Introduction and Lesson Theme:
Throughout history, the road out of poverty has been built by economic growth, and the process continues today. In evaluating whether capitalism is good for the poor, therefore, the question to be answered is whether the institutions that characterize capitalist economies are effective in promoting economic growth. The evidence supplied by a survey of the world's wealthy nations suggests that yes, capitalism promotes economic growth. The developed economies of the world promote economic growth by incorporating incentives that encourage production, exchange, and creativity. These economies operate through capitalist institutions: They establish reliable political systems that ensure the rule of law; they secure property rights; and they open markets to competition.
As the National Content Standards in Economics remind us (see standard, 15), the economic growth that raises standards of living results from investment, the foregoing of current consumption in anticipation of future benefit. Investment is risky, and the importance of clearly defined property rights, secured by the rule of law, in reducing risk and encouraging investment cannot be overstated. Of the capitalist institutions that offer opportunities for the poor to ascend the economic ladder, secure property rights is one of the most fundamental. Indeed, Hernando de Soto, Peruvian writer and statesman, contends that in developing countries, the lack of secure property rights condemns the world’s poor to a nightmare existence in which hard work brings only more of the same. He reminds us that commonplace features of ownership that we may even regard as trivial, are, in their absence, matters of overwhelming significance to the poor.
Imagine a country where nobody can identify who owns what, addresses cannot be easily verified, people cannot be made to pay their debts, resources cannot conveniently be turned into money, ownership cannot be divided into shares, descriptions of assets are not standardized and cannot be easily compared, and the rules that govern property vary from neighborhood to neighborhood or even from street to street. You have just put yourself into the life of a developing country. . . . (De Soto 15)
In such an atmosphere, investment shrivels, and the probability of increasing output dwindles. In this lesson, we will begin our examination of capitalist institutions by focusing on how property rights affect the ability of the poor to allocate their labor and how property rights shape incentives for investments in human and physical capital. Case studies from India and Latin America illustrate how policies that target institutions may be more successful in reducing poverty than policies that target people.