Many of the world’s most advanced economies are capitalist at their core. Clearly, there are many advantages of capitalism. That is no surprise, as modern-day capitalism can be traced as far back as the 17th century.
The system is based on private ownership and supply and demand. Of course, there is much more you can learn about capitalism to truly understand it.
Here, we will focus on the main advantages of capitalism. We will look at its advantages over other economic models. Lastly, we will look at the advantages of capitalism for specific industries.
Main Advantages of Capitalism
The advantages of capitalism come from the two main ideas behind it: private ownership and supply and demand. These ideas separate the model from other types of economies.
Capitalism succeeds because everything is owned privately. Businesses produce goods and services that they sell to consumers. The resources that go into producing those goods and services are also owned privately.
For example, if you produce beef you need land and cows. Both the land and cows are owned by you. The company is owned by you. The beef you produce is owned by you and you can sell it as you like.
This creates a free market. Anyone is free to create a business. This leads to competition.
If your beef business is doing very well, another entrepreneur will see an opportunity to compete with you. They may start their own business that is better than yours in certain ways. This could be by offering a better price, a better product, or a better consumer experience.
Competition like this drives businesses to perform better. It also provides better products, services, and pricing to consumers. Without competition like this, there would be no incentive for businesses to care about the consumer as much.
Innovation is a huge advantage of capitalism. Competition does not just inspire better pricing. It also forces companies to think about the future and innovate.
In a competitive market, businesses must be one step ahead (or more) of their competition in order to succeed. This requires constant innovation.
Steve Jobs is one of the most successful entrepreneurs in history. He famously said, “Innovation distinguishes between a leader and a follower.”
Capitalism favors the people and businesses willing to innovate. In fact, it is oftentimes the key to survival for a business.
Ludwig von Mises was a famous economist who won a Nobel Prize in economics. He was an advocate of capitalism. In his most famous work, “Human Action,” he wrote:
“The market economy is the social system of the division of labor under private ownership of the means of production. Everybody acts on his own behalf, but everybody’s actions aim at the satisfaction of other people’s needs as well as the satisfaction of his own.”
The last part is important. It speaks to another advantage of capitalism. In capitalism, everything is produced according to demand. This gives the consumer more power. Consumers decide what they want to buy and how much they will pay for it.
This creates competitive pricing. It also makes the economy more adaptable and efficient.
All of the above advantages encourage entrepreneurship. Individuals are free to start their own businesses. The competition encourages problem-solving. See something missing? Find a better way to do something? Entrepreneurs can bring those solutions to market easily in capitalism.
Capitalism creates incentives for pushing boundaries and treading new ground. Entrepreneurship does well in the arena of a capitalist economy.
There are many different ways to become an entrepreneur. According to the Global Entrepreneurship Institute, there are seven main types of entrepreneurs:
- Small business entrepreneurs: Creates a business to fulfill personal and family goals. About 90 percent of U.S. entrepreneurs are in this category.
- Franchise entrepreneurs: Those who buy and operate a franchise of a business.
- Serial entrepreneurs: Think “startups.” Serial entrepreneurs look to grow many promising businesses fast by investing in them.
- Corporate entrepreneurs: Entrepreneurs start their own businesses, but they also grow and innovate at existing ones. Even though Tim Cook did not start Apple, he is a leader in the company developing new business ideas.
- Creative disruptors and innovators: People who develop something that changes the face of an industry or a way of doing things.
- Extreme entrepreneurs: Entrepreneurs will often take the unbeaten path. These entrepreneurs will skydive from a plane. They account for more adventurous pursuits.
- Social and nonprofit entrepreneurs: Many believe in the power of business to create social change. Entrepreneurs in this category want to make a positive impact on society.
Entrepreneurship is possible in a free market. It thrives in a free market. Economist Lester Thurow wrote that “Entrepreneurs...bring the new technologies and the new concepts into active commercial use. They are the change agents of capitalism.”
Capitalism gives entrepreneurs the freedom to develop products and services. It also allows individuals to control their financial future.
Capitalism encourages efficiency in many areas. This includes more efficient productivity, resource distribution, and adaptation.
- Productivity: Businesses need to be efficient to succeed. They constantly look to improve their productivity. Capitalism makes people “work smarter, not harder.”
- Resource distribution: Capitalism runs on demand. Resources are distributed and used more efficiently because of this. If there is a need, then resources go toward it. If there is not, then they do not.
- Adaptation: Businesses in a capitalist system adapt well because they need to.
They have to change according to the market.
Advantages of Capitalism Vs. Other Models
There are other economic models in the world. Many developing countries go through a long journey of figuring out which works best for them.
Take a look at the expected top-10 GDPs by country for 2019, according to Focus Economics:
- United States: 21.506 trillion
- China: 14.242
- Japan: 5.231
- Germany: 4.210
- UK: 2.982
- India: 2.935
- France: 2.934
- Italy: 2.161
- Brazil: 2.095
- Canada: 1.822
All of those figures are in USD. Most of those countries operate some form of capitalism. Some are more regulated than others. Overall, it speaks to the advantages of capitalism over other systems.
Capitalism Vs. Communism
Karl Marx and Friedrich Engels famously came up with modern communism. However, it never really worked as an economic model.
In 1961, philosopher Ayn Rand gave a lecture on why capitalism is better than communism:
“No political-economic system in history had proved its values so eloquently or had benefited mankind so greatly as capitalism, and none has ever been attacked so savagely and blindly.”
In the last part, she is referring to the growing popularity of Marx’s idea of communism.
Here are the advantages of capitalism over communism:
|Focuses on individual freedom, so individual rights are protected.||It focuses on the community at the expense of individual rights.|
|Resources are accessible to all and distributed by private businesses.||Resources are technically owned by everyone, but in order to do so, the government distributes them. Technically the government owns them.|
|Competition creates innovative, productive businesses that grow the economy.||Businesses are not incentivized to innovate or grow beyond the minimum. Even worse, they do not even need to be efficient.|
Capitalism Vs. Socialism
Socialism is a less extreme model of communism. There is still a focus on “the greater good” instead of the individual. However, businesses can still be private. The government owns major resources and services. These include energy sources, utilities, and financial services.
Here are the advantages of capitalism over socialism:
|Major industries advance through the competitive free market.||Major industries owned by the government are safe from competition. They tend to be less inefficient.|
|Price is set by supply and demand.||The government often sets price controls, which hinder growth.|
|Resources are accessible to all and distributed by private businesses.||Major resources and services are controlled by the government, giving it a lot of power.|
Capitalism Vs. Command Economy
Economic activity is centralized in a command economy. It is also known as a “planned economy.” This is because the government controls and plans major economic activity. The government owns land and other resources. It sets prices and controls supply and demand.
Here are the advantages of capitalism over a command economy:
|The economy is free to grow through competition.||An economic path is set. This has risks when the economy changes.|
|Supply and demand dictate where capital is spent.||The government decides what industries to invest in. The investment may not be in line with true economic needs.|
|Individuals are free to operate without much government control.||Governments have a lot of control over individuals.|
Capitalism Vs. Traditional Economy
Traditional economies are just as they sound. They are based on the tradition of a certain culture or society. The largest sectors in this type of economy are agriculture and fishing or hunting.
Many less developed or developing countries have a traditional economy.
Here are the advantages of capitalism over a traditional economy:
|Creates innovation that leads to an advanced economy.||Based on traditional businesses that don’t innovate.|
|Provides more consistent, efficient access to resources and goods.||Access to resources is dependant on external factors.|
|Improves the individual quality of life.||Quality of life remains the same.|
Advantages of Capitalism By Industry
The advantages of capitalism can be seen when looking at a country as a whole. It also benefits certain industries in specific ways. Technology, healthcare, and finance are major industries that thrive in a capitalist system.
There was a time when artificial intelligence and robots were science fiction. Thanks to capitalism, there are many new advanced technologies.
Five U.S. tech companies have built up over the past decade to change the world. Apple, Google, Microsoft, Amazon, Berkshire Hathaway, and Facebook are all leaders in technology. This is a product of innovation from the competition.
Apple, Berkshire Hathaway, and Amazon were among the top-5 most revenue in 2018:
- Walmart: $514,405 million
- Exxon Mobile: $290,212
- Apple: $265,595
- Berkshire Hathaway: $247,837
- Amazon: $237,887
To give context, Walmart had the most revenue of any company in the world that year.
Technology companies compete with each other. They also compete with companies around the world. Korea’s Samsung is Apple’s biggest competitor. There are others emerging.
Innovation in technology is not just inventing products. It is a process of building on past innovations. Technology expert Ray Kurzweil talks about technology as a “driving force”:
“Technology goes beyond mere tool making; it is a process of creating ever more powerful technology using the tools from the previous round of innovation.”
Capitalism encourages technology to move forward.
Innovation in healthcare is based on technology. This is true in many areas of healthcare. Better technology allows us to:
- Keep track of patient information
- Diagnose diseases
- Cure disease
- Perform safer surgery
- Develop more effective medicine
Of course, there is much more. The human lifespan is longer because of improvements in medical technology.
Capitalism allows for collaboration across industries. The booming technology industry has innovated new solutions in the healthcare space.
Financial institutions and services are at the center of the economy. In capitalism, banks compete with each other. They are accountable to the market.
This dynamic leads to many advantages:
- The best rates on lending money, according to the market.
- More access to loans.
- Access to larger loans and lines of credit.
- Lower interest rates on borrowed money.
- Higher interest rates on money in savings accounts.
These benefits are because banks compete with one another. They also adapt to the demands of the market.
People have more and more control over their finances. Financial technology has developed to meet new demands from consumers. All of this is possible in the context of the free market.
There are many advantages to the capitalist system. Capitalism is always working toward economic growth. This is made possible through competition and innovation. Countries that have an economy based on capitalism are the wealthiest in the world.
In addition, capitalism often encourages a more stable society. Many economists argue that capitalism is the most moral economic system.
Friedrich Hayek is one of them:
“It is only where the individual has choice, and its inherent responsibility, that he has occasion to affirm existing values, to contribute to their further growth, and to earn moral merit.”
Cleary, the freedom of capitalism has many advantages.
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