The more I ponder the topic of capitalism, the more convinced I become of the importance of businesses. I used to think of businesses as generally a good thing because they provide jobs, but I see now that it’s much more.
Everyone should want a business-friendly environment. Not because it helps businesses, but because it helps society achieve widespread prosperity.
A business-friendly environment means taxes aren’t too high, regulations aren’t too burdensome, and public discourse doesn’t demonize all businesses as greedy and evil.
Where does prosperity come from?
Let’s first take a step back and understand how society achieves prosperity. In a nutshell, prosperity comes from improved productivity and innovation.
Productivity means that the economy can produce more products and services with fewer workers. Efficiency. Productivity improves our standard of living by increasing our incomes and making products more affordable.
Innovation means technological advancement, product and process improvements, and new inventions. Innovation is probably more important than productivity. Why? First, productivity itself often requires innovation. Second, innovation gives us many new and exciting products and services that give us better ways to work, eat, travel, and communicate. These are remarkable benefits that improve our standard of living.
I cannot stress enough the importance of productivity and innovation as the wellsprings of prosperity. To put it starkly, if productivity and innovation had never improved, even Americans and Europeans would still be dirt-poor today, eking out a miserable existence that most would find intolerable. Premature deaths of loved ones, no central heat or air conditioning, no cars or planes, no television or cellphones.
Now let’s turn to the reasons we should be pro-business.
Businesses key source of productivity
Businesses play the key role in productivity improvements. To increase productivity is to become more efficient at producing products and services. Businesses play the dominant role in supplying products and services, and therefore are the dominant source of productivity improvements.
Businesses key innovation player
Businesses also play a key role in achieving innovation, but this is a bit more complicated.
The first requirement of innovation is to have a good new idea. Businesses generate many innovative ideas in pursuit of new or enhanced products, services, and processes.
But businesses are not the only source of innovative ideas. Individuals, universities, and government also generate some ideas.
However, just having an idea is not enough. Ideas also need some way to be transmitted across society. Innovation only benefits society if it is shared with others. Businesses play a key role here, spreading innovation by introducing it into their normal supply of products and services.
Most types of innovation require this support from businesses, even the ideas that come from non-business sources. For example, if your neighbor invents some great new product, how will society be able to make use of it? Probably only if a business designs it, manufactures it, and places it into selling channels for people to buy.
Businesses therefore play a key role in innovation because they A) generate innovative ideas and B) spread innovation across society.
Businesses help all of us
Let’s recap. Society achieves widespread prosperity through productivity and innovation. Most productivity and innovation is created or realized at the business level. Conclusion: businesses are essential to achieving widespread prosperity.
But wait, that’s not all! Businesses provide us with jobs and incomes. Businesses supply us with most of the products and services we use. These are awesome benefits for society!
Businesses also pay 100% of all taxes, directly or indirectly. Even taxes paid by individuals are really paid by business. Businesses pay the incomes of business employees, and therefore also their taxes.
It’s a similar story for public sector employees, just more indirect. Government pays their salaries, but where does government get money? From taxpayers. Business activities pay all taxes, so businesses indirectly pay the incomes and taxes of public sector employees as well.
Therefore, all of us should grateful for businesses: business employees, public sector employees, retirees, welfare recipients, and consumers.
A business-friendly approach belongs in the ‘supply-side’ camp of economics. Just to illustrate the contrast, the demand-side camp prefers to focus on consumer spending and increase government spending to ‘stimulate’ demand.
In reality, supply and demand are interrelated; a which-came-first-the-chicken-or-the-egg type situation. However, I believe a supply-side emphasis makes more sense because A) supply naturally feeds demand and B) supply is the bigger challenge.
Supply feeds demand: Supply must come before demand. If I have a cupcake business, I must sell cupcakes to earn the money I need to buy food, clothing, and housing. My supply of cupcakes represents my demand for other goods. The greater my supply of cupcakes, the greater my demand for other goods. Supply increases demand.
Or consider a low-income family. Is their problem that they don’t desire more goods, or that they can’t afford more goods? Obviously, it’s the latter. How can this family increase their income? By working more hours or making their labor more valuable. Their supply of labor feeds their demand for goods.
Supply is a bigger challenge: Consumers and consumer demand are important. But let’s be honest. It’s part of human nature to desire more and better food, clothing, housing, transportation, etc.
On the other hand, the supply of those things is much less certain. Do we have enough factory capacity? Technical capabilities? Raw materials? Properly trained workers? Did weather disrupt any activity? Etc.
Surely, the bigger challenge facing society is how to supply the material goods desired by consumers.
The same is true with innovation. It’s not usually a challenging task to persuade consumers to buy innovative new products that they like. We can usually count on consumer demand for innovation.
The supply of innovation is a far greater challenge. Innovative products must be invented, designed, and produced before consumers even see them. And then, only after this investment in time and money, consumers decide if the new product will succeed or fail. Supply is far riskier.
Clearly, generating a supply of products and services is a far more difficult and risky task for society than generating demand. And supply must come before demand. A business-friendly environment recognizes these realities and succeeds because it does not raise further (artificial) obstacles in front of a task that is already difficult and risky.
Consumers still important
None of this means that consumers are unimportant. Far from it. Capitalism revolves around the satisfaction of consumers. Consumers ultimately drive the actions of the capitalist economy.
Capitalism also treats consumers very well. It may seem counter-intuitive, but the business-friendly approach is a more effective way to help consumers. Supply-side policies will result in more consumer spending than trying to target it directly!
The goal of capitalism is not flourishing businesses, but flourishing consumers. Consumers flourish when they have jobs and can afford to buy innovative products and services that they desire. That is what a business-friendly economy delivers.
Too many people feel that being anti-business is virtuous. They think we need to choose between a business-friendly mindset and a worker- or consumer-friendly mindset. That is a false choice.
It is more accurate to say that the interests of businesses, workers, and consumers are linked together in pursuit of mutual prosperity. As JFK told us, a rising economic tide does lift all boats, even if not equally. A business-friendly environment gives us the best chance for a rising tide.
I’m not saying that all businesses behave well always. They are staffed by human beings. But overall, businesses do much more good than bad.
I encourage you to enter comments or questions below. Two rules: 1) be reasonably polite, 2) address the issue and avoid personal attacks.