The Path to Prosperity - IEA London Webinar

Sarayu Bacchu

According to Daniel Lacalle, the past few years have been one of the very best for humanity across the globe. And frankly it is true, despite the arguably relentless focus of news media on bad news, a whole lot of good has occurred in these past few years and decades! Massive reductions in extreme poverty and large gains in the education and empowerment of women have been some of the success stories across the world. In recent years, another 325,000 people got their first access to electricity. Each day, more than 200,000 got piped water for the first time. And some 650,000 went online for the first time, every single day.

The media has been fixated on the seemingly unsolvable problem of inequality, and perhaps for good reason. Whilst we have taken several steps in the path of progress, there is undoubtedly still miles to travel before we reach the end goal. Thus, the questions arise - why has it taken so long for progress to occur? Why do we still have large-scale inequality today? How do we combat this in the most effective way? Lacalle’s answer to these questions is the fact that measures to combat poverty and inequality have so far mainly been limited to interventionist measures. Large scale state action has not provided the benefits promised, and thus newer, more innovative solutions need to be proposed.

In his book, Lacalle elaborates further on inequality, and how there are two main types. The first is ‘mimic inequality’ – positive inequality. He describes it as “Where you want to do your best, and make it seem to others that ‘you’ve made it’ ”. In other words, when inequality occurs due to being surrounded by peers and colleagues seemingly doing better than you. Also known as the ‘American Dream’ and the reason why millions immigrate to the United States – for equality of opportunity not equality in general. He argues this type of inequality is beneficial as it spurs innovation and progress. The other type of inequality is ‘privileged inequality’ – negative inequality. This is the inequality caused by cronyism and corruption.

To decrease privileged inequality and increase mimic inequality, the solution is social capitalism – an adjustment of capitalism to the challenges of modern society. Capitalism is constantly evolving and unlike socialism is progressive. Social capitalism must focus of prosperity and progress as the goal, not equality. Lacalle says, as evidenced by history, “Equality […] is a consequence of sustainable prosperity”. Social capitalism advocates for more freedom to economic agents, and curbing of excess power to governments. A strong state is needed, but institutions should be independent and civil society granted powers to limit interventionist desires of some politicians.  

To sum up, free markets benefit the majority and whereas governments can only equalise down, social capitalism may be able to lift society up.