Equity investors rarely stop to think about it, but the stock market is the essence of capitalism: the private ownership of the means of production.
With very little money and a quick phone call – or a click of the mouse – you can own a fractional interest in any of thousands of the nation’s most profitable businesses.
The system is fair too.
You will pay (and receive) no more or less for your shares than the wealthy do. And thanks to technology and market liquidity, commissions and spreads are now negligible.
If you own Microsoft (Nasdaq: MSFT), for instance, your investment returns in the years ahead will be identical to those of the world’s richest man, Bill Gates.
(Sure, he may own a few more shares than you do. But your percentage returns will be the same.)
Given the many benefits of capitalism, I was surprised when a survey by the Institute of Politics at Harvard showed that the majority of Americans between 18 and 29 do not support the free-market system that underpins our economy.
A full one-third said they preferred socialism. The question, of course, is “why?”
I began polling friends and colleagues to get their views.
Some insisted that too many young people have not been raised to be responsible, productive adults. They were on the dole from the day they were born. Their helicopter parents did most things for them. And they grew up with a sincere belief that “everyone gets a trophy.”
(For more on this subject, you might read Senator Ben Sasse’s new book The Vanishing American Adult.)
Others said their kids don’t understand that capitalism is a profit and loss system. When companies fail – as many do eventually – it causes economic disruption for employees (not to mention investors).
It’s unsettling to find yourself suddenly out of a job. We all prefer economic security to anxiety and uncertainty.
Unfortunately, that’s not how modern economies work. In our globally competitive world, most workers today will hold not just multiple positions over a lifetime, but also will work in multiple industries.
And sometimes job skills don’t transfer easily.
Others said that anti-capitalist attitudes are all their kids have ever been taught. They graduated from high school without even a basic understanding of compound interest, adjustable-rate mortgages, 401(k)s or why we have a stock market.
Then they enrolled in institutes of higher learning where their professors explained that we live in an unfortunate economic system – based on greed, selfishness and exploitation – that allows a few to benefit at the expense of the many.
It’s not just the anti-business ideology that is hurting them.
The Wall Street Journal just reviewed the latest results at some of the most prestigious universities in the country and found that college kids are graduating without basic critical thinking skills.
At more than half of schools, a third of seniors were unable to interpret data in a table, assess the quality of evidence in a document or make a cohesive argument.
As a result, many companies today are struggling to find qualified workers.
It’s a shock to kids who spent a small fortune getting a degree in bitterness studies to find that what prospective employers really want is analytical reasoning and problem-solving skills.
They don’t have them. What they do have is tens of thousands of dollars in student loans.
That’s not a good way to start off in life…
Capitalism, however, is not the problem.
The free market creates jobs, lifts people out of poverty, and meets virtually all of our wants and needs. (It also creates investment opportunities inside and outside the financial markets.)
Capitalism promises that you can have anything you want if you just provide enough other people with what they want.
Unlike government, business is about freedom and individual choice, not coercion. If you don’t like a particular company or its policies, you don’t have to work for it, sell to it, buy from it or own its shares.
Businesses focused solely on short-term profits don’t last long. If you cut corners on quality, your customers will leave. If you bargain with suppliers too hard, they won’t trade with you. If you undervalue your key employees, they will take their talents elsewhere.
It is in the best interests of business owners to make sure all stakeholders – employees, suppliers, customers and communities – are satisfied.
Now here’s a newsflash: Businesses are run by fallible human beings.
Sometimes they make mistakes, breach contracts, use poor judgment, harm individuals or damage the environment. When they do, the transgressors should be punished.
But that doesn’t make capitalism wrong any more than democracy is wrong when a congressman is found to have stacks of $100 bills in his refrigerator.
The majority of wealthy Americans achieved their affluence not by inheritance or real estate speculation, but by owning a profitable business.
Most of us don’t have the time, the investment capital or the experience necessary to found and run a successful company, but we can still own a piece of one through the stock market.
And owning a piece of a firm is a whole lot easier than running one. You don’t have to sign personal guarantees, hire or fire employees, grapple with an avalanche of federal mandates and regulations, pay lawyers and accountants, or even show up for work.
How great is that?
Capitalism drives innovation. It creates prosperity. It raises our standard of living. And it improves our quality of life.
If your kids don’t understand this, do them a favor.