A few days ago, Stacey Abrams, the Democratic candidate for governor of Georgia, claimed in a speech on healthcare that she was “sick” of hearing the free market is the solution. Abrams concluded her speech by stating “the problem with the free market is the free market needs to make a profit and there is no profit in doing the right thing.” [a]
Since Abrams discussed healthcare, we want to demonstrate why her grievances about American healthcare cannot legitimately be blamed on the free market, while focusing on a more overall case for the superiority of free market capitalism over the left-wing progressivism espoused by politicians like Abrams.
First, Abrams complains that the free market doesn’t provide medical products and services for free. Tellingly, she seems to understand that that’s not how markets work, but switches to saying it “SHOULD be run differently,” ie, provided for free. However, those who design and invent medical products and services should not be forced to give away the fruits of their labor for free. Saying otherwise, as Abrams does, is essentially theft.
Undoubtedly, Abrams’ reasoning behind this, like most politicians who share similar sentiments is borne out of concern over the rising costs of healthcare. However, the free market cannot be blamed for the high rise in healthcare costs.
When discussing healthcare, the primary complaint generally raised about US healthcare is its cost. Some of this is explainable – Americans pay more partially because they have better access to lifesaving drugs for a host of various diseases and conditions. However, high healthcare costs are also largely attributable to government intervention, which undercuts Abrams’ blame of the free market.
To begin, let’s start with a little history. [b] In 1965, President Johnson signed Medicare and Medicaid into law, which took effect in 1966. Looking at inflation trends, one notices that this also happens to be when medical costs started increasing significantly, in fact higher than general CPI. Economic laws explain why: put simply, there was an expansion of demand WITHOUT an equal expansion in supply.
As the economist Milton Friedman notes, there are essentially three stages of the rise in healthcare costs. One, after the birth of Blue Cross and Blue Shield, the precursors to modern health insurance, Friedman noted that from 1929-1940, cost per patient day was indeed rising, but only MODESTLY. This wasn’t alarming, as the average of all commodities were also rising modestly, including wages.
Two, after the introduction of employer sponsored health insurance (brought about by employers after the government instituted wage ceilings during World War II), Friedman then observed a threefold increase in cost of per patient day.”
Three, the introduction of Medicare and Medicaid. After these programs were implemented, cost per patient day multiple a FURTHER EIGHTFOLD.”
The point? If Stacey Abrams wants to fight high healthcare costs, she could start by correctly identifying one of the primary problems – excessive government intervention, not the system of free market capitalism she seems to despise.
Moving on to Abrams’ statement that “the problem with the free market is the free market needs to make a profit and there is no profit in doing the right thing,” it’s true that the word "capitalism," or its cousin "free market," evokes many strong emotions. Some claim that capitalism is oppressive, and, among other things, enslaves the populace to greedy employers who deliberately keep them poor through low wages.
However, the critics, including Stacey Abrams, have it wrong, for reasons which we’ll explain in detail. Nations that rank higher in terms of economic freedom have higher rates of economic growth, lower rates of poverty, higher life expectancy, increased wealth, and more.
From even a cursory glance, the superiority of capitalistic societies over socialist or Marxist ones becomes apparent. As Steven Pinker, Harvard psychologist, often asks, would you rather live in South Korea, a wealthy prosperous nation with a market economy which has seen steady economic growth, poverty reduction and is the 11th largest economy overall [c] or North Korea, a Marxist dictatorship where 40% of the population lives below the poverty line, food shortages are widespread, the infant mortality rate is 33%, and many other horrendous conditions? [d] Would you rather live in capitalist Chile or socialist Venezuela?
Before going beyond the cursory glance, we need to first define economic freedom. For that, we will turn to one of the premier free-market think tanks, the Canadian-based Fraser Institute.
The basics of economic freedom are as follows: [e]
1) Size of Government: As government spending, taxation, and the size of government-controlled enterprises increase, government decision-making is substituted for individual choice and economic freedom is reduced.
2) Legal System and Property Rights: Protection of persons and their rightfully acquired property is a central element of both economic freedom and civil society. Indeed, it is the most important function of government.
3) Sound Money: Inflation erodes the value of rightfully earned wages and savings. Sound money is thus essential to protect property rights. When inflation is not only high but also volatile, it becomes difficult for individuals to plan for the future and thus use economic freedom effectively.
4) Freedom to Trade Internationally: Freedom to exchange—in its broadest sense, buying, selling, making contracts, and so on—is essential to economic freedom, which is reduced when freedom to exchange does not include businesses and individuals in other nations.
5) Regulation: Governments not only use a number of tools to limit the right to exchange internationally, they may also develop onerous regulations that limit the right to exchange, gain credit, hire or work for whom you wish, or freely operate your business.
Now that we have an operational definition, let’s examine the evidence for capitalism, using the categories outlined earlier.
A. LIFE EXPECTANCY
1) According to the Fraser Institute, countries in the top quartile of economic freedom have a life expectancy of 79.5 years vs. 64.4 years in the bottom quartile. [e] To put this plainly, life expectancy is HIGHER in the MORE/MOST economically free nations, and LOWER in the LEAST economically free nations. This is important for two reasons: 1) it refutes the far-left critics of capitalism who allege that capitalism is responsible for more deaths than Marxism and 2) contrary to socialist assertions that capitalism doesn’t promote a moral economy, the fact is that socialism fails to provide a moral economy that ensures human flourishing.
2) Using a regression analysis, economist Mark J. Perry with AEI also notes a positive correlation between life expectancy and economic freedom. Specifically, Perry states that for every 10 point INCREASE in economic freedom, life expectancy INCREASES by 4.6 years. [f]
3) Research in the Journal of Public Health finds that economic freedom extends life expectancy in developing countries. [g]
4) Stroup (2007) finds that life expectancy is more favorable in countries with strong private property rights, a central component of economic freedom. [h]
1) In Fraser’s analysis, the MORE economic freedom a nation has, the HIGHER their income per capita. Fraser arrived at the data results by comparing World Bank development indicators with economic freedom levels. [e]
2) Specifically, the MOST economically free countries had an income per capita of $40,376. The LEAST economically free nations had a per capita income of just $5,649. [e]
3) Compton et al (2013) finds that changes in economic freedom positively affect after-tax income in the United States. In nearly all cases, economic freedom made Americans RICHER, and no evidence that it made anyone poorer. [i]
4) A low tax burden, another component of economic freedom, is also relevant to consider here. Furceri and Karras (2012) found that for every 1% increase in the total tax rate (measures as the total tax ratio to GDP) by 1% of GDP has a long-run effect on real GDP per capita of –0.5% to –1%.” Results held even after accounting for endogeneity. [j]
1) When comparing economic freedom data with data on economic growth, Fraser shows that the more economically free a country is, the more rapidly economic growth occurs. [e]
2) Research by Faria and Montesinos (2009) finds a clear causation of economic growth due to economic freedom, even after controlling for endogeneity. [k]
3) Research by the World Bank shows that as countries embraced major movement towards free trade, they experienced accelerated rates of economic growth. [l]
4) Wacziarg and Welch (2008), using quantitative analysis and a thorough review of country-specific case studies of economic liberalizations, found that countries who economically liberalized (ie, became freer) “experienced average annual growth rates that were about 1.5 percentage points higher than before liberalization.” [m]
1) Fraser’s comparisons of economic freedom rankings with extreme and moderate poverty rates show that in the LEAST economically free nations, extreme poverty is at 31.71%. Moderate poverty averages 51.74%. By contrast, the third quartile shows extreme poverty at 14.05% average. Moderate poverty average is 28.82%. The second quartile shows 5.88% extreme poverty, 14.25% moderate poverty. The top quartile, that is the MOST economically free nations, had the LOWEST extreme and moderate poverty rates, at 1.48% and 4.31%, respectively. [e]
2) Between 1990 and 2015, the global rate of extreme poverty was cut in HALF. According to the Economist magazine, while there are a myriad of reasons for this dramatic decline of extreme poverty, the biggest reason is free-market capitalism. [n]
3) According to a study by Hasan et al (2003), “The principal empirical results that emerge from this exercise indicate that important indicators of economic freedom such as openness to trade and small size of the government are robustly associated with poverty reduction.” Further, “civil liberties that encompass various types of important economic freedom such as poverty [property] rights, rule of law, etc., also contribute significantly to poverty reduction.” [o]
At this point, it’s important to insert some clarification. As this article makes an unabashed defense of free market capitalism, some may take this to mean we’re endorsing a state of practically anarcho-capitalism. To be clear, we do not endorse anarcho-capitalism or the complete abolition of a social safety net.
In conclusion, the superiority of capitalistic societies over socialistic/Marxist ones is clear. It turns out that “profit motive” that Abrams criticizes actually brings about a lot of good in the world. If politicians like Stacey Abrams truly believe in promoting human flourishing and development, the evidence is clear that free market capitalism is the way. Because clearly, enabling humanity to enjoy longer lives with increased wealth, while having more of a chance of living outside of poverty IS about doing the right thing. Stacey Abrams should take note.