over the last 30 years, scholars have used this index in over 1,300 peer-reviewed journal articles to study all kinds of social and economic outcomes.
Our study, which will appear in a forthcoming edition of the Southern Economic Journal, collected 2,184 statistical estimates from 135 published studies that measured the effect of economic freedom on economic growth, income levels, national levels of investment, and inequality. Unsurprisingly, the statistical evidence found in these articles strongly supports the conventional view that the more capitalist nations grow faster, invest more, and achieve higher levels of income.
But what about inequality? Based on 759 statistical estimates from 26 published studies, the average effect of economic freedom on inequality was essentially zero. To be sure, about one-fifth of the estimates agreed with Piketty’s view that economic freedom goes with more inequality across countries. But about one-fourth found the opposite result concluding that more economic freedom actually improves economic equality. More than half of estimates found no effect at all.
We investigated all sorts of explanations for these contradictory findings but found no convincing evidence that author bias, article quality, or journal rankings affected the results. The bottom line is that the scholarly literature is very, very mixed when it comes to capitalism and inequality, but the best estimate we have right now is that there is simply no relationship between the two.
There is a lot of inequality in the world both within and across nations. Many people, me included, long for a more equal world where the haves and the have-nots are not so far apart. Simple solutions to the problem of inequality however need to be taken with extreme care.
Thomas Piketty and sympathetic street protestors around the world would have us throw out private property and free trade in favor of a centrally planned world run by omniscient and omnipotent bureaucrats tasked to make us all more equal.
The evidence from the scholarly literature however suggests that getting rid of capitalism won’t make us more equal, but it will make us all poorer.
Robert Lawson holds the Jerome M. Fullinwider Centennial Chair in Economic Freedom at Southern Methodist University’s Cox School of Business. The Southern Economic Journal article can be found here: https://onlinelibrary.wiley.com/doi/full/10.1002/soej.12680
