Our society runs on capitalism. Private or corporate ownerships strive for maximizing profits by serving customers better than their competitors. They do this by constant innovation and competing against others to make their products/services better & better in a free and open market.

Characteristics of capitalism include capital accumulation, competitive markets and a price system. It allows people to become owners of massive trillion dollar juggernaut businesses and having net worth of hundreds of billions of dollars.

Capitalism provides economic incentives to people to out invent & out earn others to make their capitalistic dreams come true.

Entrepreneurs and businessmen have great economic incentives to strive for making their product better and to serve their customer. And no, making a lot of money is certainly not their prime motive while building a great product, but it can be one of them. Who doesn’t like to get paid for their blood, sweat & tears which they poured in their companies.

Because of capitalism, individuals like you and me get to choose which product to use. Because there are tons of companies out there working hard to make their offerings better than the rest of the competition. So, we consumers collectively decide which product is better and which needs improvement.

Competition plays a key role in capitalism. Because of competition, prices of products are decided based on supply and demand. Companies can’t charge very high amount of money for their product because if they do, their customers will go to their competitors and buy the product from them. And all the companies can’t charge very less for their product than competitors because if they do, their profits will decline and will run out of money soon. So, an ideal price will get selected collectively.

That’s why governments across the globe don’t like monopolies. Because monopoly companies can control their markets as there are no big enough competitors in the same market segment.


Inequality

Because of capitalism, some people i.e. entrepreneurs and businessmen, economically “get ahead” i.e. become wealthier than a large chunk of people in the society. Because of that, equality suffers.

That’s why, many people don’t like capitalism, as it creates this economic inequality in the society. Some people get so rich that their net worth becomes larger than GDP of entire countries and they can fly to the space in their own rockets all by themselves!

But if we see, because of capitalism our everyday lives have become so much better than people living in the 1900s and 1950s. We can make video calls across the globe, we can get any information by searching on Google, we can connect with our friends via social media platforms, we can order almost anything from Amazon & Alibaba and we can do tons of other cool things on our iPhones and Androids.

So, if we compare the lives of people today vs. 50 years ago, all of us have made a significant progress. Our lives are much better than people from the 1950s. So, everyone has made progress in these last 50 years.

But, here’s the catch - this progress is asymmetric, meaning some people(i.e. entrepreneurs and businessmen) will progress so far ahead than other people did.

Because of this asymmetric progress, a handful of people will go from earning $50k a year to having net worth of $10 billion or $100 billion and the rest will go from $50k to let say $500k or $1M during the same timeline. So, progress is asymmetric in capitalism.

So, there’s a tradeoff between freedom and equality. Both of them can’t be together.


Innovation

To bring back equality in society, what if we don’t allow anyone to become a billionaire? So, let’s say the government passes a law that, the moment the owner of a company hits a net worth of $1 billion, they need to stop their growth.

Let’s take the example of Amazon. If Jeff Bezos - founder and ex-CEO of Amazon, is stopped building Amazon by the government the moment he hits net worth of $1 billion, all the future benefits of Amazon will get lost. Today, we can go to our phone and order almost anything via Amazon and they will deliver the item to us the same or the next day. That’s mind blowing. So, Amazon has built this amazing product for society, and people are willing to pay for it. That’s why it’s a great business.

If we take an example from India, Jio is a great one. Mukesh Ambani made his fortune from oil and gas industries and invested that money to create Jio. Which lowered the internet data prices so low that almost everyone can afford to use the internet. Because of Jio, the internet became a commodity in India.

Millions of people came online because of very low prices of internet plans of Jio. And because of that, other telecom operators like Airtel and Vodafone have to lower their internet data prices and because of that, startups like Paytm, Ola, Swiggy, Byju’s, Zomato, OYO, BigBasket got access to a customer base of hundreds of millions of Indians.

If we see great innovation in the last couple of decades, most of them came because of capitalism & free markets. Entrepreneurs like Gordon Moore and Robert Noyce of Intel were incentivized to make semiconductors in the 1960s, which led the personal computer(PC) revolution and which led to internet revolution and which eventually led to mobiles and smartphones revolution and on these massive platforms, companies like Facebook, Google, Amazon and Microsoft thrived to reach public valuation of trillions of dollars.

I think innovation needs an incentive for people to do the hard work for many years and ultimately make billions of dollars. And capitalism acts as that incentive for people to innovate and lead the progress of societies.