In this BA thesis I investigate the nature of the relationship between capitalism, defined by inclusive economic institutions, and the contemporary society's poverty rate. My case builds on two critical assumptions. First, incentives that shape human behavior diverge dramatically between different institutional contexts. And second, the most desirable society is one which maximizes the well-being of all but allows for inequalities when they benefit those who are the worst off. I first present empirical evidence and theoretical mechanisms for the hypothesis that capitalist institutions, especially private property and market competition, are the main driving force of long term, self-sustaining economic growth. I then present the arguments of neoclassical economy why economic growth at least in the beginning stages of economic development enables higher incomes and higher standards of living for the majority of people, including the poorest. An increase in productivity tends to dramatically lower the degree of absolute poverty due to a decrease in living expenses and a raise in workers' wages. However, capitalism's critics are correct in pointing out that economic growth alone does not keep increasing incomes in highly developed capitalist countries. By comparing the changes in wage growth in chosen capitalist countries such as the US on the one hand and Canada and Scandinavian countries on the other, and evaluation of the potential traps of a generous welfare state, I conclude that the two crucial and equally important factors of improving the income of the least well-off, are capitalist economic institutions and a reasonable degree of social redistribution.
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