Capitalism and the Markets Fuel Economic Growth

Jan.29.09 | About: SPDR S&P (SPY)

The chart above (click to enlarge) shows annual real GDP per capita (in 2004 dollars) from 1800 to 2008 (data from Global Financial Data, paid subscription required). Between 1800 and 1904, real GDP per capita grew in the U.S. at 1.5% per year, a sustained, positive growth rate in real output over an entire century that was likely historically unprecedented until the 19th Century, and even then a phenomenon isolated to only America and Western Europe. The 1.5% annual growth translated into almost a 5 time increase in per capita real GDP between 1800 and 1904, from $1,069 to $5,202.

As impressive as the 1.5% real annual growth was in the 19th Century, the average growth rate in the 20th Century increased by more than a third, to above 2% per year from 1904-2008, an increase in the growth trend clearly observable in the chart above (blue line). Because of the higher growth rate, real GDP increased more than 8 times between 1904 and 2008, from $5,202 in 1904 to $42,675 in 2008.

How much better off are we today because of the acceleration of economic growth from 1.5% per year in the 19th century to 2% in the 20th century? The dashed brown line above tells the story. If annual growth had continued at 1.5%, real GDP per capita today would be only $24,475 (about the level back in 1982); instead it's actually 74% higher at $42,675.

We hear a lot lately about the defects and flaws of the market economy, and the death of capitalism, etc., but as the Adam Smith Institute points out "Capitalism is the only economic system ever to manage a consistent and long lasting rise in the average standard of living." As bad as economic conditions might appear today, the trend in economic growth over the last 200 years, largely as a result of capitalism and markets, suggests that we still have a lot to be thankful for. Capitalism works.