What role does capitalism play in my finances?

The Four Factors of Production

Crack open any introductory economics textbook and you will see listed in the first couple of chapters what economists call the four factors of production. Commonly known as resources, they are land, labor, capital, and entrepreneurship.

All of these resources are owned by households. The owners of these resources trade them to businesses, government, and the international market for rent, wages, interest and profit respectively. Too many Americans focus on trading their labor resources to employers for wages. To build wealth, households should focus on building their assets by acquiring land and capital.

Land.

Land can be in the form of raw land or developed properties such as rental homes, commercial buildings, apartments, etc. This asset classification provides an income stream in the form of rent. By purchasing land resources, households can provide additional income above and beyond what can be earned through providing labor to an employer.

Capital.

Capital exists in the form of buildings, equipment, money, machinery, factories, etc. Households who own their own business may have one or more of these forms of capital. Those who provide funds for businesses by saving or purchasing stocks and bonds, convert their cash into an asset that pays either profit or interest. Those households indirectly provide capital to business as they allow them to have the funds necessary to expand.

Capitalism = opportunity

Capitalism as an economic system provides great opportunities for households to acquire multiple asset categories that allow them to build large amounts of wealth over time. By providing courts that enforce contracts, allowing for property rights, and providing freedom, including the ability to start a business, the government creates an environment that allows for wealth building.

Here’s the Bottom Line

It is imperative that American households recognize they can own multiple types of resources. This ability is not only available to the ultra wealthy. By emulating what wealthy individuals do, middle and poor households can take advantage of an economic system designed to allow all members to gain tremendous amounts of wealth.

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