Two Cheers for Capitalism?

Peter T. Leeson†

Abstract

An increasingly popular position holds that although markets can be important contributors to
development, they can also undermine it. Evidence for capitalism’s effect on development is
ambiguous and mixed. We should therefore be cautious and modest advocates of markets. I call
this view “two cheers for capitalism.” This paper empirically investigates this view. I find that
citizens in countries that became more capitalist over the last quarter century became
substantially wealthier, healthier, more educated, and politically freer. Citizens in countries that
became significantly less capitalist over this period endured stagnating income, shortening life
spans, smaller gains in education, and increasingly oppressive political regimes. The data
unequivocally evidence capitalism’s superiority for development and merit its unqualified
endorsement. Full-force cheerleading for capitalism is well deserved and three cheers are in
order instead of two. I conclude with a few thoughts about why some academics insist on
pretending otherwise.

*
I thank Pete Boettke and Chris Coyne for comments and suggestions. The financial support of the Fund for the
Study of Spontaneous Orders is also gratefully acknowledged.
†
Email: [email protected]. Address: Department of Economics, George Mason University, MSN 3G4, Fairfax, VA
22030.

1
1 Introduction

In 1974 Peter Berger published his important book, Pyramids of Sacrifice. This book examines

what Berger calls “political ethics and social change” and, in particular, considers the “ethical

dilemmas of development.” As Berger described this project 12 years later, Pyramids of

Sacrifice was “largely shaped by my experience in and my reflections about Latin America . . .

In this book I tried very hard to be evenhanded as between capitalist and socialist models of

development, arguing that both should be assessed in terms of a number of moral criteria I

proposed . . . I have had no reason to change these moral criteria since then, but precisely their

application to the empirical evidence led me step by step to my present position, which is that

capitalism is the morally safer bet” (1986: 12).

Berger’s position in Pyramids of Sacrifice was, crudely, that capitalism has some benefits

but also some shortcomings. The same is true of socialism. Between the two modes of political-

economic organization there is no obvious choice. To satisfactorily deal with development,

thinkers on both sides of the capitalism/socialism debate must abandon their “dogmatic”

adherence to extremes and forge a practical third way.

Although Berger later abandoned this position to come to the “pro-capitalism side,” the

view he expressed in Pyramids of Sacrifice is important to consider because it approximates a

view that many people hold today. According to this view, although markets can be important

contributors to development, they can also undermine it. This point has been driven home most

forcefully in light of the recent financial crisis, which underscores the importance of taking a

cautious approach toward capitalism as an engine of development. Evidence for capitalism’s

effect on development is ambiguous and mixed. We should therefore be cautious and modest

advocates of markets.

2
 According to those who hold this position, social scientists who do not water down,

qualify, and temper their praise and advocacy of capitalism as an engine of development are

“ideologues,” “dogmatists,” and “free-market fundamentalists.” They let wishful thinking

contaminate their scientific views and privilege faith over the hard empirical evidence, which

neither supports an “extreme” position in favor or capitalism for development, nor permits

categorical claims for capitalism’s superiority. I call this popular view “two cheers for

capitalism.”1 It appears most prominently among academics, though it’s the favored stance of a

growing number of laymen as well.

Berger’s later book on capitalism, The Capitalist Revolution, urges social scientists of all

stripes to not be “dogmatic,” to generate falsifiable propositions and, most important for my

analysis, to examine the evidence in light of those propositions. In the spirit of Berger’s request,

this paper aims to empirically evaluate the two cheers for capitalism view. I selected the

evidence I examine for this purpose on the basis of the two moral criteria that Berger says we

should look at when considering development in Pyramids of Sacrifice. The first criterion, which

he calls the “calculus of pain,” refers to the avoidance of human suffering. Berger’s second

criterion, which he calls the “calculus of meaning,” refers to respect for the values of individuals

in the developing world.2

I also empirically evaluate a common variation on the two cheers for capitalism view,

which suggests that even if capitalism is good for development, “excessive” or “uncontrolled”

capitalism is not. Past some point, more capitalism is counterproductive. Laissez faire, then, is

1
I first heard Peter Boettke use this term to describe milquetoast defenses of the market. I think his use of the term is
very apt, so I use it here. Evidently, Irving Kristol (1978) has a book by this title as well. I haven’t read it but
understand that its premise is that while capitalism deserves two cheers, as a neoconservative, Kristol believes the
third cheer must be held back. Thus the book is an endorsement of a particular variety of two cheers for capitalism
thinking.
2
Berger’s call for a rendering of development based on these broader criteria is reminiscent of Sen (1979, 1985,
1999) and Nussbaum’s (2000) calls for considering “human capabilities,” except Berger offered his argument 5-10
years before these others.

3
not conducive to development. Such maximal capitalism is past the optimum. Rather, a well-

regulated marked economy with healthy doses of intervention to restrain its excesses is

conducive to maximal development. Only a dogmatic free-market ideologue would argue

otherwise.

Although it has a different purpose in mind, my enterprise is similar in its basic approach

to Andrei Shleifer’s approach (2009) in his recent paper, “The Age of Milton Friedman.”

However, whereas Shleifer was interested in documenting how the world’s embrace of free-

market policies over the last 25 years has affected global development, my interest is in

documenting how countries that became more capitalist over this period fared relative to

countries that became less capitalist in terms of their development.

My findings are straightforward. The two cheers for capitalism view is wrong. Although

many relationships in the social sciences are unclear, capitalism’s relationship to development

isn’t one of them. Unless one is ashamed of unprecedented increases in income, rising life

expectancy, greater education, and more political freedom, there’s no reason to be a milquetoast

defender of capitalism. This is what sprawling free markets have meant for countries that became

more capitalist over the last quarter century. On the other side, there’s no evidence that countries

that eschewed the global trend toward freer markets and embraced substantially greater state

control performed better on any of these indicators. On the contrary, they performed

demonstrably worse. I also find that the two cheers for capitalism variant that desires markets,

but “within reason,” is wrong. There is no evidence for a Lorenz curve-type relationship between

capitalism and development. Rather, this relationship is linear. Maximal capitalism begets

maximal development.

4
 It does not make one “dogmatic” to acknowledge these facts. In fact, it makes one

dogmatic to refuse to acknowledge them. They are facts. There are precious few overwhelmingly

clear relationships in the social sciences. We should embrace this one rather than running away

from it. The data clearly support capitalism’s superiority for development and merit its

unqualified defense by social scientists who believe that wealth is better than poverty, life is

better than death, and liberty is better than oppression. Full-force cheerleading for capitalism is

well deserved and three cheers are in order instead of two.

2 Three Cheers-Worthy in Theory

The theory of how capitalism leads to development is straightforward.3 Capitalism is an

economic system based on the institution of private property rights. Earlier defenders of private

property rights, such as Adam Smith, Ludwig von Mises, and F.A. Hayek, created a two-pronged

approach to understanding the primacy of private property for wealth creation.

Smith’s (1776) line of argument focused on the incentives that private property creates

for individual actors. Where property is privately owned, agents are residual claimants on the

uses of their property. In the context of the market, this means that private property owners’

discounted future-income streams depend on how well they use their private property to satisfy

others’ desires. This is a restatement of Smith’s famed “invisible hand,” which pointed out that,

in an institutional environment of private property, each agent pursuing his own self-interest is

led to promote the interests of others. In this way, private property rights serve to align the

interests of resource owners and resource consumers. Through this institution the interests of the

former become inextricably linked to the interests of the latter.

3
This section is based on and draws from Leeson (2008).

5
 In contrast, where the state separates ownership rights from private individuals and holds

them instead, it severs this linkage. On the one hand, since governments are coercive they can’t

go out of business. The interests of political agents who control property in a society where

property is collectivized don’t depend on satisfying their citizens’ interests. Political agents are

thus free to use resources in ways that benefit themselves at others’ expense. On the other hand,

since citizens in such a society are not residual claimants on the majority of their economic

activities, their incentives to be productive vanish.

The second prong of the theory of private property’s primacy for development is rooted

in the arguments of Mises (1920, 1947, 1949) and Hayek (1937, 1945), whose discussions

provide the complementary argument to Smith’s incentive-based defense of private property.

These two thinkers emphasized the information-generating capacity of private property rights.

Mises’ (1920, 1947, 1949) argument was simple but powerful. Without private ownership there

can be no exchange. Without exchange, there are no exchange ratios, i.e., market prices. Without

market prices, rational economic calculation is impossible. And without economic calculation,

there’s no way to ensure that resources will tend to flow to those areas where actors value them

most. The institution of private property is what allows for market prices, which in turn enable

the rational allocation of resources.4

Building on Mises’ argument, Hayek (1937, 1945) describes the information-carrying

capacity of market prices. Market prices, he argues, signal the relative scarcity of resources to

producers and consumers. They tell producers how to combine resources in the ways that

produce the most value for consumers, and tell consumers when they should expand or contract

their consumption of various goods and services. Hayek pointed out that the information

communicated to market participants through the price system is decentralized, localized, and
4
For an excellent application of Mises’ argument to the failure of the Soviet Union, see Boettke (1990).

6
often inarticulate. This knowledge, he argued, exists only in a divided, diffused form, throughout

the members of society. As such, centralized decision makers have no way to access its most

important elements. Because government can’t tap into this decentralized knowledge, central

planning based on collective ownership is doomed to fail. Private property, in contrast, which

enables exchange and market prices to emerge, is able to tap into this information and deliver it

to economic actors in a way they can use to coordinate their ends.

Peter Bauer (2001) hit upon a number of important conclusions that strengthened the case

for the primacy of private property in generating development. What is needed for development,

Bauer suggested, is for government to protect private property rights. This requires government

to protect private citizens’ property claims vis-à-vis one another and, more important, to refrain

from using its coercive power to violate the property claims of its citizens.5 In this institutional

environment, the power of market-generated incentives described by Smith’s invisible hand, and

the illumination of market-created information described by Mises and Hayek, can operate fully,

maximizing the potential for economic progress.

A government that goes beyond this role not only fails to promote development, but

actually retards wealth creation. This occurs for two reasons. First, government interventions that

attenuate individuals’ private property claims distort market participants’ incentives. They make

certain avenues of economic activity, such as rent seeking, relatively more profitable, and other

avenues of economic activity, such as production for consumer wants, less profitable.

Christopher Coyne and Peter Leeson’s (2004) paper on the “Plight of Underdeveloped

Countries” documents this effect in the context of developing nations. Their argument builds on

William Baumol’s (1990) distinction between productive and unproductive entrepreneurship.

The basic reasoning behind this idea is simple. The institutional environment, specifically the
5
More recently, this second aspect has been emphasized by de Soto (1989) as well.

7
property rights arrangements, of various countries shapes economic actors’ incentives. Where

governments are active and go beyond the mere protective state Bauer discussed, they raise the

relative payoffs of unproductive entrepreneurial activity, such as rent-seeking. This result lowers

the prospects for development, as citizens expend time and talent participating in the political

process to secure the transfer of wealth rather than creating it. On the other hand, where

government protects private property and stays within these bounds, the relative payoff of

wealth-enhancing activities, such as production and exchange, rises. This improves the prospect

for development, as citizens devote energies to enterprises that make the members of society

better off.

To Baumol’s (1990) productive and unproductive categories of entrepreneurship, Coyne

and Leeson (2004) add a third dimension they call “evasive entrepreneurship.” Evasive

entrepreneurship involves the resources market participants devote to navigating the costly

procedures for conducting business that governments that extend beyond the merely protective

function create. It includes, for example, the bribes citizens must pay to corrupt inspectors, the

resources private actors must expend to avoid government detection, which would impose higher

tax costs on their operations, and so forth. Like the unproductive entrepreneurial activities that a

poor institutional environment creates, evasive entrepreneurial activities also constitute

deadweight losses to society—squandered resources agents could have deployed productively

elsewhere to contribute to progress.6 In a society characterized by an institutional regime that

raises the payoff of evasive entrepreneurial activities, economic decay is inevitable, as agents

increasingly devote resources to ends that don’t contribute to social wealth.

6
The World Bank’s “Cost of Doing Business Index” measures what Coyne and Leeson (2004) call “evasive
entrepreneurship,” allowing researchers to operationalize this idea. For a further discussion of the connection
between the cost of doing business across countries and their institutions of property rights protection, see de Soto
(1989).

8
 Second, government interventions that attenuate private property rights also distort the

information embodied in market prices. Some interventions, such as wage and price controls

actively pursued in many developing countries, literally destroy the market price system, and,

with it, the information-generating features of this system that ensures the efficient allocation of

resources. Other interventions, such as subsidies, or import barriers, that don’t directly interfere

with market prices, indirectly distort price-provided information. Some avenues of production

that are actually wealth-destroying for society, such as production in a domestic industry that

produces inefficiently relative to foreign producers in that industry, artificially appear profitable,

as though they created wealth for consumers. Others avenues of production that are wealth-

creating for consumers, such as those industries that would absorb the labor and resources used

in the inefficient industry receiving protection, artificially appear less profitable than they

actually are, as though they created less wealth for consumers than they do. The result in both

cases is an inefficient allocation of resources, leading to wealth destruction and economic

decline.

While the theory of how capitalism causes development demonstrates how the institution

of private property creates prosperity even under “worst case” assumptions about political-

economic conditions, the theory of socialism fails to do so even under “best case” assumptions

about these conditions (Boettke and Leeson 2004). The assumptions I refer to here are those

relating to individuals’ motivations and information. “Worst-case” assumptions assume that

individuals are knaves and are ignorant. “Best-case” assumptions assume that individuals are

angels and are omniscient.

While socialism is extremely fragile to deviations from ideal political-economic

conditions, capitalism is robust to large deviations from such conditions. In fact, capitalism

9
leverages such deviations for its benefit. As Adam Smith pointed out, capitalism functions

precisely by harnessing men’s knavish motivations and putting them to work for society’s

benefit. This is what his “invisible hand” is about. Under the institution of private property,

individuals service their wants best by servicing others’ wants. Ingeniously, greed is made a

servant of the public good.

While capitalism thrives on such deviations from ideal motivations, socialism stumbles.

Since individuals under socialism aren’t incentivized through private property, we must hope

they’re benevolent if we want them to work toward servicing the public good. If they’re not,

rather than leading them to produce for others’ benefit, the institution of common property leads

them to “free ride” on others’ efforts, creating idleness and lethargy.

Even if we make this problem disappear for socialism by making “best-case”

motivational assumptions for individuals, socialism still fails if we don’t also assume ideal

informational conditions—i.e., if we don’t assume that individuals are not only angelic, but also

that they’re omniscient. The reason for this is the one Mises (1920) pointed to: without private

property, rational economic calculation, and thus an efficient allocation of resources, is

impossible. Short of assuming socialist society will be populated by benevolent and omniscient

beings—i.e., gods—socialism fails.

Capitalism, in contrast, thrives in the face of informational imperfections. This was

Hayek’s (1945) argument, which demonstrated how the market price system, possible only under

the institution of private property, feeds on the dispersed and decentralized information that

market participants hold. Even if we assume that the individuals who populate capitalist society

are purely selfish and stupid, capitalism thrives. In this way, private property uses political-

economic imperfections as fodder to fuel capitalism as an engine for development. In contrast,

10
the engine of socialism stalls when confronted with these imperfections. Capitalism is robust;

socialism is fragile.

In theory, capitalism is certainly worthy of three cheers. The institution of private

property provides a clear mechanism whereby capitalism creates development that solves both

the incentive and information problems that plague political-economic organization. Further,

capitalism is a robust political-economic organization. It not only works in the face of less-than-

ideal conditions; it flourishes in the face of such conditions. In contrast, in theory, socialism isn’t

worthy of even a single cheer. It lacks a logical mechanism whereby the institution of common

property could solve the incentive problem or the information problem, let alone both

simultaneously. In theory, socialism only “works” if it’s populated by gods. Besides the fact that

gods don’t populate any portion of the globe—socialist or capitalist—even this “workability”

fails to provide reason for so much as a hesitant, half-cheer for socialism. Any, and every,

political-economic organization “works” if it’s populated by gods.

3 Three Cheers-Worthy in Practice

3.1 Data and Empirical Approach

Theory is one thing; practice is another. How many cheers does capitalism deserve in practice?

I was at a conference a few years ago in which, following a spirited discussion about the merits

of capitalism for development, one of the participants, fearing the praise for capitalism was

growing unduly strong on one side of the room, noted that “The jury is still out on how

capitalism has affected development globally. Capitalism has brought some benefits for certain

countries; but we can’t make blanket statements about capitalism’s ‘goodness’ for development.

We simply don’t have the evidence we need to make a judgment on this question; and what little

11
evidence we do have is less than clear.”7 She made this comment to her colleagues’ approving

nods. I’ve subsequently heard others make similar claims. The claim-makers are often, though

not always, non-economists. This is classic “two cheers for capitalism” thinking.

Contrary to this participants’ claim, the jury is not still out on how capitalism has affected

development globally. We have plenty of evidence. And it overwhelmingly points in one

direction: the growth of capitalism has made the world better off. In fact, there are few, “big”

political-economic hypotheses for which the evidence is so clear and the hypothesis so

unambiguously supported. Why some academics have insisted on pretending otherwise is a

matter I’ll return to in my concluding remarks. For now, let’s consider the evidence. My

comments below will be brief. They are brief because little needs to be said. The data speak for

themselves.

The relationships I look at aren’t the only ones one might want to consider. Certainly

others could be examined, and I encourage the reader to do so if she’s curious. In a moment I’ll

present the evidence on the growth of capitalism and then on income. Income is highly and

positively correlated with pretty much every positive development indicator one can think of (for

example, access to a clean water source), and highly and negatively correlated with pretty much

every negative development indicator one can think of (for example, infant mortality). There are

exceptions. But this strong tendency militates against depicting many of these relationships.

Once the relationship between capitalism and income is established, for most purposes it

becomes redundant to examine the relationship between capitalism and improved access to a

7
I wasn’t a participant in this conversation; I was just the moderator.

12
clean water source, infant mortality, and so on.8 If the reader wishes to verify this for herself, she

is encouraged to plot the data and see.

With that said, 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 most people are concerned with: wealth, health, education,

and political freedom. Second, these categories comport with those I imagine Berger (1974) had

in mind when thinking about 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 she believes

would better capture what Berger had in mind and would better evaluate the number of cheers

capitalism deserves, she is again 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

8
This is why arguments about “human capabilities” from Sen (1999) and Nussbaum (2000) carry much less weight
than they otherwise might. See, for example, Boettke and Subrick (2002) who show that the rule of law promotes
wealth, which is in turn highly correlated with a slew of development indicators consistent with Sen-type
“capabilities.”

13
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

expectancy 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.

14
3.2 A Funny Thing Called Evidence

Over the past quarter century there’s been a clear trend in the world’s political-economic

organization: the globe is moving towards more capitalism and less reliance on government

management of the economy. The growth of global capitalism is remarkable in both its

consistency and magnitude. Figure 1 depicts this growth by plotting the average level of

economic freedom in the world over the last 25 years at five-year intervals.

Figure 1. The Growth of Global Capitalism

6.4
Economic Freedom in the World

6.2

5.8

5.6

5.4
1980 1985 1990 1995 2000 2005

Source: Fraser Institute - Economic Freedom of the World (2008).

The spread of capitalism globally is undeniable. Equally undeniable is what this spread

has meant for humanity: more wealth, health, and human freedom. Flourishing capitalism has led

to flourishing development. Figure 2 illustrates the movement of income over the same period. It

15
depicts average GDP per capita PPP (in constant 2000 international $) at five-year intervals in

countries that became more capitalist over the last quarter century.9

Figure 2. Income in Countries that Became More Capitalist

10500

10000

9500

9000

8500

8000

7500
1980 1985 1990 1995 2000 2005

Source: Shleifer (2009) from WDI (2006).

No ambiguity here. Countries that became more capitalist became much wealthier.

Specifically, the average country that became more capitalist over the last 25 years saw its GDP

per capita (PPP) rise from about $7600 to nearly $11,800—a 43 percent increase. If rapidly

rising wealth deserves cheering, so does capitalism.

What about longevity? All the money in the world doesn’t mean anything if you’re not

alive to spend it on things that improve your life. Figure 3 charts the movement of average life
9
To determine this I simply subtracted countries’ economic freedom score in 2005 from their score in 1980. In cases
when scores weren’t available for 1980, I used the next closest year to calculate their change. The resulting
subsample includes all countries that had a positive economic freedom change.

16
expectancy at birth in countries that became more capitalist over the last quarter century at five-

year intervals.

Figure 3. Life Expectancy in Countries that Became More

67
Life Expectancy at Birth (total years)

66

65

64

63

62
1980 1985 1990 1995 2000 2005

Source: Shleifer (2009) from WDI (2006).

No mysteries in this figure either. Growing capitalism is clearly associated with growing

life expectancy. In the average country that became more capitalist over the last 25 years, the

average citizen gained nearly half a decade in life expectancy. If longer life for the average

person deserves cheering, so does capitalism.

Man doesn’t live by bread alone. Education not only allows him to live the “life of the

mind” but also to build his human capital. Both of these things give individuals more power to

shape their identity and their destiny—to live life as they see fit. How has the spread of

17
capitalism world-wide affected education? Figure 4 illustrates this relationship by plotting

average years of schooling in the total population (citizens age 25 and over) in countries that

became more capitalist for the years 1980 through 1995 at five-year intervals. (Data were

unavailable for the years 2000 and 2005).

Figure 4. Education in Countries that Became More Capitalist

6.0

5.8

5.6
Years of Schooling

5.4

5.2

5.0

4.8

4.6
1980 1985 1990 1995

Source: Shleifer (2009) from Barro and Lee (2000).

Trends don’t get much clear than this. In the average country that became more capitalist,

the average number of years of schooling in the population rose from 4.7 to just over 6. If more

education for the average citizen deserves cheering, so does capitalism.

Economic freedom and the economic benefits it brings is one thing. But what about

political freedom? How has democracy fared in countries that have become more capitalist over

18
the last quarter century? To see, consider Figure 5, which illustrates the growth of democracy in

countries that became more capitalist over the last 20 years at five-year intervals between 1980

and 2000. (Data were unavailable for 2005).

Figure 5. Democracy in Countries that Became More Capitalist

6.0

5.5
Democracy

5.0

4.5

4.0

3.5
1980 1985 1990 1995 2000

Source: Shleifer (2009) from the Polity IV Database (2000).

The discerning reader will have now detected a pattern. The growth of capitalism has

unequivocally led to improved development in countries that became more capitalist. Political

freedom is no exception. Countries that became more capitalist over the last 20 years became

dramatically more democratic. On a 0-10 scale, where 10 represents “total democracy” or

“complete political freedom,” the average country that became more capitalist rose from a

19
democracy level of 3.8 to 6.4—a 68 percent increase. If growing political freedom and

democracy deserves cheering, so does capitalism.

There are no ambiguities about what capitalism has meant for development. If, like most

people, you consider large increases in wealth, health, education, and freedom a good thing,

capitalism deserves three loud cheers.

4 No Cheers for Backsliders

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. The United States, for example, became less capitalist by 0.09 points

on Fraser’s index between 1980 and 2005 but remained the 7th-most capitalist country in the

world. Such countries have significant “surplus funds” built up through decades of capitalism.

Such funds allow them to consume part of their surplus in the form of increased government

intervention with little negative effect on their developmental growth.

However, 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.

It doesn’t require any high-powered empirical techniques to detect developmental

stagnation and retrogression in these backsliders. The evidence that becoming significantly less

capitalist results in stalled and reversing development is as clear and obvious to anyone who

bothers to look at it as the evidence that growing capitalism has dramatically improved global

20
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.

Fortunately, only five countries became significantly less capitalist over the last quarter

century when most everyone else was busy reaping the rewards of becoming more capitalist.

These countries are: Myanmar, Rwanda, Ukraine, Venezuela, and Zimbabwe. Each of these

countries lost more than 1 point of economic freedom over the period on Fraser’s 10-point scale.

This decline translates into a 20-40 percent loss of economic freedom depending on the country

one considers.

Figures 6-9 depict the movement of the same development indicators, at the same five-

year intervals, for these countries that Figures 2-5 depicted for the countries that became more

capitalist over this period. I’ve made an effort to depict the data using the same vertical-axis

scales as I did in Figures 2-5 so you can get a sense not only of the very different trajectory of

development in countries that became significantly less capitalist over the past 25 years, but also

so you can get a sense of the very different magnitudes of development involved between

countries that became more capitalist and countries that became significantly less capitalist. Here

are the data:

21
 Figure 6. Income in Countries that Became Notably Less
Capitalist
11000
GDP per capita PPP (constant 2000 international $)

10000

9000

8000

7000

6000

5000

4000

3000
1980 1985 1990 1995 2000 2005

Source: Shleifer (2009) from WDI (2006).

22
 Figure 7. Life Expectancy in Countries that Became Notably Less
Capitalist
69

67
Life Expectancy at Birth (total years)

65

63

61

59

57

55
1980 1985 1990 1995 2000 2005

Source: Shleifer (2009) from WDI (2006).

23
 Figure 8. Education in Countries that Became Notable Less
Capitalist
6

5
Years of Schooling

2
1980 1985 1990 1995

Source: Shleifer (2009) from Barro and Lee (2000).

24
 Figure 9. Democracy in Countries that Became Notably Less
Capitalist
7

5
Democracy

2
1980 1985 1990 1995 2000

Source: Shleifer (2009) from Polity IV Database (2000).

The average country that became significantly less capitalist over the past quarter century

has seen its citizens’ average income stagnate, life expectancy shorten, and democracy plunge.

Only education has managed to improve. Two items must be observed here. First, the number of

years of schooling in the average country that became less capitalist over the past 25 years is

about 50-60 percent of what it is in the average country that became more capitalist over this

period. This is the magnitude issue I pointed out above. Second, the increase in the number of

years of schooling in the average country that became more capitalist over the past 25 years is

about 40 percent larger than it is in the average country that became less capitalist over this

25
period. Countries that became more capitalist improved more on education than countries that

became less capitalist.

The takeaway from Figures 6-9 is straightforward. Unless one prefers poverty, premature

death, ignorance, and political oppression to wealth, longevity, knowledge, and freedom, less

capitalism deserve no cheers.

5 Two Cheers for Capitalism at Odds with the Evidence Again,

Or, there’s No Lorenz Curve for Capitalism and Development

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 our job as social scientists appear complex and sophisticated. Its major

shortcoming is that the data completely contradict it and instead support a straightforward,

“extreme,” three cheers for capitalism view whereby the more capitalist a country is, the better

its development is, and the less capitalist it is, the worse its development is. In other words,

maximal capitalism begets maximal development.

This variety of the two cheers perspective posits something like a Lorenz curve for

capitalism and development. On the vertical axis is development. On the horizontal axis is

economic freedom. Up to some unspecified point, development is increasing in capitalism. Past

that point, however, more capitalism lowers economic development. This is the “excesses” of

greed at work, or . . . Actually, exactly how more capitalism is supposed to retard development

26
past some point isn’t often well articulated.10 Nevertheless, markets are seen as potentially good

provided they’re tamed with healthy dollops of socialism to prevent their alleged downside from

growing in disproportion to their limited upside.

What do the data say? Let’s have a look. Below I consider the same four “core”

development indicators I consider above. The difference is that now I examine the relationship

between capitalism and these indicators in cross section. I use the year 1995 because this is the

most recent year for which my data are available that falls within the quarter-century period

considered above. Things look similar for other years. The skeptical reader is invited to collect

the data and create their own scatter diagrams.

10
The “arguments” I’ve heard typically fall into two camps. The first is a kind of moral argument about the evils of
“greed’ or the erosion of community and social capital because of impersonal exchange. The second is an argument
about special interest groups. As people become wealthier they have more time to lobby and the payoff to rent-
seeking is higher. I don’t follow the first argument. And the second seems to misunderstand why capitalism is.
Capitalism is a political-economic system based on private property. Government’s scope for benefiting one group
at the expense of others is minimized because government’s ability to do anything is minimized. So, it’s unclear
how capitalism can undermine development using this logic. If government’s power grows such that the payoff of
rent-seeking increases, rent-seeking will of course increase. But this wouldn’t be a movement toward capitalism. It
would be a movement away from it.

27
 Figure 10. More Capitalism = More Income
45000
GDP per capita PPP, 1995 (constant 2000 international $)

40000

35000

30000

25000

20000

15000

10000

5000

0
3 4 5 6 7 8 9 10
Economic Freedom, 1995

Source: Fraser Institute – Economic Freedom of the World (2008) and Shleifer (2009) from WDI (2006).

Figure 10 considers the relationship between capitalism and average income. There’s no

Lorenz-type curve here. The more economically free a country is, the richer it is. The less

economically free it is, the poorer it is. The fit is remarkably tight. And, contrary to the idea that

at very high levels of economic freedom development begins to suffer, the data depict a positive

exponential relationship: at increasingly high levels of capitalism, the associated increases in

income become larger. Capitalism certainly deserves of all three cheers here.

28
 Figure 11. More Capitalism = Longer Life Expectancy
90

80
Life Expectancy at Birth. 1995 (total years)

70

60

50

40

30

20
3 4 5 6 7 8 9 10
Economic Freedom, 1995

Source: Fraser Institute – Economic Freedom of the World (2008) and Shleifer (2009) from WDI (2006).

What about the relationship between capitalism and life expectancy? Surely there’s a

Lorenz curve-type relationship here, right? Wrong. The relationship is tight, positive, and linear.

Citizens in more capitalist countries live longer. Citizens in less capitalist countries die sooner.

Three cheers for capitalism are again order. The two cheers view is again unwarranted.

29
 Figure 12. More Capitalism = More Education
14

12

10
Years of Schooling, 1995

0
3 4 5 6 7 8 9 10
Economic Freedom, 1995

Source: Fraser Institute – Economic Freedom of the World (2008) and Shleifer (2009) from Barro and Lee (2000).

Figure 12 examines the relationship between capitalism and education. You shouldn’t be

surprised at this point to see that the relationship is tight, positive, and linear. There’s no

evidence for a Lorenz-curve relationship here. And there’s nothing ambiguous about this. The

popularity of the two cheers view is remarkable given how obviously wrong it is across the

board. Capitalism once again merits three cheers.

30
 Figure 13. More Capitalism = More Democracy
10

7
Democracy, 1995

0
3 4 5 6 7 8 9 10
Economic Freedom, 1995

Source: Fraser Institute – Economic Freedom of the World (2008) and Shleifer (2009) from Polity IV Database

(2000).

Figure 13 depicts our final relationship of interest, that between capitalism and

democracy. The figure isn’t as pretty as figures 10-12 because the Polity IV Project’s democracy

data are discrete. Further, the relationship isn’t as tight as the relationship between capitalism and

wealth, health, and education. But it’s still positive, and it’s still linear. More capitalist countries

tend to be more democratic than less democratic countries.11 Unlike the cases considered above,

here there are some notable exceptions. Singapore, for example, has a low democracy score but a

11
In other words, Hayek (1944) and Friedman (1962) were basically right. Hayek pointed out that only capitalism is
compatible with democracy in the long run because socialist planning requires autocratic political leaders who can
ensure that citizens don’t frustrate their economic planning. Friedman argued that although capitalist autocracies are
possible, socialist democracies are not. See also, Mandelbaum (2007).

31
high economic freedom score. It’s located in the lower-right quadrant of Figure 13, essentially

alone as a “free-market autocracy” in the world. On the other side, you’ve got a few countries

like Ukraine that score well on the democracy index but have very low economic freedom. These

countries are in the upper-left quadrant of Figure 13. The overarching relationship depicted in

this Figure is clearly positive, however. And there’s again no evidence at all for a Lorenz curve

relationship. On average, as a country becomes more capitalist, it becomes more democratic at

all levels of economic freedom. Capitalism gets three cheers. The two cheers for capitalism view

turns out to again be nonsense.

6 Concluding Remarks

When people say things like, “It’s still unclear what effect the spread of capitalism throughout

the world has had on humanity,” they’re wrong. Similarly, when people say that “markets are

important; but we should be restrained in our endorsement of capitalism, as it has harmed as well

as helped humanity,” they’re also wrong. Global capitalism’s effect is clear to the point of

smacking one in the face: it has made the world unequivocally better off.

Claims that, “If capitalism becomes excessive, it becomes a social liability instead of an

engine for progress,” are wrong too. There’s no evidence for a Lorenz-type curve that maps

capitalism and development. There is considerable evidence that capitalism’s relationship to

development is linear. The more capitalist a country becomes, the better it fares in terms of

development and vice versa.

This paper will conclude with some amateur psychological and sociological theorizing

about the sources of academics’ tendency to pretend the evidence presented above either doesn’t

exist or is somehow ambiguous. Given the unrelenting clarity of the evidence regarding

32
capitalism’s effect on global development, why do so many people, especially academics, refuse

to give capitalism more than two cheers? I suggest three hypotheses, which aren’t mutually

exclusive.

1. Some academics intrinsically value “moderation” in social-scientific claims. Many academic

questions are thorny. There are many facets and nuances to them. Sweeping, categorical

statements not only fail to capture these facets and nuances, but appear careless and suggest

superficiality. For many social-scientific questions the evidence is murky and caution must be

exercised in making claims. Because of this, academics are trained to make modest, qualified

claims to the point that when the evidence is in fact clear and supports categorical, unqualified

claims, they can’t bring themselves to make them. The mealy-mouthed approach crucial to living

in academia is so ingrained in them that it actually feels unscholarly to them to go with the

evidence when the evidence supports sweeping statements. It’s as if mealy-mouthism has

become part these academics’ utility functions; or rather, mealy-mouthism has become

inextricably bound up with the idea of what it means to be a scholar, which occupies a prominent

position in their utility functions.

2. Closely related, some academics won’t make sweeping, categorical statements, such as the

claim that capitalism has clearly improved development across the globe, even when the

evidence supports them, because they fear being branded as “dogmatic” or “ideological” by their

colleagues. The culture of mealy-mouthism, discussed above, together with the presence of some

individuals who rather wish the evidence didn’t so clearly support the desirability of capitalism

33
for development, discussed below, socially pressures these academics to moderate their claims in

favor of capitalism, even when they believe more “extreme” claims are supported.

3. Some academics have still haven’t gotten over the fact that socialism failed miserably and

capitalism proved to be the incredible generator of development its defenders claimed it was. It’s

untenable to hold the “hard-core” socialist position in the wake of the Soviet Union’s collapse.

But this doesn’t mean one has to fully embrace capitalism. The resulting position is a reluctant

and perfunctory admission of the necessity of markets, quickly followed with commentary

pointing to the alleged downsides of markets and claims about the supposedly ambiguous

empirical evidence on capitalism’s effect on development.

These aren’t the only possible reasons for the popularity of the two cheers for capitalism

position, of course. They just happen to suggest themselves most readily to me given my

personal experiences. In his book Pyramids of Sacrifice, Peter Berger urged social scientists to

approach the capitalist and socialist models of development even-handedly and articulated an

important form of the two cheers for capitalism view. Berger wrote this book in 1974, 15 years

before socialism crumbled. At the time, his two cheers for capitalism were in fact one, or even

two, cheers more than many of this contemporaries were willing to offer, especially in the field

of sociology. By 1986 Berger had abandoned the two cheers position. However, many others did

not. Today, the two cheers view has returned with a vengeance. This situation makes it more

important than ever to examine the data, which clearly evidence that it’s time to abandon this

position. Capitalism isn’t just the “safer bet” for development, as Berger concluded 12 years after

34
writing Pyramids of Sacrifice. It’s the only bet that makes any sense at all. Capitalism has earned

all three of our cheers. It’s time that we give them.

35
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