Thursday 20 October 2016 4:38 am

Wanted: A market breakthrough to solve poverty in rich countries

What is the point of a free market system? It’s to lift people out of poverty, giving them a better life, richer in every way. By this test, free markets have been fantastically successful historically.

But rich countries, from the UK and America to those in Europe, have done nothing much for the poor in the past generation. A new breakthrough is necessary.

Breakthrough is necessary politically, because discredited ideas of how to help the poor through centralised means are filling the vacuum. But it is also necessary economically. Only by making the poor richer can the market grow substantially.

Markets always want to grow. The ideas for innovation are there. The entrepreneurs are there. The wall of money is there. But the customers are not prosperous enough.

From feudal times to the mid-nineteenth century, there were two salient economic facts. One: average income levels were inhumanely low, often failing to keep body and soul together. Malnutrition, disease, and untimely death were rampant. Two: there was a huge gulf between the tiny elite at the top, and the rest. Kings, courtiers, bishops, and lords had immense land and power; nearly everyone else had close to nothing.

Joseph Schumpeter, the great economist, once remarked that Queen Elizabeth I (1533-1603) had silk stockings. No working woman had anything comparable until nylon arrived in 1935. Inexpensive clothes and food came from two developments, starting from the eighteenth century.

Silk Stockings

First in the UK, then throughout the whole world, there was an industrial revolution. Industry required specialisation, capital investment, new practical inventors and entrepreneurs, and a new class of factory workers.

In 1771, a barber and wig-maker called Richard Arkwright opened the world’s first large textile mill, using water from the River Derwent to power his water frame for spinning cotton. Five years later, James Watt, a Scottish “mechanic”, invented the first commercially viable steam engine. By 1787 Britain boasted 145 cotton mills.

What industry required was freedom to let markets work their magic. As Karl Marx noted in 1848, the machine system implied permanent revolution. “Modern industry”, he wrote, “never looks upon the existing form of process as final. The technical basis of that industry is therefore revolutionary, while all earlier modes of production were essentially conservative.”

Allowing markets to operate freely gives growth in output of about 3 per cent a year, which has been achieved everywhere throughout industrial history. Three per cent a year sounds modest, yet it doubles living standards every 23 years.

Read more: The digital innovations transforming life for the poorest

But industry is impotent if it can’t trade freely across national boundaries. This required action to sweep away old taxes and duties, especially tariffs against foreign goods. In 1846, Sir Robert Peel, fearing Chartist revolution, repealed the Corn Laws, allowing cheap food freely into Britain. Peel began the global trade explosion we still enjoy, which has rescued a billion-plus people from poverty.

The economic system has changed. “For the first time in human history,” says Spanish sociologist Manuel Castells, “the human mind is a direct productive force. Computers, communication systems, and genetic programming are all amplifiers and extensions of the human mind.” This is wonderful – it is ecological, it is creative, it gives power to individuals; it undermines centralised power and monolithic corporations, whether funded by the state or the stock market.

But “post-industrial” society can also widen the gap between the best-educated and richest third of the population and the bottom third, whom new opportunities often leave behind. Paradoxically, new market solutions require not just imagination and innovation, but also action to break up old institutions and expand freedom. Initiatives such as the sale of council houses in the UK, and privatisation everywhere, have multiplied wealth and opportunity.

We now need a new market breakthrough to reduce poverty in rich countries. That’s why, in association with the Institute of Economic Affairs, I am offering the Richard Koch Breakthrough Prize for the best such idea. The first prize is £50,000. The Prize aims to transform the fortunes of millions whose lives are less rich than they should be.

The breakthrough idea exists; it is out there somewhere, in your mind and your imagination. Liberate the best idea in your mind and you can make a huge difference.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.