In my last two columns, I talked about my recent visit to my son’s seventh-grade class to discuss how ordinary Americans could achieve the American Dream of financial independence.

It begins with appreciating the beauty of the capitalist system.

[ad#Google Adsense 336×280-IA]Two hundred years ago, 85% of the world’s population lived on the equivalent of less than a dollar a day.

Today less than 15% do.

What is responsible for the enormous spike in material prosperity?

Part of the credit goes to science and technology.

But it took something more pedestrian to transform the world’s standard of living: the profit motive.

This is hardly a bad thing. As Adam Smith wrote in The Wealth of Nations in 1776, “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard for their own interest.”

Government doesn’t provide us with food, clothing, shelter, healthcare or the Callaway Alpha 816 Double Black Diamond driver. Businesses do.

And in the process of meeting our economic wants and needs, public and privately owned companies develop employee job skills, build careers, support local communities, contribute to charitable organizations, pay billions in taxes and, of course, provide financial rewards for owners and shareholders.

Detractors will argue that capitalism is all about selfishness, greed and exploitation.

That is a mischaracterization. Economic freedom is about voluntary exchange for mutual benefit. That’s why you hear two thank-yous whenever you make a retail transaction.

You say “thanks” because you want the merchandise more than the money. The shopkeeper says “thanks” too because he wants the money more than the merchandise. Capitalism is not a zero-sum game where one side wins and the other side loses. It’s a win-win.

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 them, sell to them, buy from them or own their shares.

Businesses focused solely on short-term profits don’t last long. If you cut corners on quality, your customers will leave. If you push suppliers too hard, they won’t trade with you. If you undervalue your employees, they will take their talents elsewhere. It is in the best interests of business owners to make sure all stakeholders – employees, suppliers, customers, shareholders and communities – are satisfied.

As for greed, you can be the greediest person in the world and no one will give you a dime until you offer value for money.

Capitalism promises that you can have whatever you want, but only if you provide enough other people with what they want.

Most wealthy Americans achieved their affluence not by inheritance or real estate speculation but by starting and managing a profitable business. Most of us don’t have the time, the investment capital or the experience necessary to found and run a successful business, but we can still own a piece of one through the quintessential expression of capitalism: the stock market.

With even a modest amount of money, an individual can accumulate a stake in any of thousands of the world’s great businesses. And it’s easy. A click of the mouse – and a $5 commission – and you’re in. Another click – another five bucks – and you’re out. (Compare that to your typical real estate closing.)

And owning a piece of a company is a whole lot simpler 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?

Some Americans today obsess over the issue of fairness. But the stock market shines here, too. If you own shares of Microsoft (Nasdaq: MSFT), for example, your gain over the next year will be exactly the same as that 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.

“All well and good,” you say, as a few seventh-graders did. “But is it realistic that the average person earning the average wage could really accumulate enough to be financially free?”

Absolutely. For proof, you need only look at the example of Ronald Read, the $8 million janitor.

I’ll relate his story in my next column.

Good investing,

Alex

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Source: Investment U