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The Free Market: Lifting All Boats

Professor Mathews teaches economics at Coastal Georgia Community College.

In the free market, the rich get richer while the poor get poorer. America’s market economy might create wealth for some, but it certainly doesn’t benefit the poor. How often we read or hear such statements. What they assert is familiar. But is it true? Does the free market really leave the poor behind?

A good way to determine how the poor fare in the free market is to examine how the standard of living of the poor has changed over time. One factor to consider is real income. Between 1900 and 1990, the growth in real (inflation-adjusted) income—generated by the free market—was enormous: Real income in 1990 was 15 times greater than it was in 1900. Real per capita income was over four and one-half times greater in 1990 than in 1900.

Another important measure of income is real money earnings from employment. Real earnings were almost four times greater in 1990 than in 1900. But statistics on real earnings mask significant changes in work hours and the way workers are compensated. In 1900 nonfarm workers toiled 60 hours a week; by 1990 they worked 39.3 hours a week, a decrease of over one-third. Moreover, in 1900 workers received almost all of their compensation in wages; by 1990 workers received nonwage benefits accounting for almost 40 percent of their total compensation. That means an hour of work in 1990 paid well over eight times what it did in 1900.

Still, one might argue that real per capita income and money earnings tell us little about the status of the poor. Did the poor share in the economy’s growth?

Since real income in the United States has increased, we know that the real income of the poor has increased if the share of income received by the poor is stable or increasing. In 1900, the poorest 20 percent of income earners received 4.8 percent of the nation’s income; in 1990, they collected 4.6 percent. Thus, the real incomes of the poor have risen significantly this century.

Another way of determining whether the poor have benefited from income growth is to look at changes in the percentage of families classified as living in poverty over time. By our current definition of poverty, 56 percent of families in the United States were poor in 1900. By 1947, even after the economic shocks of the Great Depression and World War II, the percentage of families in poverty had been reduced by more than half, to 27 percent. By 1967, the percentage was halved again, to 13 percent. Notably, the decrease in poverty between 1900 and 1967 occurred before the advent of the greatly expanded welfare state. In other words, it was the free market, not government welfare, that caused the poverty rate to fall from 56 percent in 1900 to 13 percent in 1967.

What has happened to real incomes and poverty rates demonstrates that the free market does not leave the poor behind. Yet another measure of the standard of living is the level of goods and services consumed. Real per person spending on consumer goods rose dramatically between 1900 and 1990 (see table 1).

These extraordinary gains were shared by the poor. Consider some conveniences that we consider to be essential today (see table 2).

Health is another important component of the standard of living. Life expectancy at birth was 47.3 years in 1900, and 75.4 years in 1990. Other health statistics are even more revealing. Deaths from once-common diseases have dropped dramatically since 1900. It was not primarily medical advances, but improved water and sewer systems and housing, that lowered mortality rates—and helped the poor far more than the rich (see table 3).

Of course, a critic might concede the dramatic nature of these changes, but counter that these improvements took 90 years to occur. It would be helpful, then, to look at a shorter period, during which time the living standards of the poor, according to common knowledge, worsened.

Under the official definition of poverty, a household of four, for example, is classified as poor if its annual income is less than $14,400. But, as noted earlier, living standards depend on the goods and services consumed, so a family should be classified as poor on the basis of its level of consumption, not income. University of Texas economist Daniel Slesnick has devised a consumption-based measure of poverty and calculated poverty rates for the years 1949 to 1989. He found that 24 percent of U.S. households were poor in 1959. By 1989, only a generation later, the poverty rate was but 2 percent. And Mr. Slesnick’s calculations exclude noncash government benefits such as Medicaid, public housing, and a long list of government-provided community services.

The claim has also been regularly made that the poor have been getting poorer for over a decade. Yet households officially counted as poor are as likely to own a host of major consumer goods as was the general population just two decades ago (see table 4).

But these data indicate something even more striking: the remarkable amount of goods owned by poor families. In the United States today a household which owns a washer, dryer, refrigerator, stove, microwave, color TV, VCR, and car might still be considered poor. The point is, the free market has not only dramatically improved the material well-being of the poor; it has generated so much wealth that it has completely transformed what we consider poverty to be.

What has happened to the living standards of the poor in our predominantly free-market economy shouldn’t surprise us. The soul of the free market is not wealth creation but liberty and private property, and it is liberty and private property which enable entrepreneurs to create more efficient production methods that yield better goods and services. Entrepreneurs were the primary cause of the income growth that we’ve observed, as well as all those new and improved products consumed by everyone. The free market does not leave the poor behind, it makes them, as well as everyone else, richer. Much richer.

Table 1

1900 / 1990 / Percent Change

Food $1,178 / $1,814 / 54

Clothing 272 / 920 / 238

Housing 256 / 1,898 / 641

Water 20 / 87 / 335

Electricity 1 / 265 / 26,400

Health 172 / 1,928 / 1,021

Transport 143 / 1,621 / 1,034

Total $3,266 / $13,051 / 300

Source: Stanley Lebergott, Pursuing Happiness (Princeton University Press, 1993).

Table 2

1900 / 1990

Percent of homes with:

running water 24 / 99+

flush toilets 15 / 99+

electricity 3 / 100

Percent of households owning:

car 0 / 88

refrigerator 0 / 100

television 0 / 98

telephone 5 / 95

Sources: Lebergott, Pursuing Happiness and The Americans: An Economic Record; Statistical Abstract of the U.S., 1994.

Table 3

Death Rates

(per 100,000 population)

1900 / 1990

Tuberculosis 194 / 0.70

Typhoid 31 / 0.05

Diphtheria 40 / 0.05

Whooping cough 12 / 0.05

Measles 13 / 0.05

Influenza, pneumonia 202 / 32.00

Gastritis, colitis 143 / 1.00

Sources: For 1900, U.S. Bureau of the Census, Historical Statistics, Colonial Times to 1970. For 1990, Statistical Abstract of the U.S., 1994.

Table 4

Percent of households with . . . Poor households / All households

1984 / 1994 / 1971

Washing machine 58.2 / 71.7 / 71.3

Clothes dryer 35.6 / 50.2 / 44.5

Dishwasher 13.6 / 19.6 / 18.8

Refrigerator 95.8 / 97.9 / 83.3

Freezer 29.2 / 28.6 / 32.2

Stove 95.2 / 97.7 / 87.0

Microwave 12.5 /  60.0 / <1.0

Color television 70.3 / 92.5 / 43.3

VCR 3.4 / 59.7 / 0

Personal computer 2.9 / 7.4 / 0

Telephone 71.0 / 76.7 / 93.0

Air conditioner 42.5 / 49.6 / 31.8

One or more cars 64.5 / 71.8 / 79.5

Source: Federal Reserve Bank of Dallas, 1995 Annual Report, p. 22. There’s More to Government Than You Think

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