The poverty of anti-capitalism

By Tunde Obadina

It is an irony that progressives who claim to advocate for poor people in developing economies often prescribe an ideology that is detrimental to the interests of those they supposedly support. They rant about the evils of capitalism and urge poor-nation governments to restrict foreign capital and curb the activities of multinationals. They contend that the pursuit of profit, especially by foreigners, invariably results in cruel exploitation of the weak, as happened during the eras of slave trade and colonial rule that preceded modern-day globalisation.

This view of capitalism as a cause of poverty is nonsense. The reality is that over the past 250 years, trade and the pursuit of profit have lifted billions of people out of extreme poverty. To understand why we need to first be clear on what poverty entails. Wikipedia defines it as “the state of one who lacks a certain amount of material possessions or money.” This description is fine as far as it goes. But there is more to deprivation than being broke. A person from a wealthy family who for religious and other ideological reasons chooses to live with minimum possession of material goods is not poor, at least not in the sense the term is commonly used in relation to people in underdeveloped countries.

A more appropriate definition is provided by the United Nations which described poverty as “the inability of getting choices and opportunities…and … lack of basic capacity to participate effectively in society”. Individuals are poor because they lack options to access or create wealth. A peasant living off a tiny plot of land that cannot yield more than subsistence revenue is poor if he has no other source of livelihood. It is the lack of means to acquire higher income that traps people in poverty.

From the standpoint of the poor farmer the capitalist who offers to buy his land or to hire his labour for payments greater than his current income is a bringer of opportunity. In offering employment the capitalist has placed value on the farmer’s labour which previously did not exist. He presents him with choice.

Painting employers simply as exploiters is sheer absurdity. Each party to an employment transaction has a choice – they can say yes or no. The fact that in developing countries large numbers of people queue for low paying jobs reflect the dearth of choice and opportunity available in these places where millions toil for very little compensation. For a person earning $1 a day the prospect of getting $2 a day for the same amount of work is an improvement.

Capitalism is an economic system in which the factors of production are wholly or largely privately owned and operated for gain. It is a system of production through investment and the operation of markets. Owners of assets engage in free exchange, with outcomes of mutual benefit. As crude as it may sound to some, human labour is an economic asset which combined with capital creates goods and services. When person A is employed by person B to perform an economic task, what transpires is that A exchanges the hire of his labour for monetary compensation from B. He does this to gain the difference between any costs incurred in delivering his service and the remuneration paid him. In other words, he profits from hiring his labour – if he didn’t, he would not voluntarily make the exchange. By the same token the employer hires labour to gain the difference between the wage he pays and the market value of the item produced by the labour.

In negotiating the price at which a transaction is executed both parties seek to advance their own interest. In the end they may reach a price acceptable to both. If not, the exchange does not happen and they go their separate ways. It is important to bear in mind that there is no intrinsic value to the labour of any person. Their economic worth is determined by how much others value the products of their labour. Workers are paid according to the worth of their input into the productive process. A skilled footballer in Nigeria may earn only hundreds of dollars per match, while with equal amount of ability the same player may fetch thousands of dollars in the UK premier league.

Economic underdevelopment reflects the fact that economies at early stages of development have fewer markets and labour prices tend to be lower than exist in advanced economies. But this has not been a static situation. Markets have evolved and deepened in Africa, compared with conditions prior to the emergence of capitalism. Two hundred years ago a subsistence farmer was utterly trapped in his economic condition. He had no prospect of selling his land or hiring out labour. Today, millions of Africans make their living from a wide range of occupations that were inconceivable a century ago. Markets have evolved in so many different spheres of human activity that in the proportion of people involved basic cultivation of food is fast declining.

Sustainable jobs are created through market operations. Or more specifically, they arise through production of marketable goods and services. The employment revolution in East Asia arose from individuals and companies combining capital and labour to produce goods sold for profit, mainly in the wealthy western markets. It was pursuit of profit through production that gave rise the so-called Asian economic miracle. Without production, the more varied and higher paying jobs that lifted millions of out of poverty would not have happened.

Yes, higher paying jobs. It is a common mistake to view the employment opportunities provided by export-orientated factories in developing countries as low-paying. Certainly, levels of pay are substantially lower than those that exist in advanced economies, which is what gave Asian producers their competitive advantage over domestic manufacturers in the importing countries. But the wages and working conditions in emerging economies were improvements for workers who previously earned even less money scraping a living off low yielding land. Capitalism brought higher wages to workers who entered productive markets, even if the pay conditions were abysmal relative to compensations in developed economies. Indeed it was the juxtaposition of higher wages in Asia paid to produce low-cost goods destined for western markets that was the crucial basis of East Asia’s industrial revolution. Globalisation was effective because it enabled poor people in less developed nations to trade profitably with rich consumers in advanced economies.

It is a mistake to think that governments in developing countries can create enough descent jobs to meet the demands of their citizens for higher earnings. Unlike profit-making companies, whose labour costs are eventually paid for by consumers, when governments employ workers to produce things that no-one is willing to pay for, it is taxpayers who foot the bill. As only a small proportion of the workforce pay tax funds available to government to retain subsidized employees are limited.

Another misconception is the idea, often propagated by opponents of capitalism, that capitalists are super-rich people who make up a tiny and exclusive segment of society. The presentation of the typical capitalist as the CEO earning 400 times the wage of the lowest paid worker or the investor banking millions of dollars from dividend payouts is a misrepresentation of capitalism. Sure, there are capitalists who are multimillionaires and billionaires, but most are not. Some make profit levels that are little above the minimum wage.

A person who buys a wheel barrow to set up a business to collect rubbish for a fee is a capitalist, even though at the end of his working day his profit is pittance. If this rubbish collector decides to hire a worker to help expand his operation, he becomes an employer. In many respects the nature and dynamics of this small rubbish collection business is not fundamentally different from the operation of a multimillion dollar refuge disposal business.

Capitalism is not simply about the activities of rich capital owners, it is about voluntary investment and exchange in the production and sale of goods and services, at all income levels of society. It is a system in which each individual is able to use what belongs to him, including his labour, to pursue his desires to the best of his ability, without interference from the state or any other authority except to protect the right of others to the same freedom.

It is a fact that much of the economic progress in Africa and other developing regions in recent decades has been the result of grassroots capitalism, individuals investing in production for profit as rubbish collectors, shopkeepers, barbers, garment makers, private school owners, telecoms equipment providers, etc. This is how underdeveloped economies will develop, if only the state gets out of the way of economic activities that do not impinge on the property rights and safety of others or endanger the environment.