Originally Posted by
wufwugy
It may not seem like I've said much on this since what we're dealing with mostly is derivation from economic principles.
To answer simply how capitalism reduces inequality: it allows for people to best apply the value of their capital (skills and equipment) and their labor. Markets are where people with varying attributes go to find buyers, and to find sellers of other attributes, all for the purpose of creating more beneficial resources for the involved parties. The free market allows for this to happen to its fullest extent. It provides for those with the lowest quality and quantity of attributes to find the optimal price to sell their goods/services for.
When a government intervenes into this engine, it inflates costs because it does not intervene efficiently. This cost inflation harms those with the lowest quality and quantity of attributes first, which diverges equality. As more intervention comes, costs inflate further. Today's market is intervened so heavily in by government that there are many huge industries where the poor and middle class have valuable skills that others want to purchase but they can't because the costs are too high. What this leaves behind is a situation where only the wealthy can engage in the market because they're the only ones that can afford the high costs and those with the skill and desire to produce don't even engage the market. This creates another vicious cycle of government and the rich rubbing each others' backs, further pushing out competition. We've seen this happen all over the place, from medical associations that want only their special group of doctors to be allowed to perform functions that nurses can do just as safely for much cheaper, to unions that lobby to raise the minimum wage so that there is less competition for contracts from cheaper alternatives than the union.
If we think of our healthcare systems, the true cost of care is very very very very low compared to what the prices are. The best way to make medicine available for sick babies is to let the system that thrives on abundance and pleasing the customer (capitalism) do what it does. The best way to keep babies from getting the medicine they need looks similar to what governments are doing with healthcare: all sorts of interventions that greatly deter supply.
This raises the question: "what can governments do proactively to raise supply?" Well, I have a hard time finding things since most of what they can do, and what is popular among voters, is that which decreases supply. For example, people don't like when a brand new drug is very expensive so they want government to set a price control. On the surface it sounds like there is nothing wrong with this, but it reduces the supply in the drug market and hurts everybody.
The sensibility of production for sale on a market wasn't really even a thing until it was invented somewhere around the Dutch area and sometime in the 17th century or something. Most of history before then was about people farming for sustenance and paying the remaining in tax to the state or warlords, while a handful of others did specific tasks for the aristocracy (like blacksmithing or stable tending). These societies had huge class divides and very little in the way of markets.
Northern Europe created the idea of private enterprise, Britain embraced it more, a Scottish philosopher (Adam Smith) explained the theory behind it, and America took the idea and ran with it. The American government was the very first time that a government had constitutionally limited power, and the American land was the first time that the sensibility of private enterprise was allowed to flourish without great obstacles. This is the difference that created the world we live in today. Many say "it was technology" or "it was oil". Neither provides the story. Without economics to apply markets to the supply, demand, and distribution of goods and services, oil would still be in the ground and the light bulb would be something people who have access to books know about.
I mentioned some above. It's more than giving examples but explaining why they're examples. Like Friedman said, every prosperous country is an example of this. There are no known examples of countries that have risen from third world poverty to have a middle class that didn't do so by embracing free market reforms and limiting government intervention.
This stuff involves a deconstruction of so much that we take for granted. For example, the term "middle class" is itself a symbol of the example you're looking for right beneath our noses. There was no middle class in the entirety of history except for when it grew out of capitalism in America and Europe. China and several other countries are undergoing the same creation of a middle class that we did in real time, and economists are watching it in real time. The emergent China middle class is coming as China's government is deregulating its markets and allowing entrepreneurs and consumers and workers do as they like.
