Why Do We Need Capitalism and How Does it Lead to Innovation?

Our modern society is mostly based on capitalism! Minds are divided if this is actually positive or not. There are many pros and cons when it comes to this being a perfect system. But, we can’t really say that a perfect system actually exists. There have been many systems before this one and each of its founders thought that it is the right one. Perhaps after capitalism, we do get to experience something different that our children will view as innovative and modern.

Capitalism is considered as a social system that is based on accepting individual rights. These rights include property rights, which are rights of individuals of owning their own privately owned property. Capitalism is also considered as an economic philosophy that requires the existence of a government that grants individual freedom. What comes of this is competition, invention and, most importantly, innovation.

This is why modern society is solely based on creating new ideas and making them work. It is what fuels innovations and what makes it work. Simply said, capitalism supports progress and the creation of new ideas. The most prosperous parts of a capitalist regime are companies that invest in innovation and creative people. This helps to further develop the society and bring on the development of all of its branches.

But how does capitalism really lead to innovation? The answer is really simple, actually, there are several of them. But basically speaking, capitalism needs the existence of a government in order to provide protection and consequences to its users.

Accumulation of Wealth

The simplest thing that you need to understand about capitalism is that it needs money. Accumulating wealth is what matters and what the most important aspect of capitalism is. The same goes for innovation. It too needs money to be invested in it in order to thrive and develop further.

But accumulating wealth to invest in innovation is not easy. Luckily, capitalism directly allows you to do it. It allows you to accumulate wealth outside Government taxation that you can further invest in innovation and consequently developing it.

Flexibility of Funds

As mentioned, in order for innovation to develop it needs capitalism. Basically, it needs funds to further develop inventions. The way capitalism works is that there are a few ways that you can get capital. You can persuade the government to give you some funds, persuade a venture capitalist or get a loan from the bank.

Socialism can only work by persuading the government and taking loans from them. That way of accumulating funds is the safest one and comes with a minimal amount of risk. Innovating is risky business and one wrong step can lead to failure. That is why in order to succeed in the Capitalist society you need to take risks.

Individual Greed

There are two possible outcomes with innovations and capitalism. Since individuals make their own decisions, they also have to suffer the consequences. One of them is if the product fails the individual accumulates debt and therefore needs to pay for everything. The individual may also face a stagnant loss that can lead to bankruptcy. But there is a different, much positive end. If the product is a success, the individual then garners profit. Profit then leads to the individual becoming richer which will then prompt him or her to accumulate more wealth to innovation. Hence, we come to greed.

The consequences that capitalism does not allow individuals to relax and to go about this freely. It actually makes them think and allows them to become smarter. Because of this, people work harder, are more efficient and produce better products. This is all due to capitalism and the way it prompts innovation.


If we don’t have the government and the current economy to watch over the individuals within it, then everybody will start doing what they want. Consequently, each individual may start acting like its own government. And if things are not as important as they are now and when things stop matter, innovation will not move and won’t develop further.

Article by: Frank Saggs