Capitalism and Income Growth

Income Growth Adjusted for Inflation

The above figure demonstrates the consistent income growth the US has experienced over the last 200 years and economically underlines the success of capitalism.  Further, India, one the ‘BRIC’ countries, has experienced rapid income growth from the 1990’s driven by economic reform and market freedom, and so may be thought of as an emerging capitalist power.  Yet Sweden, a more socialist country, has also experienced consistent income growth and even closed the gap with the US in the 20^th century, perhaps due to its lack of involvement in military conflicts. 

China is an interesting case.  Until the mid-20^th century it experienced flat income growth, but after the Communist party took control and Mao’s ‘Cultural Revolution’ was implemented real incomes plummeted.  However, in the latter half of the 1970’s economic liberalization occurred leading to surging income growth (6.3% annual increase in income) under a state capitalist regime.  Today, whilst the economy continues to grow rapidly, there has been increasing discontent at government corruption and suggestions that the economy is beginning to slow.

The plots for Mexico and Chile should be considered with more caution.  Both countries have experienced consistent income growth but they are ranked number 1 and 2 respectively by the OECD (amongst OECD countries) for economic disparity (full figures here).  In the case of Chile, income growth has been accelerated over the last 2 decades perhaps due to a move toward greater economic and social freedom (including market reforms).  This move came about in the in latter half of the 1980's fueled by economic collapse in 1982 and subsequent civil unrest. 

Notably, a move toward capitalism seems to arise from severe social, economic or political distress.  This has been the case for countries such as India, Chile and even China as discussed above.  Interestingly, this seems to liberate innovation and entrepreneurship, and so fosters rampant growth.  Yet, mature capitalist democracies currently face a growth crisis which gives rise to an important question – is capitalism sustainable?