Calgary Herald

Five ways capitalism can benefit investors — and the economy

Profit motive, competitio­n provide strong incentives for businesses to innovate

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.

1.

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. 2.

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.

3.

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.

4.

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.

5.

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.

Financial Post

Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independen­t investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/short Fund may own non-canadian stocks mentioned.