I was in a spirited debate with a mate recently — the kind where neither side expects to win, but both enjoy the verbal sparring.
It kicked off when he casually declared that, sure, investing might be lucrative, but investors themselves add no real value to society. In fact, they just skim off the hard work of others, leeching wealth without creating anything.
It’s not an uncommon view; that of the extractive capital class. Where the rich get richer while the workers toil away but never get ahead.
Well, as you can imagine, that was red to a bull. Not only was he wrong, but the opposite was true — investors are essential to growing prosperity!
I gulped my beer, cleared my throat, and let fly like Mussolini from the balcony (all in good fun, of course).
Before you can invest, I explained, you need capital. And to have capital, you must have saved. And the only way to have savings is if you (or some kindly benefactor) have produced more than you’ve consumed.
If I earn $100,000 in a year and spend $80,000, I’ve put $20,000 more into the economy than I’ve taken out. (Keynesians may clutch their pearls at this point, insisting that unspent money stifles economic activity. But that’s a topic for another day.)
The key point is that savings represent a net contribution to society, at least from a resource use standpoint
(Debt, on the other hand, does the reverse. When you borrow and spend, you’re withdrawing resources from the economy before you’ve earned them.)
This is, I hope, self-evidently true.
If I take those savings in cash, and set them on fire, I’ve effectively donated my time and effort to society for free. But more likely, I’m going to invest those savings. And if I don’t, the money will be spent or invested by someone else when the bank lends it out (and then some) to other people.
So let’s say I invest those savings into a business. Well, the only sustainable way a business can generate long-term returns is by delivering value for other people — if it didn’t, no one would buy what it was selling and the enterprise would fail.
Sure, there are exceptions — companies that survive through government handouts, regulatory capture, or other forms of crony capitalism. And in that scenario, I’m actually in agreement with my friend. But in a competitive, free market, businesses only succeed if they make life better for others.
Crucially, this isn’t a zero-sum game. Success doesn’t mean taking a bigger slice of the pie at someone else’s expense. It means growing the whole pie.
Yes, business owners and investors get richer. But not because they sat around doing nothing. They saved, worked, and risked their capital; allocating resources to ventures that improve lives.
That’s the opposite of extractive.
If the business instead fails, as most do, the invested capital is essentially redistributed to others. Think about it, the money put into a venture doesn’t just disappear in the event of failure; it goes to employees, suppliers, landlords, and countless others in the economy.
Again, that’s not extractive.
“Aha!” says my mate. “Even if that’s true for direct investment, when you buy shares on the market, your money just goes to the previous shareholder. It doesn’t help the business at all.”
Which is half true. The business certainly doesn’t get your money.
But it does impact, indirectly, a company’s cost of capital. A higher share price means a business can raise funds more efficiently, issuing fewer shares to raise the same amount of money. This provides a greater ability to invest in growth — whether that’s hiring more staff, expanding operations, or developing new products. Activities that either create or redistribute value across the economy.
And what drives share prices up? The same thing that determines all prices — the interaction of supply and demand. If more people want to own shares than want to sell them, the price will rise. And vice versa.
Even if an investor never lifts a finger after buying shares, they’re still playing a role in shaping capital allocation by restricting the available supply of shares on the open market.
To an outsider, it might look like investors are just sitting around, sipping cocktails by the pool. But that view ignores the process that got them there.
To even be in a position to invest, they first had to defer consumption, take risks, and allocate capital wisely. Every day represents an internal struggle to resist cashing out when prices jump, or fleeing in terror when they fall. Even without any gut-wrenching volatility, to stay invested is to further delay consumption — that is, to avoid extracting real resources from the economy.
And if investors get it wrong? Their capital is redistributed to those who did it better.
Yes, some investors get lucky. Some are born into privilege. But that’s the exception, not the rule.
The vast majority succeed precisely because they help grow the economic pie, albeit in a somewhat indirect manner.
Did I convince my mate? Probably not. Is this simply an exercise in preserving some misguided sense of self worth? Maybe.
But in any event I tip my hat to you, fellow investor, for helping to make society more prosperous (or donating your savings to those that do).
Not all heroes wear a cape 😉
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