Last week, I shared some great information from Superabundance, a new book that shows how economic liberty has made us much better off, as measured by how much more we can buy per hour worked.
Today, let’s look at a related benefit of capitalism, which is that we don’t have to work nearly as many hours to achieve high living standards.
Here’s a tweet from Chris Freiman, a professor of philosophy at William & Mary University. As you can see, people in market-oriented nations work far fewer hours than they did 150 years ago. In some cases, hours worked per year have dropped by more than 50 percent.
When economists study these issues, they generally say the willingness of people to supply labor (whether to work and how much to work) depends on compensation. In other words, people give up leisure because they want money so they can consume.
But that choice can be complicated. It is governed by an “income effect” and a “substitution effect.”
For those who want to learn the economics, here’s a good description from the University of Washington.
- Substitution effect of an increase in the real wage, w. As w increases, income increases by working more and a worker substitutes work for leisure so labor supply, NS, increases.
- Income effect of an increase in the real wage, w. As w increases, working the same number of hours still gives an increase in income so that a worker may decrease the number of hours worked and maintain the previous level of income so labor supply, NS, decreases.
Simply stated, people like both income and leisure. So we all make choices about how much to work depending on our preferences and tradeoffs.
However, that decision can be influenced by economic policy. If there are generous government handouts, for instance, people may decide to work fewer hours. Or not at all.
And a decision to work only a small amount may be a result of high implicit marginal tax rates that are embedded in redistribution programs.
Taxes also play a big role. High marginal tax rates can discourage labor supply, which helps to explain why people work more hours in the United States than in Europe.
And that’s true even though Americans are much richer, thus showing how the substitution effect can outweigh the income effect. At least in the short run.
In the long run, the above chart shows how the income effect is dominant.
But let’s forget about economic jargon. What the chart really shows is how free markets enable societies to generate so much income that we can enjoy better lives in exchange for far less effort.
International Liberty 
[…] Part V, and Part VI), and I’ve shared lots of long-run datashowing how some peoplebegan to enjoy unimaginable prosperity as capitalism emerged and monarchism, feudalism, and mercantilism began to […]
[…] V, and Part VI), and I’ve shared lots of long-run data showing how some people began to enjoy unimaginable prosperity as capitalism emerged and monarchism, feudalism, and mercantilism began to […]
[…] The Glory of Capitalism, Captured in a Chart […]
John, I lack wisdom? HaHa! You can’t even see the value of a longer, healthier, safer, and happier life. But with regard to your most recent data, once again you fail to provide any citation. It renders your numbers meaningless.
Do you realize that you have attempted to challenge almost nothing of what I have written in my last couple posts? Be it about Japan or about how it is that we can be so much richer (Dan thinks and you haven’t disagreed) than Switzerland despite the fact that they have enjoyed significantly greater economic freedom for a long time (just to give two examples).
PHK, I do not “make up” my numbers. The double and triple is based on OECD data, and it’s the effective tax rate on either the median or average person, don’t recall. You lack wisdom. Leave me alone. And again, if you object so much to what Dan has to say, stop reading.
Where do you come up with your numbers? Make them up off the top of your head? Can you ever back anything up? I don’t know if the data I have is the most pertinent (I’m no tax expert), but at least I find numbers from reputable sources.
The OECD reported that the U.S. tax wedge for the average single worker decreased by 1.2 percentage points from 27.2% in 2020 to 28.4% in 2021, which is still less than the OECD average for all countries—34.6% in the same year. Meanwhile, after taxes and benefits, the take-home pay of an average single U.S. worker was 77.4% of their gross wage, compared with the OECD average of 75.4%.6 (Average American Taxes (thebalance.com))
So where do you come up with “the average European pays double the income tax and triple the sales tax compared to the average American.”?
From usafacts,org: “According to our extensive research: The average personal income in the U.S. is $63,214. The median income in the U.S. is $44,225.” In this case the mean is nearly 50 percent higher than the median! You say I make too much of average and median. But what if Dan’s numbers are off by that whopping of a percentage. Changes things a little, doesn’t it?
Many Europeans would say they have more freedom, including, in most European countries a mandatory paid 4 – 6 week vacation period. They also live longer by several years and have homicide rates that are a third or a fourth or a fifth of ours. Is being able to live a part of freedom?
I don’t care if Dan responds to you. I understand average and median very well, and I think you are making too much of the issue. Maybe Europeans work less because the average European pays double the income tax and triple the sales tax compared to the average American. It may be a rational choice given their circumstances, but it means less freedom for Europeans.
Lets’ start with your first country, Japan:
“The Japan’s postwar economy developed from the remnants of an industrial infrastructure that suffered widespread destruction during World War II. In 1952, at the close of the Allied Occupation, Japan was a “less-developed country,” with per capita consumption roughly one fifth that of the United States….in 1968 its economy became the world’s second largest, following that of the United States.” JAPAN’S POST-WORLD-WAR II ECONOMY AND THE ECONOMIC MIRACLE OF THE 1950s AND 60s | Facts and Details
That’s 16 years [!].
Taiwan and Hong Kong did it nearly as quickly; they certainly didn’t take decades.
What prior years of economic freedom have allowed Belgium and France to be prosperous today after being shattered by WWII?
I agree that economic freedom is not the only thing; I have no disagreement with your second paragraph.
I also agree when you write in your third paragraph, “I personally don’t care if Americans work more hours or less, as long as they are free to choose.” The only reason I raised the issue of the graph is that if going down is good (as Dan implies), then we’re not going down as much as others. That could be because of choices made freely; it could also be because of choices forced on a person to give up vacation time to pay for child care or medical care or nursing home care or,…well, you get the idea. You see, Europeans can also make choices and maybe they have decided to choose quality of life over a bigger truck or TV set. Maybe that’s why nearly all the western world leads the U.S. in the annual UN World Happiness Index.
In your last sentence I’m afraid you’re falling into Dan’s trap of insisting on average (mean) rather than median.
You asked once why did I keep haranguing Dan. Maybe you should ask Dan why he can’t answer my question with real data.
Japan, Hong Kong and Taiwan did take decades to become prosperous. Japan, France, Belgium and others previously had much more economic freedom. Their prior years of better economic freedom still help their prosperity today.
Anyway, economic freedom is not the only thing. Hugely significant, but not the only thing. If two countries have equal freedom but the culture of one lionizes commercial achievement while the other despises commerce, the first one will be more prosperous.
I didn’t dodge your question about the graph, just wasn’t sure what graph you were even talking about. Now, I’m not sure of your point. I personally don’t care if Americans work more hours or less, as long as they are free to choose. It could be that more hours of work is a significant reason why the average American is able to enjoy so many more goods and services than Europeans.
John, I don’t think we’re nearly so apart as maybe we thought. I agree with everything you say in your first paragraph. 🙂 I have no problem with the first paragraph at all and am a strong proponent of free market capitalism (with reasonable and modest government controls). I agree that most of the wealthy have worked hard to get to where they are. And even if one is born with a silver spoon in his or her mouth, should there be a law against that? I don’t think so. Perhaps you are familiar with a small but brilliant book titled, On Equality, by Princeton philosopher Harry Frankfurt. He argues that sufficiency, not equality is the moral imperative. Consider two countries A and B. And let us, for the sake of argument, set $60,000 as the “sufficient” amount needed to live a good life with a home, the opportunity to send children to college, access to medical care, the ability to travel, etc. Now in country A, everyone makes $40,000 a year, no exceptions. Equality Nirvana. In country B, by contrast, 90 percent of the of the population makes $65,000 and the other 10 percent are multi-billionaires. The height of inequality. In which country would you rather live? I think almost everyone would say “B.”
My beef with Dan is that when he relies on averages he skews the picture he is trying to present. I think it is generally well known that the very richest Americans are much farther ahead of their compatriots (even though those compatriots may be doing well), than can be said for the other countries he is comparing us with. That is why median would mean so much more than mean.
You did dodge my question about Dan’s graph of decreasing number of work hours. 🙂
See Economic Freedom of the World, 1975-1995 Annual Report (fraserinstitute.org) to see how the U.S. has not taken the world by storm in terms of economic freedom going back nearly half a century. But then you already know that because you said we have been among the top five consistently. You did not say we have always been number one. In fact, of European countries, Switzerland has us beat over that long stretch of time. So why, according to Dan’s own chart, are we so much wealthier than them? They’ve been beating us in economic freedom for 50 years. Could it be that there is something wrong with Dan’s relying so heavily on consumption as the measure of the wealth of a nation? Maybe he should be more open to other metrics.
And why aren’t they (Switzerland) at least second in Europe (according to Dan’s own chart)? I believe they are fourth (fifth overall), about 20 percent poorer than us. Does anyone really believe that.
The U.S. fell out of the top ten in economic freedom for the first time in 2006. Since then, that’s becoming more and more the norm.
The 2015 Heritage Foundation ranking had us 12th..
In 2018 HF had us at 18th (you can see the trend).
In 2022 our ranking, according to Heritage is down to 24th, with about 20 of the countries ahead of us being European.
And yet we’re still the wealthiest country. You say that it takes decades of economic freedom to attain prosperity, but then how do you explain such places as Hong Kong, Japan, and South Korea? And how do you explain relatively wealthy countries like Belgium, Japan, Israel, Croatia, France, Costa Rica, and Italy, all of which rank below 35th in economic freedom (with France, Costa Rica, and Italy below 50th)?
Perhaps Dan could begin by explaining Switzerland: well ahead of us for decades in economic freedom, and yet significantly poorer by his own measure of national prosperity.
A quibble: it’s The College of William & Mary and not William & Mary University.
OK, PHK, you’re not obsessed with the top 1%. Let’s call it deeply concerned. I don’t see uber wealthy people as a problem. In the US, most of them earned their money more than inherited it. And they earned it by satisfying customers. How? By introducing innovative new products and services, or being more productive than their competitors. When they create wealth, they give us better products and services, they create jobs or improve our incomes, and they pay lots of taxes (directly and indirectly) that flow to society. That’s beneficial enough already. But then many of them later in life also donate much of their personal wealth to build libraries, museums, schools, end malaria, etc. The rich are without doubt a great benefit to society. The only way to think otherwise is if you’re obsessed (or deeply concerned) about this thing called inequality. To me, that’s just short-sighted.
As for the rankings of economic freedom, prosperity doesn’t pop up or disappear based on a year or two of economic freedom. Prosperity is slowly gained or lost over decades. Historically, the US was famous for economic freedom. Even in the more recent few decades of Heritage measuring economic freedom, the US was for many years regularly in the top 5.
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John, I’m not “obsessed” by the top one percent, but that group in this country is so far ahead of the rest of the country, relative to what one finds in Europe, as to skew the data. I would even be willing to bet that the top ten percent also skews the data significantly. But Dan won’t even acknowledge (much less deal with) that reality. Others have, however. You could Google the following piece which does argue that using the median is superior to using the mean.
“The Median Is the Message: A Good Enough Measure of Material Well-Being and Shared Development Progress”
by Nancy Birdsall and Christian Meyer
The graph he shows on this particular post is interesting. Clearly, we are to conclude from the graph that being lower is better and being higher is worse. But at the end of the day, after all those decades of improvement, look who has the highest figure: the good ol’ US of A (remember, higher is worse; that’s the clear message of the graph). My guess is, you could throw in another dozen or more OECD nations and we would still be at or near the top (i.e. among the worst).
Finally, the Heritage Foundation’s latest index of economic freedom ranked us 25th in the world. Not bad, but hardly top of the class. How can we be so much wealthier than Europe, as Dan says, if nearly all those “poorer” European nations have more economic freedom than we have? I thought economic freedom was the path to wealth. I can understand a few exceptions, but nearly all of Europe?
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Give it up PHK. The OECD metric of avg individual consumption measures the consumption of goods and services by households, so it’s a decent measure of material wellbeing. That is the main purpose of an economy, right? And it includes the effect of both government and non-profit spending, so it’s comprehensive. Meaning it’s capable of comparing smaller-govt economies to bigger-govt economies. Meaning Dan’s point about relative material wellbeing is correct.
As for average vs median, I get your point. I usually like seeing both. But average is good enough. It’s been a while since I looked at that data, but they may provide only the average. Anyway, the only reason to obsess about average is if you’re obsessed by “the top 1%,” and that is not healthy.
Overall, if you don’t like what Dan has to say, simply stop reading it. You don’t have to harangue him continually.
Correction: not the mean per capital individual consumption, but just the mean capital individual consumption.
Please be honest, Dan, and quit telling everyone how Americans are richer than Europeans (I’m sorry.. “much” richer). You drag out the same old tired chart which compares per capita average individual consumption of a large number of European nations and the U.S. A much more meaningful statistic would be “mean” per capita individual consumption.