Capitalism – How and Why Capitalism Works


Taking a brief aside from investment strategies and growing wealth, today’s entry addresses the basic tenants on which the stock market exists. 

The stock market is a vehicle by which individuals with ideas and the willingness to do the hard work to enact those ideas gain capital.  An individual who wishes the start a company and grow rapidly issues stock which investors purchase, giving them an ownership stake in the new company.  If the company is successful, those investors are expecting the value of their ownership stakes to grow, such that they can later sell those stakes to others for substantially more money, or they can remain owners and reap benefits of the successful business in the form of dividend checks.  While there are some exceptions, such as Ben and Jerry’s, neither the individuals who start the company nor the investors are motivated by a desire for doing some higher good.  Individuals do not start a chain of restaurants through the desire to provide the residents of the area with another dining choice.  They do so to make money.

Because of the motivation is growing wealth, capitalism has been painted as inherently evil by university professors, Hollywood screen writers, and self-described intellectuals.  Who can forget Gordon Gekko’s speech in the movie, Wall Street, on how greed was good?  It is no mistake that he was the villain in the movie, representing any number of real-life traders and hedge fund managers who have made their fortunes in the financial system.

But walking into a supermarket in a Capitalist society I find ten kinds of mustard.  Twelve kinds of catsup.  I find ingredients for ethnic dishes from several countries right down the street in the supermarket, even in a small town.  If I don’t like the selection or the prices in that supermarket, I can drive a mile away to another supermarket, just as large.  In the former Soviet Union there were stories of people standing in line for hours for the basic necessities and shortages of basic items such as toilet paper.  I can walk into any number of stores and find 10-20 different brands of toilet paper, ranging from cheap single-ply to elaborate quilted triple-ply and cotton blends.

Turning to food, I can find over 50 restaurants in my town of 20,000.  In a larger city I could find thousands.  I have the choice of several Mexican restaurants, Chinese restaurants, burger joints, chicken restaurants, fish places, home cooking, bar and grills, local diners, and waffle shops.  If I want to buy a car, I have ten dealers to choose from within a five-mile radius and perhaps 100 within a 70-mile radius.  The same goes for auto parts, garden shops, pet care services, employment agencies, doctor’s offices, lawyers offices, dentists, and lawn services.

The cause of this bounty — of stores stocking what I’m looking for, open the hours that I need them to be, and with this great amount of variety — isn’t the result of some central planner who anticipated my needs.  How could it be?  How could an individual or even a department of individuals 1000 miles away be able to design a system that meets my needs and those of all of my neighbors and all of the neighborhoods across the nation? 

And what of the individuals who work twelve-hour days? Nights? Weekends to start these companies and make them grow?  Is their effort the result of some central planner who provides them with a grant or some other incentive?  No, if anything the regulations created by the central planners and the mountains of paperwork they force entrepreneurs to create serve to dissuade the young entrepreneurs from starting companies and pursuing their passions.  These individuals work these hours, try to anticipate the needs of those around them and place the right product, in the right place, right when someone needs it not because of government direction.  Not out of some sort of benevolence and desire for self-sacrifice.  They do so in an effort to meet needs that aren’t being fulfilled to make money.

Capitalism creates a system in which individuals, entirely on their own, seek out ways to provide for their fellow humans in the most efficient manner possible.  If there is a need of great enough significance that someone can make a profit from serving it, someone will meet that need.  If a service or product is offered that does not meet a need, it will fail and be removed from the market.  The capital that funded it will be directed elsewhere to a better idea. 

Capitalism is not evil – it is the most efficient means of meeting the needs of a nation.  Most importantly, because there is no central control, the individuals of the society enjoy the greatest amount of freedom.  Because individuals provide goods and services for themselves and others without the need for resources from a central group, no central group can easily use the provision or withdrawal of those goods and services to hold power over others.

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