Lifting People Out of Poverty Through the Free Market

At Gratefully Helena, we love our economic freedom, and there are MANY reasons for that. We love how the free market has allowed women to gain financial independence throughout the world. We love that it allows people to work in professions that give them joy, and how it creates an environment for greater innovation. We love how it generates variety and choices in things like fashion, healthcare, entertainment, food, and more.

But most importantly, we love the free market’s incredible ability to lift people out of poverty.

It’s an observable phenomenon throughout the world – the freer it's market, the more likely a country is to prosper. Certainly, other factors can contribute to a people’s economic situation – war, access to natural resources, and natural disasters come to mind. But the fact remains that free markets can lift people out of poverty like nothing else in the history of humanity.

There are many examples of this – one needs only to look at the economic freedom indexes from the Fraser Institute, The Heritage Foundation, or the Economic Freedom Map from the Fraser Institute to see that countries with more economic freedom also have lower poverty rates than their economically restrictive counterparts.  

These indexes are perhaps the best tool for illustrating that concept. In this article, however, we’ll discuss 3 big reasons why the free market is so darn good at reducing poverty and improving lives. 

What’s so great about taking risks? Well, without risk, we would never get anything new. Bold claim, we know. But think about how we discover new things.  Maybe sometimes someone just stumbles upon an amazing new discovery – a new product, a new material, a new method of doing things. Almost invariably, that discovery will require someone to take a risk in order to make that discovery useful. The new product requires someone to invest in its development and marketing. The new material requires investment (or risk) in order to process it into a usable form. The new method also requires the risk of someone testing it out. These risks are often large, often personal, and they don’t always pay off. So why take them?

The possibility of return on investment if the product/method/material/business succeeds! In a free market, everyone is able to take on whatever risk they are comfortable with. Meaning that someone with a high risk tolerance can take a chance on whatever venture they want, in the hopes that it will pay off and they will be personally better off than when they started. In this system, people with a lower risk tolerance benefit too. They are able to assume the role of consumer and/or employee. You can look forward to reading more about this concept in next week's GH blog post, Entrepreneurs: Why We Need Them.

The less free a market, the less likely people are to take risks. The direct benefits are diluted – under socialism, for example, the risk-taker is not the primary beneficiary of a successful product. The government has the power to distribute the pay-off among the members of society. Why should an individual take on that risk, if the potential for personal gain is lower?

This makes it much more difficult for an individual to advance to a higher economic status. You never see the return on your investment. Not only does this keep the individual stuck in their economic situation, it affects the whole population adversely as well. When an entrepreneur takes a risk and receives a reward in return, not only does their product/service/discovery benefit those who consume it... but, the more economic prosperity they experience, the more people they can hire, employ, and provide for. Those people, in turn, can use their new economic success to continue the cycle of growth, risk-taking, and innovation, benefiting the entire economy.

As we discussed in The Free Market, What is it Really? and How the Free Market Embodies the Golden Rule, the free market runs on mutual benefit. However, another component that makes the free market work is competition. Competition is what makes sure mutual benefit occurs.

If we take the example of the coffee shop from How the Free Market Embodies the Golden Rule, we see that if you’re a customer at my coffee shop, and I don’t serve you in a way that satisfies you, you will stop coming to my coffee shop. Period. With competition at play, chances are, you won’t just stop buying coffee.  No, you’ll find a new coffee shop, and if I want your business back, I will have to change in some way to make my coffee shop better than the one down the street.

I’ve given poor service, so the first thing I need to do is improve my product and service. Simple. Let’s say instead I give great service. My coffee is delicious and hot, my service is prompt and pleasant, but I’m still losing customers to the coffee shop down the street. One way I could improve my business (and thereby your experience as the customer) is through innovation. Maybe I can develop a method to make my coffee more efficiently, meaning I can serve customers faster, and sell more coffee in a day. I can develop an incredible new menu item that my customers can’t resist. I can add a drive through. I can do all sorts of things! All in the hopes of keeping more of my customers, and gaining more. In the meantime, my innovation drives the other coffee shops in town to improve as well. Over time, the coffee shop industry as a whole becomes better. Again, my efforts benefit me, but also my employees, and indirectly, the community at large.

This one is pretty simple. In a free market, whoever has more value to offer will be more successful. The gist of the idea is this: the free market doesn’t care what race, gender, or anything else you are. The market is driven by consumers, all that matters is that you please the consumer.

Certainly, there are a few factors that go into “pleasing the consumer,” and in some cases, a person’s immutable characteristics may come into play. This is why regulation may be necessary in some cases, as we discussed in point one of our Common Free Market Myths. The beauty of the free market is that you have the freedom to pursue whatever job or business venture you want. That doesn’t mean that you won’t face difficulty, and maybe some of that difficulty will even have to do with your race, gender, etc. However, under the free market system, you have the opportunity to make your offer and work even better, in order to overcome the difficulties you may face. Your achievements will be your own, and you are free to reap the benefits of the risks you take, without a governing body taking your earnings and distributing them as they please (or usually keeping them for themselves). This is invaluable to someone living in poverty, because it means that they have the opportunity to pursue whatever job, business, or dream they feel will advance them to a better life. When everyone has this freedom, the whole society’s chances at prosperity increase ten-fold.

Don’t believe us? Check out the World Economic Indexes linked above. There you will find detailed breakdowns of the economic freedom (or lack of freedom) in different countries. You will see just how big of a difference the free market makes in the overall poverty or prosperity of a group of people. Maybe you’ll get just as hyped over the free market as we are!