How Capitalism Reduces Poverty And Creates Wealth

Authored by James T. Moodey via American Thinker,

The word capitalism was coined in the 1700s. The definition was vague. It generally meant "private property traded freely" or "free markets." However, most non-totalitarian countries had free markets, and these countries in Europe and elsewhere were not particularly wealthy. Their rural people were paupers living off the land, even in England, France, and the U.S. at our founding.

We generally regard capitalism as creating wealth, but free markets are not what created the enormous wealth that occurred in the United States. I knew that and studied our economic history to find out: If it was not free markets, what was it? What specifically were the mechanics of "our capitalism" that created such wealth?

I found the answer. However, I also learned that capitalism cannot be taught without properly defining wealth.

Wealth of a nation is its amount of usable goods. I use the term usable goods to exclude paintings and other speculative items. Poverty is a lack of usable goods, such as clothes or food. A large supply of usable goods brings prices down and reduces poverty. We became wealthy because we produced an enormous amount of usable goods. But how did that happen?

Usable goods are created by factories. It is not the amount we pay factory workers that is important; it is the millions of hammers, shoes, and vehicles they produce that create wealth. Farmers and utility workers can be included with factory workers who produce usable goods for millions of people.

Cyrus McCormick's reaper would supply a large amount of food, but sales were difficult and slow. The reaper would break down on farms far away. McCormick had difficulty traversing the country making repairs and sales. He solved these problems by inventing a unique idea of setting up distributors. He shared significant profit with the distributors. They stocked the product locally, performed repairs, and made sales. Sales grew rapidly, and McCormick Reapers were supplied throughout the country. The United States became an exporter of food.

Here is the key to capitalism's success: When farmers tried to buy direct from McCormick, he refused and made them buy from their respective distributor.

Other manufactures, of home goods, saw McCormick's success and not only set up distributors, but added another discount to include retailers. Again, customers were sent back to the retailers. Retailing became a very profitable business. In the 1850s, general stores appeared in nearly every town.

It was not greed that made capitalism successful; it was nearly the opposite. It was the sharing of profits with all who sold the product.

Prior to this, women made their own soap, household goods, and clothes and tended their own crops. Men planted crops, hand-forged steel tools, and built what they needed. Rather than make their own goods, people began to buy them at a local store. Rural couples were unshackled from the centuries-old life of paupers.

Rural couples had been purchasing limited goods from peddlers who occasionally passed through their valley. Or they bought goods from catalogues. Returns of goods was an enormous problem, and single sales limited mass production at the factories, which kept prices high.

When couples found they could buy any goods they wanted at a general store, demand for home goods exploded. Prices for household goods and farm equipment fell due to the resulting mass production. Farm families soon found buyers for their excess farm produce, and those profits were spent on fast-declining prices of home goods. Men could afford farm equipment, and women bought dresses rather than made them. Rural people and the merchants became wealthy. America soon became known as the "land of opportunity."

Incomes were rising while prices steadily fell for decades, up to and including the Roaring Twenties. Introduction of the income tax reversed the trend. In the 1930s, the lowest income tax bracket was raised to 24 percent and the highest income bracket to 94 percent.

Capitalism is not simply free markets. We are not free to bargain for the price of milk in a store. We are not free to bargain with the factory. The epitome of free markets are barter societies in the Middle East. They are free to bargain with the retailer and the factory. High-volume factories cannot survive in a barter society, and those societies are mired in poverty as a result.

Capitalism is a self-perpetuating economic system designed to increase sales using a structure of profits for all who sell the product, and those profits are protected by the factories. That is what created millions of usable goods, reduced prices, reduced poverty, and created our great wealth.