Many people believe that in order for some to be wealthy, others have to be poor. If this were the case, then the entire wealth of the planet could never go up because one person’s gain would be offset by another person’s loss. If we look at just the last 200 years, we can see that the entire wealth of the world has gone up dramatically. Our standard of living is much better than our parents, just as their standard of living was much better than their grandparents. So how is this happening? Let’s break it down to the story of a Capitalism best asset: The Entrepreneur.
The Story of Steve, The Entrepreneur
Steve was always traveling and sick of using a rotary phone so he invented a new gadget that you could take with you on the go. Steve had to eat ketchup and mustard sandwiches while saving three years worth of salary to risk it on his vision: a business selling his new product, mobile phones. Initially, they were priced at $4000 each and he had just enough money to produced forty. Companies and rich tech geeks purchased them up as the first-adopters because it was more efficient for their specific needs. Steve lived off some of the profit and put the rest back into the company to buy in larger quantities. This bulk purchasing brought down prices for the next batch of phones and Steve was able to sell them for $3,500 to more people while keeping his profit margins. Steve did this several times as he reinvested into R&D, manufacturing, and innovated more efficient ways to assemble the phone. He was able to get the price all the way down to $600.
Economies of Scale Help Producers and Consumers
At this point, millions of people wanted to purchase. Steve was able to reduce his profit margin per phone but still make more overall profit than he did at $4000 per phone. Seeing this giant customer base, competitors flocked into the mobile phone space with their own innovations to drive down prices and/or create a better phone for the same price. What was once complicated to manufacture had now been tweaked to perfection. Designs were their most efficient. Consumers could now walk into a store and get a phone that was ten thousand times more powerful than the first mobile phone, 1/10th of the size, and 1/200th of the cost.
Planetary communication grew faster and more connected, which helped other business’s lower their costs and pivot as fast as possible. Cost reductions and improved efficiency allowed businesses to decrease prices in order to compete for more market share, driving prices down in a competitive market. Many consumers were now able to afford products that were once unaffordable, which raised their standard of living.
This is the story of Free-Market Capitalism. The best attribute of capitalism is that you can only grow rich if you labor and innovate for what other people value. Steve solved his own problem first, and then saved and worked hard to solve that same problem for millions of other people. Their dollars “voted” for his product over others because each individual valued his product over others.
Money acts as water flowing towards the entrepreneurs who offer the best product at the best price. Consumers voluntarily chose to purchase these products, which rewards the best entrepreneurs. The business owner can then decide to reinvest the new capital, save the new capital for future consumption or opportunity, or spend it on current consumption. All of these roads eventually put the money (water) back into the economic pool where it will voluntarily flow to the most valued producers. Then they’ll save, spend, or reinvest, and the process repeats. The culmination of every voluntary, value-based consumer choice for every product is called “The Market.”
The Market rewards good entrepreneurs with more resources and leaves inefficient entrepreneurs with less resources. This is important feedback because The Market is saying that it does not value the product at it’s price point. This provides a valuable learning experience for entrepreneurs. Ask any successful business owner how many times they’ve failed or had to pivot. You won’t find one that hasn’t had hardship.
Private Investment = Incremental Risk
The silver lining is that success breeds more success, in larger and larger intervals. If you start off with a successful venture, you will earn money to be able to put back into your business, just as Steve did. If you fail, you fail with only what you started with: your capital and your labor.
Sometimes, you gain more traction, and may be able to convince others to invest in growing the business faster than you could have alone. Still, in this situation, the risk is only spread among those who volunteered to take on the risk for the calculated reward.
Free Market > Government Spending
On the other hand, when the government takes on a venture, the risk is spread out among current taxpayers and future taxpayers. You, your children and their children are being involuntarily involved in risky government ventures as we speak.
When a public project fails, it fails huge and for everybody. Instead of thousands being spent incrementally, it’s millions upfront, without establishing traction first. Instead of one or two people working, it’s hundreds. You get almost all of the risk, right away.
Since the government operates on tax money and not profit, the government will never know if it’s product is the Market’s true choice or if it is just wasting resources. This is why you see zombie government projects like the bridge to nowhere, amtrak, no child left behind, war on poverty, war on drugs, California High-Speed Rail, etc that keep getting funded even though they have had little to no effect for the amount of resources they take. Or they start funded, and end up incomplete because costs go beyond initial projections and the utility of the project was never established (by the Market).
In the Free Market, there is a natural process of attrition where resources used inefficiently are released back into the resource pool so other entrepreneurs can have their shot to utilize them effectively. In the Government, there is a job that goes on endlessly, even if it’s providing no value. Consumers’ dollars don’t vote to keep the project in place, instead, it’s kept on life-support with tax dollars.