5 ways investors — and the economy — can benefit from capitalism

Every once in a while, my friends and I get together and discuss economics, the market and politics. I really try to avoid these discussions, except for the part about stocks, but whenever the discussion turns to economic systems, I usually end the argument with a killer blow.

For example, during a comparison between capitalism and socialism, I ask my friends, “Why do we not see any migrants on a leaky boat leaving North America and trying to get into Venezuela?” Nobody ever has a good response. Capitalism is just better. Of course, it does not work better for everyone, but it works better for an economy on the whole.

Capitalism, as an economic system, is characterized by private ownership of the means of production, market competition and the profit motive. Put another way, it is often thought of as an economic system in which private actors own and control property in accordance with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society.

Of course, the stock market is the ultimate symbol of capitalism. In the market, companies raise money to meet their capitalistic goals and non-owners — you and I — can instantly become owners by buying shares on the market.

Here are five benefits commonly associated with capitalism, and why the system can help companies, economies and investors.

Economic efficiency

Capitalism tends to allocate resources more efficiently through the mechanisms of supply and demand. In a competitive market, businesses strive to minimize costs and maximize output to achieve profits.

This leads to more efficient production and innovation as companies continuously seek ways to improve products and reduce costs. Corporations make profits, consumers get lower prices. Both groups, and shareholders, win.

Innovation and technological advancement

The profit motive in capitalism provides strong incentives for businesses to innovate. Companies and entrepreneurs are encouraged to develop new products, technologies and services to gain a competitive edge. This dynamic environment fosters creativity and technological progress, driving overall economic growth.

It is no secret that the United States has undergone a massive shift from basic industrial production to service and thinking businesses. For stock investors, one thing to look at here is how much a company is spending on research and development. Money spent today often translates into bigger profits tomorrow.

Consumer choice

In capitalist economies, consumers have a wide variety of goods and services to choose from. The competition among businesses to attract customers results in a diversity of products that cater to different preferences and needs. This variety empowers consumers to make choices that best suit their desires and budgets.

Overall, consumer choices are improved, and prices remain acceptable because of the heightened competition. For investors, focusing on niche companies that can win market share in such dynamics can result in faster profit growth.

Economic growth

Capitalism often leads to sustained economic growth as businesses expand, invest in new projects and hire more workers. This growth can lead to higher standards of living, improved infrastructure and increased opportunities for individuals to improve their economic status.

This is a general statement, but for investors, as more individuals improve their economic standing, there is obviously more money available for owning stocks. We have certainly seen this in North America, with stock ownership significantly rising in Canada and the U.S. over the past five decades.

Personal freedom and opportunity

Capitalism typically supports a high degree of economic freedom, allowing individuals to pursue careers, start businesses and invest in ventures of their choice. This freedom fosters a culture of entrepreneurship and self-reliance, enabling people to take control of their economic futures and potentially achieve financial success.

It’s a little harder to equate this theme to the market, but capitalistic freedom will certainly entice some entrepreneurs to leave their jobs as employees and take a chance to do something better on their own.

For us, focusing on founder-led companies often leads us to good new investment ideas as the capitalistic-driven founder revels in their new role.

Capitalism is not perfect, of course. The benefits noted above have to be considered along with downsides such as economic inequality and market failures. Certainly, individuals who fail to prosper are bitter towards those with fabulous wealth. But, overall, it works.