Free Enterprise Systems Analytical Essay
Introduction, influence of free enterprise systems on moral development, influence of free enterprise systems on economic development.
Free Enterprise Systems
Free enterprise systems have been adopted by many countries as the main form of business model. This model allows people to transact businesses without excessive government control and external influences from third parties (Hayek and Hamowy, 2011). The free ownership of property, rule of law, competition and free pricing are encouraged in this system (Bastiat, 2007).
The free enterprise system poses different advantages and disadvantages to the society. One of the influences of this economic model is on the moral and economic development of the society. These aspects of the society are important pillars of human existence. Therefore, it is important to understand how the moral and economic fabric of our society can be affected by the free enterprise system.
More importantly, this analysis would improve the understanding of our social, economic and political environments today (as a product of free enterprise systems). From the above understanding, this paper seeks to investigate the influence of free enterprise systems on the moral and economic development of the society.
The most notable characteristic of free enterprise systems in today’s society is the fact that the model gives all people an opportunity to be successful. Unlike other economic and social models, free enterprise systems do not offer limits to success. In fact, if one fails, the system always offers another opportunity to try once again.
Subsequently, if someone fails for a second time, he or she can try a third time (and again). It is very easy for people to succeed in such a system but most importantly, the system does not discriminate who is eligible for success (Bastiat, 2007). From free enterprise system, we have therefore seen many people rise from poverty to become some of the richest people in the world.
Certain socio-economic systems such as the caste system in India offers limits to success and almost entirely, the social class where someone is born dictates the socio-economic destination of the individual. Free enterprise systems are therefore fair to every individual.
The biggest drawback associated with free enterprise systems is the inequality created within such a system. The gap between the rich and the poor can be dramatically wide such that it may be very difficult for poor people to earn a decent living in this system. This situation may be realized through the understanding that free enterprise systems produce gullible individuals who may cannibalize everyone else for their benefit. Rogge (1979) explains that in such a system, there is little concern for the welfare of the majority.
For instance, free enterprise systems have been known to give rise to a wealthy minority who control most of the resources in the society. This inequality puts the poor majority at the mercy of the wealthy minority. Therefore, exploitation, unfair work policies, poor wages and similar practices are likely to be witnessed in such a system.
These are only some of the unfair societal practices we witness today from the establishment of free enterprise systems. Many people would argue that such an unfair and unjust system is immoral in today’s society because it does not uphold good ethical principles. Rogge (1979) observes that the future of free enterprise systems is shaky and there is need to re-evaluate its place in future societies.
Free enterprise systems also erode our moral fabric because it brews corruption and favoritism within the society. For instance, the argument advanced by proponents of free enterprise systems on inequality and injustice is that the poor and the downtrodden are taken care of through charities (Rawls, 1999).
However, the realities of potential success in such a system are extremely low. If charities are set up and donations flow in such systems, people who give such donations receive favor from authorities and all those concerned. Through this understanding, free enterprise systems reward corruption and support peddling. In fact, it is very easy for the wealthy minority to dictate policies in the society by using donations as a tool to wield power over the poor.
From the above dynamics of free enterprise systems, it is important to highlight that the free enterprise systems creates a materialistic society, which is obsessed by the accumulation of wealth (Danner, 1994, p. 63). Through this understanding, free enterprise systems hardly account for everyone’s well being.
Critics of free enterprise systems have cited this drawback as a strong weakness of the socio-economic model. Some have even observed that free enterprise systems will soon collapse because they will lead to the depletion of global resources since people are excessively greedy. This assumption bears a high credibility because the free enterprise system has created the perception that happiness can only be achieved through excessive accumulation of wealth and increased spending (Danner, 1994, p. 48).
Undesirable traits have therefore sprouted in today’s society because of this assumption. It has therefore been very easy for people to be envious of other’s success (and for those who have acquired wealth to be unreasonably selfish).
The increase in materialism has brought forth a generation that is willing to do anything to acquire status, fame and money. For example, many people are now willing to engage in crime to earn easy money. These statistics show how free enterprise systems have created a superficial society (Danner, 1994).
As noted in previous sections of this paper, free enterprise systems support competition. Competition is an important aspect of economic development because it leads to innovation and the production of good quality goods and services. The free enterprise model also ensures that consumers can get the best prices in the market.
The freedom which is evident in free enterprise systems ensure that producers produce the best quality goods and sell them at the lowest prices so that they can be able to stay in business. If businesses do not conform to these requirements, they will be run out of business by others who do so. This business outcome ensures that the economy develops within the principles of quality and fair pricing (Hayek and Hamowy, 2011).
The fact that free enterprise systems do not offer limitations to the number of businesses that can operate within the economy increases the prospects of witnessing rapid economic growth. In addition, free enterprise systems ensure that as a producer, someone can produce whatever type of goods they wish to and sell them at their preferable price.
Similarly, buyers have the privilege of purchasing what they want within the confines of their unique tastes and preferences. The principle of free will is therefore upheld within a free enterprise system. Within such a system, economic growth is likely to be realized (Hayek and Hamowy, 2011).
The influence of free enterprise systems on economic progress is therefore undoubted. Excerpts from economic studies show that over the last few centuries, free enterprise systems have birthed economic growth in most countries. Therefore, some of the world’s super powers we know today became wealthy because of adopting free enterprise systems. For instance, if we use different economic parameters such as gross domestic product (GDP), capacity utilization and the standards of living, we can see that countries, which have adopted free enterprise systems as their main economic model, have the highest GDPs, capacity utilization and standards of living in the world. A few examples are the United States (US), United Kingdom (UK), Canada, Japan and other western powers. Economic theorists attribute the increase in economic development to the ability of free market systems to control price and establish free market systems. Rogge (1979) explains that these elements are the main pillars of economic progress in free enterprise systems.
To affirm the above observation, it is important to highlight that within past two centuries, the global economy has grown substantially. Upon further entrenchment of free enterprise systems, it is reported that further economic progress has been witnessed (Rogge, 1979).
During these times, some of today’s economic giants such as Japan were extremely poor nations but after adopting the free enterprise model, they have become formidable forces it today’s deregulated economy. Consequently, there has been a sharp increase in the standards of living (which has been occasioned by better healthcare services, increased food availability, and increased wages).
This paper shows that free enterprise systems have offered immense opportunities and limitations to our economic and social lives. Economically, the model has contributed to growth and an increase in the standards of living. Apart from the notable divide between the rich and the poor, free enterprise systems seem to work fine (economically).
However, weighing the moral retrogression that free enterprise systems have brought forth; it is difficult to support the economic model. Comprehensively, we can agree that free enterprise systems are economically progressive but morally retrogressive.
Bastiat, F. (2007). The Law . Alabama: Ludwig von Mises Institute.
Danner, P. (1994). Getting and Spending: A Primer in Economic Morality . Kansas: Rowman & Littlefield.
Hayek, F. & Hamowy, R. (2011). The Constitution of Liberty . Chicago: University of Chicago Press.
Rawls, J. (1999). A Theory of Justice . Harvard: Harvard University Press.
Rogge, B. (1979). Can capitalism survive? New York: Liberty Press.
- The Role of Entrepreneurship in Business
- Global Entrepreneurship Monitor in Canada and Australia
- Free Enterprise System and the Development of Individuals
- The Appeal of Enterprise Resource Planning
- Gender Inequality and Socio-Economic Development
- Concept of an Entrepreneur in Business
- Entrepreneurship & Strategic Thinking
- The opportunity to succeed for women entrepreneurs in Saudi Arabia
- Sources of Business Start-up Capital
- Social entrepreneurship: What Everyone Needs to Know by Bornstein and Davis
- Chicago (A-D)
- Chicago (N-B)
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Free Enterprise
“A noted economist has claimed, “American prosperity and American free enterprise are both highly unusual in the world, and we should not overlook the possibility that the two are connected.”
Indeed, the evidence seems overwhelming that free enterprise and widespread economic prosperity are more than just connected; the first leads directly to the second, not just in the United States but around the world. Organizations as diverse as the Wall Street Journal, the Heritage Foundation and the World Bank produce annual research documenting the fact that the more enterprising people are free to be, the more businesses they will start, the more people they will employ and the more technologies and innovations they will discover. Free countries feed, clothe and house people at higher levels than unfree countries, by far.
The Founders understood the significance of this aspect of liberty. In his 1774 work, “A Summary View of the Rights of British America,” Thomas Jefferson asserted the exercise of free trade as a natural right of the American colonists. Among the complaints registered against Britain’s king in the Declaration of Independence are the following:
“He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance—He has given his assent to acts of pretended legislation—For cutting off our Trade with all parts of the world” (Thomas Jefferson, “A Summary View of the Rights of British America,” 1774).
The Constitution’s Framers recognized the value of property rights:
“The Congress shall have power—To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries” (The Unites States Constitution, Article I, Section 8, 1787).
Arguing for ratification of the Constitution in Federalist No. 10 in 1787, James Madison posited that protection of
“the diverse faculties of men, from which the rights of property originate—is the first object of government” (James Madison, Federalist No. 10 , 1787).
Again, in his 1792 essay “On Property,” Madison explained,
“In a word, as a man is said to have a right to his property, he may be equally said to have a property in his rights. Where an excess of power prevails, property of no sort is duly respected. No man is safe in his opinions, his person, his faculties, or his possessions” (James Madison, “On Property,” 1792).
The wisdom of protecting this aspect of liberty is also clear today. It’s no coincidence that the least free countries in the world are the poorest. North Korea ranks among both the least free and most poor. Across the border in South Korea, people of the same ethnic background live in a largely free enterprise economy and their average income is more than 16 times that of their relatives to the north. In pre-Civil War America, free states were richer than slave states. It’s a familiar pattern the world over.
What is this arrangement we call “free enterprise” that produces so much wealth? What characteristics must an economy exhibit to qualify as a “free enterprise” one?
A good way to answer these questions is to make plain what free enterprise is not. We should understand up front that it’s possible to have enterprise that isn’t free. Visit a busy North Korean tractor factory and you’ll see investment, resources, employment and even busy people managing other busy people – lots of “activity.” But no one would call such enterprise “free.” That’s because only the government in North Korea can own a tractor factory. Whether or not tractors are made, how many of them are made, what they sell for and whether they work or not—these are all decisions made by those in political power. Their incentives are very different from those of private entrepreneurs who have to invest properly, compete well, price their product and serve their customers or run the risk of going bankrupt.
In other countries, governments allow private people to start their own enterprises and to “own” them, at least on paper, but then tax and regulate them so heavily that they end up taking as many orders from politicians and bureaucrats as they do from customers. You may find some “enterprise” there but not much of the “free” part.
Many people make the mistake of thinking that free enterprise means special favors, protections and subsidies for business. But those things can only be granted by government to some businesses at the expense of other businesses, and also at the expense of many characteristics that define true free enterprise. Madison also addressed this problem in the 1792 essay:
“A just security to property is not afforded by that government, under which unequal taxes oppress one species of property and reward another species: where arbitrary taxes invade the domestic sanctuaries of the rich, and excessive taxes grind the faces of the poor; where the keenness and competitions of want are deemed an insufficient spur to labor, and taxes are again applied, by an unfeeling policy, as another spur—If the United States mean to obtain or deserve the full praise due to wise and just governments, they will equally respect the rights of property, and the property in rights” (James Madison, “On Property,” 1792).
What are the most important characteristics of free enterprise?
Private Property
Who “owns” resources such as tractors, factories, coal mines and restaurants? Someone has to! It’s really one or the other of these two options: 1) The owners are the people who created them or voluntarily traded something for them; or 2) The owners are the people with political power who seized those resources or forced others to pay to create them.
Sometimes a third alternative is suggested, namely, “common” ownership: “We all own it because it belongs to the people.” But genuine common ownership is woefully impractical. Everyone would have strong incentives to use and abuse the property and no one would have much reason to take care of it. “Common” ownership always reduces to those in political power deciding how and when everybody else gets to use the stuff.
Free enterprise requires a legal framework that recognizes and protects the private ownership of property—the right to create it, the right to use it, the right to trade it away—so long as in doing so, the private owner does not infringe on the equal rights of other property owners. If it’s yours, then it’s “theft” if somebody takes it without your consent, even if they claim they “need” it more or can put it to better use than you. Private property under free enterprise means you can use, invest and deploy it, and enjoy the fruits of success from efficiency and good judgment, but it implies no right to other people’s property if you fail.
Free enterprise requires a legal framework that recognizes and protects the private ownership of property—the right to create it, the right to use it, the right to trade it away—so long as in doing so, the private owner does not infringe on the equal rights of other property owners.
This is essentially the perspective of America’s Founders, reflected in the Declaration of Independence, the Constitution, and other writings. Signers of the Declaration objected to arbitrary seizures and regulation of private property by the king, and the Constitution’s Framers provided protections for private property in law.
The Fourth Amendment declares that “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probably cause” (The United States Constitution, Fourth Amendment, 1791).
Protecting private property has a genuine, poverty-reducing result. Without it, economic growth is severely hampered because incentives to save, invest, take risks, build, create and produce are curtailed.
Free Prices
If you bring your product or service to the marketplace to trade with others, who determines the price? If it’s a government official, you don’t have free enterprise. If it’s voluntary agreement between buyer and seller—influenced of course by such things as consumer tastes, viable alternatives, supply and demand—then an indispensable condition for free enterprise is present. Just as critical is the fact that prices must be free to fluctuate as conditions and preferences change.
Prices in a free enterprise system send important signals to both producers and consumers. They tell us what is needed where and how urgently, what the most efficient use of a scarce resource is and when to produce or consume more and when to produce or consume less.
Competition
Many businesspeople don’t like competition and would prefer to be protected from it by such artificial, political devices as subsidies, tariffs against foreign goods, or regulations that make it harder for the little guy or the newcomer to do business. True free enterprise is not just defending the interests of business. It means even large firms must behave as if they are surrounded by competition because if they don’t, they soon will be; the law must not grant them any special advantages or protections. When the law grants such special privileges, the result is called crony capitalism, which violates principles of free trade and rule of law. British philosopher John Locke recognized the importance of the rule of law in protecting natural rights:
“They [legislators] are to govern by promulgated established laws, not to be varied in particular cases, but to have one rule for rich and poor, for the favorite at court, and the countryman at plow” (John Locke, Second Treatise of Civil Government , 1690).
Madison believed one of the most important protections of the rule of law was the watchdog function of the three branches keeping one another in check.
“Ambition must be made to counteract ambition. The interest of the man, must be connected with the constitutional rights of the place. It may be a reflection on human nature, that such devices should be necessary to control the abuses of government. But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions…” (James Madison, Federalist No. 51, 1788)
Recognizing the many temptations that elected officials would have to write special advantages into law, interfering with competition in an open market, the Founders designed a system that was intended to keep unjust motives in check.
Competition appears in many forms–from existing companies producing the same thing to companies that produce reasonable substitutes to companies that develop a totally new, alternative technology. In one sense, every firm competes against every other firm for the consumer’s dollar. For example, if a person earns an extra thousand dollars, he or she might either buy a plane ticket and take a vacation, or might buy a new washer and dryer. In that instance, an airline is competing with an appliance manufacturer for the money.
Profit and loss are important elements of competition in a free marketplace. It’s easy to lose money. This might happen through lack of preparation, laziness, guessing wrong about the future market, and many other ways. But turning a profit and doing so year after year is both a challenge in competitive markets and a tribute to the entrepreneurial skill of business managers.
Free enterprise involves constant change. Consumers are always looking for new and better things. Companies that can’t keep up give way to those who can, producing what is called “creative destruction.” Businesses that cannot survive this process may seek special advantages from government, but if government protects them from the natural cycle of competition, the result is not “free enterprise.” It would be neither “free” nor “enterprising.”
Free enterprise is a dynamic force in the world. It says to each and every one of us: “If you want to do better for yourself, find a way to produce goods and services that please other people. You can’t command the patronage of customers, you must earn it.” Under the Constitution, no one has the right to command special privileges from government, either.
“Free enterprise protects property, which according to James Madison “embraces every thing to which a man may attach a value and have a right; and which leaves to every one else the like advantage.” (James Madison, “On Property,” 1792)
Related Content
Making Economic Decisions
When we hear the term “economics,” we tend to think about ups and downs in the economy as well as graphs mysteriously depicting supply and demand. In reality, economics is vitally important subject because it is the study of making choices. More specifically, it is the study and practice of making choices in a world of limited resources (scarcity). You cannot go for a day without making economic decisions. For this reason, an understanding of economic thought makes you a more successful citizen.
Prices and Value
Prices are created through interactions between sellers and buyers. Supply (sellers) and demand (buyers) is the first, most recognized model in economics. Demand represents the various numbers of items that consumers are willing and able to purchase at a series of different prices at a particular point in time.
How Economic Systems Work
As buyers purchase goods and services, they signal to the producers what ought to be made. If people want to wear pants with farm animal designs, they buy them. Producers have to be observant to anticipate demand. As they see that the stock of cow pants is flying off the shelves, they will create many more of them. Buyers and sellers are able to communicate effectively using just money.
Free Enterprise and Prosperity
The overall wealth of the United States has been achieved because of the free enterprise system. The U.S. has a limited government, and that feature extends to economic choices; most decisions about what, how, and for whom to produce are left to market forces rather than government dictates.
Entrepreneurship
Introduction to Entrepreneurship and its history in the U.S., student activity that enables students to see the strength of a free market economy as it affects development and production of goods.
Taxes and Regulation
In America’s free society, entrepreneurs of many kinds start businesses that create the nation's wealth. The Founders established the federal government in the Constitution, and the American people ratified it to protect the rights and property of its citizens. That meant that national defense, court systems, and political administration all became part of the U.S. government. Therefore, some taxes were necessary to support the limited functions of this new government.
Saving and Investing
If, as individuals, we spend more than we earn, we can go bankrupt. The same is true with nations. If a nation spends on government services more than it takes in from tax revenue, it runs a deficit, and must borrow at interest to get back to even.
Philanthropy
Philanthropy may be defined as the desire to promote the welfare of society by giving your own money to good causes. Philanthropy is not allocating the money of others, whether through taxes or government programs, to the less fortunate in society. Philanthropy is an action of one individual or one family giving to help others.
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What Is Free Enterprise?
Understanding free enterprise.
- Free Enterprise in the U.S.
- Pros and Cons
The Bottom Line
Free enterprise: definition, how it works, origins, and example.
The term free enterprise refers to an economy where the market determines prices, products, and services rather than the government. Businesses and services are free from government control in a free enterprise environment. Free enterprise is characterized by different factors, including private property rights . Alternatively, free enterprise could refer to an ideological or legal system whereby commercial activities are primarily regulated through private measures.
Key Takeaways
- Free enterprise refers to business activities that are not regulated by the government but are defined by a set of legal rules such as property rights, contracts, and competitive bidding.
- The argument for free enterprise is based on the belief that government interference in business and the economy hampers growth.
- A free enterprise legal system tends to result in capitalism.
- A free enterprise aims to increase freedom, market efficiency, consumer rights, financial security and stability, and economic opportunities.
- Though free enterprise grants more freedom, there is higher risk of more several economic crises without government intervention.
Investopedia / Zoe Hansen
Free enterprise is a system wherein market forces determine the production, supplies, and prices of goods and services. As such, it is also referred to as a free market . Free markets are, in principle and practice, defined by private property rights, voluntary contracts, and competitive bidding for goods and services in the marketplace. This is contrasted with public ownership of property, coercive activity, and fixed or controlled distribution of goods and services.
Another definition of free enterprise is in terms of economics and was offered by the Nobel-winning economist Friedrich Hayek . Hayek described such systems as spontaneous order. Hayek's point was that free enterprise is not unplanned or unregulated. Instead, he said that planning and regulation arise from the coordination of decentralized knowledge among innumerable specialists, not bureaucrats.
A free enterprise legal system tends to produce capitalism in the absence of central planning . This may lead to voluntary socialism or even agrarianism. In capitalist economic systems (think of the United States), consumers and producers determine which goods and services to produce and which to purchase. Contracts are entered into voluntarily and may even be enforced privately. Competitive bidding determines market prices.
In Western countries, free enterprise is associated with laissez-faire economies and philosophical libertarianism. However, free enterprise is distinct from capitalism. Capitalism refers to a method by which scarce resources are produced and distributed. Free enterprise refers to a set of legal rules regarding commercial interaction.
Free enterprise may also be referred to as free trade or free market.
Goals of Free Enterprise
A free enterprise society hopes to achieve different goals. When a free enterprise society in fully operational, consumers often have freedom, efficiency, stability, security, growth opportunities, and justice.
- Freedom: The overriding goal of a free enterprise is freedom. This is the freedom of choice, freedom to express oneself through the creation of any product you'd like, or freedom to charge or pay what you prefer.
- Efficiency: By allowing markets to regulate themselves, inefficient companies are theoretically at-risk of being eliminated as market participants will not choose them and government policy won't fund them to keep them alive. In addition, there may be less processes or procedures to transact in a free enterprise.
- Stability: A free enterprise strives to be self-sustaining by having markets rooted in consumer preference. Instead of monetary or fiscal policy dictating economic circumstances, the long-term goal for free enterprise is to have the consumers shape the economy in a more predictable, stable manner than a government may be able to.
- Security: In a free enterprise, every individual should feel their goods and rights are protected. This means having the ultimate choice on what to make, what to sell goods for, and what they're allowed to consume or acquire.
- Growth Opportunities: At the heart of free enterprise is the notion that individuals should be able to pursue profit-making opportunities without government limitation. This means every individual has greater potential for success when given greater flexibility.
- Justice: Each individual should have the same rights as everyone else in a free enterprise. There is no favoritism or special circumstances granted to certain people in a free enterprise. Instead, every market participant faces the same rules without benefit from government policy.
History of Free Enterprise
The first written intellectual reference to free enterprise systems may have emerged in China in the fourth or fifth century BC when Laozi (or Lao-tzu) argued that governments hampered growth and happiness by interfering with individuals.
Legal codes resembling free enterprise systems were not common until much later. The original home of contemporary free markets was England between the 16th and 18th centuries. This growth coincided with and probably contributed to the first industrial revolution and the birth of modern capitalism. At one time, the English legal code was completely free of international trade barriers, tariffs, barriers to entry in most industries, and limitations on private business contracts.
The United States also used a largely free-market legal approach during the 18th and 19th centuries. In modern times, however, both the United States and the United Kingdom are better classified as mixed economies . Countries like Singapore, Hong Kong, and Switzerland are more reflective of free enterprise.
The opposite of a free enterprise economy is a planned, controlled, or command economy.
Free Enterprise in the United States
The U.S. economic system of free enterprise has five main principles: the freedom for individuals to choose businesses, the right to private property, profits as an incentive, competition, and consumer sovereignty.
- Economic Choice: In a free enterprise, consumers can choose the entities with whom they want to transact. This is only possible if there are multiple market suppliers. Consumers also have the freedom to choose what they want to pay, although a seller must agree to this price for a transaction to occur.
- Right to Private Property: Consumers have the right to acquire private property under free enterprise principles. This may be in the location in which they want to acquire property and should not be restricted by personal or financial limitations.
- Profit Motive: In a free enterprise, the goal is to make money in a free-flowing society. Individuals have the right to buy and sell goods to make a profit, though there are fewer restrictions on doing so compared to other restrictive forms of economies.
- Competition: Buyers and sellers compete in a free enterprise. Buyers attempt to acquire goods for lower prices or more favorable terms, while sellers attempt to sell goods for higher prices. Market equilibrium is met when both parties agree to come together.
- Voluntary Exchange: In a free enterprise, consumers have the right to choose to or not to exchange goods. Individuals can not be forced into trade or be required to consume any products.
Advantages and Disadvantages of Free Enterprise
In a free enterprise, the market faces no bureaucracy . Processes are theoretically more efficient and may be administratively less expensive to operate a business and interact with consumers. This is especially true in highly regulated markets , though increased competition may shift costs elsewhere.
Market participants are usually allowed greater expression and flexibility. Entrepreneurs aren't constrained by public policy or dictated on what goods need to be produced. A cornerstone theory of free enterprise is that the best companies will innovate to continue to meet market demand , while companies that fail will cease to exist as they no longer have a place in the market.
Instead of government policy deciding how resources are allowed, a free enterprise's large benefit is that consumers have a greater voice in the economy. The consumer determines the ultimate prices of a good, which products are needed in a market, and what goods fail or succeed. It is up to a firm in a free enterprise to understand these consumer preferences and adjust their operations accordingly.
Disadvantages
Goods that are generally not profitable to manufacture will not be produced in a free enterprise. This is because there is no economic incentive for a firm to produce these goods—unless there is government aid or a stipend . This may also include limitations on where goods are delivered. For example, government funds may partially pay for telecommunication services to be distributed to rural areas. Without this funding, those communities may not receive service.
A free enterprise may also spur unfavorable activity due to the prioritization of profits. Consider Enron , which didn't follow public financial reporting regulations resulting in financial ruin. When there are little to no rules to follow, entities within a free enterprise may sacrifice worker safety, environmental standards, or ethical behavior in favor of making more money.
A free enterprise doesn't come with bailouts . This means economic downturns are theoretically more severe, as public funds can't be used to aid failing institutions that would cause major ripple effects by dissolving. This is especially true in today's interconnected society where one large bankruptcy could negatively financially impact firms around the world.
Less bureaucratic
May be less expensive to operate a business
Allows for greater entrepreneurial freedom
Prioritizes consumer demand and preferences
May result in unprofitable products being dissolved
May restrict where goods are distributed to
May entice illicit behavior due to prioritizing profits
May result in greater market crashes due to no bailouts
Examples of Free Enterprise
Consider the differences between two companies: Apple ( AAPL ), a public company, and SunGard Data Systems, a private company . Because both companies transact within the United States, neither is truly in a free enterprise environment.
Imagine each company wants to raise capital . The Securities and Exchange Commission (SEC) has outlined regulations that public companies like Apple must meet to sell additional shares and be listed on public exchanges. This also includes meeting public reporting and filing requirements. With fewer restrictions in place as a private company, SunGard Data Systems may raise capital more freely as it does not experience as many government restrictions.
Another example of free enterprise (or lack thereof) is the financial crisis that led to the Great Recession . In response to the economic calamity, Congress authorized the use of the Trouble Assets Relief Program (TARP) emergency funds for distressed financial institutions. In a truly free enterprise, governments would not intervene to aid struggling businesses. Instead, these companies would be allowed to fail, allowing for the market to resolve itself with new market participants entering the space to claim the newly vacated market opportunity.
What Is the Main Goal of Free Enterprise?
The main goal of free enterprise is to allow citizens to dictate market and decide the value of trade. Instead of relying on government intervention or public policy, free enterprise's main goal is to allow markets to move themselves without constraint, self-discovering efficiencies and inaccuracies.
What Is the Main Benefit of Free Enterprise?
Some may argue the main benefit of free enterprise is freedom. In one sense, individuals may transact with little to no restricting barriers, especially those set by policy or trade regulation. In another sense, individuals are allowed to creatively express and transact based on a seemingly endless range of consumer choices.
What Is the Difference Between Capitalism and Free Enterprise?
Free enterprise and capitalism are related, though the two terms are different. Free enterprise refers to how a free market system has minimal barriers regarding the exchange of wealth or transacting of goods and services. On the other hand, capitalism is primarily centered on the creation of that wealth or production of those goods. Both relate to an individual initiating their own decisions with fewer market mechanisms governing the control of their resources.
What Is the Difference Between Socialism and Free Enterprise?
Whereas free enterprise is the notion around letting goods and services freely generate market results on their own, socialism is focused on governing how resources are distributed. These government policies may dictate how resources are used, who receives goods, or what pricing mechanisms certain market participants may face.
Free enterprise refers to an economic concept where markets are not governed by policy. Instead, market participants set pricing, do not face export or regulation requirements, and have more freedom in choosing how they transact. Though free enterprise is rooted in granting individuals more freedom, market failures may be more devastating without government intervention.
Federal Reserve Bank of Minneapolis. " Hayek's Legacy of the Spontaneous Order ."
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Free Enterprise: An American History
An incisive look at the intellectual and cultural history of free enterprise and its influence on American politics. Throughout the twentieth century, “free enterprise” has been a contested keyword in American politics, and the cornerstone of a conservative philosophy that seeks to limit government involvement into economic matters. Lawrence B. Glickman shows how the idea first gained traction in American discourse and was championed by opponents of the New Deal. Those politicians, believing free enterprise to be a fundamental American value, held it up as an antidote to a liberalism that they maintained would lead toward totalitarian statism. Tracing the use of the concept of free enterprise, Glickman shows how it has both constrained and transformed political dialogue. He presents a fascinating look into the complex history, and marketing, of an idea that forms the linchpin of the contemporary opposition to government regulation, taxation, and programs such as Medicare.
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Free Enterprise and the Role of Government in America
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Americans often disagree about the appropriate role of government in the economy. This is demonstrated by the sometimes inconsistent approach to regulatory policy throughout American history.
As Christoper Conte and Albert Karr point out in their volume, "Outline of the U.S. Economy," the American commitment to free markets continually endured since the dawn of the 21-century, even as America's capitalist economy remained a work in progress.
History of Large Government
The American belief in "free enterprise" does not and has not precluded a major role for government. Many times, Americans have depended on the government to break up or regulate companies that appeared to be developing so much power that they could defy market forces. In general, government grew larger and intervened more aggressively in the economy from the 1930s until the 1970s.
Citizens rely on the government to address matters the private economy overlooks in sectors ranging from education to protecting the environment . Despite their advocacy of market principles, Americans have used government at times in history to nurture new industries or even to protect American companies from competition.
Shift Towards Less Government Intervention
But economic hardships in the 1960s and 1970s left Americans skeptical about the ability of government to address many social and economic issues. Major social programs (including Social Security and Medicare, which, respectively, provide retirement income and health insurance for the elderly) survived this period of reconsideration. But the overall growth of the federal government slowed in the 1980s.
A Flexible Service Economy
The pragmatism and flexibility of Americans have resulted in an unusually dynamic economy. Change has been a constant in American economic history. As a result, the once agrarian country is far more urban today than it was 100, or even 50, years ago.
Services have become increasingly important relative to traditional manufacturing. In some industries, mass production has given way to more specialized production that emphasizes product diversity and customization. Large corporations have merged, split up and reorganized in numerous ways.
New industries and companies that did not exist at the midpoint of the 20th-century now play a major role in the nation's economic life. Employers are becoming less paternalistic, and employees are expected to be more self-reliant. Increasingly, government and business leaders emphasize the importance of developing a highly skilled and flexible workforce in order to ensure the country's future economic success.
This article is adapted from the book "Outline of the U.S. Economy" by Conte and Karr and has been adapted with permission from the U.S. Department of State.
- America's Capitalist Economy
- Laissez-faire Versus Government Intervention
- Regulation and Control in the U.S. Economy
- History of Government Involvement in the American Economy
- Economic Growth: Inventions, Development, and Tycoons
- The U.S. Government's Role in Environmental Protection
- Understanding the Pros and Cons of Protectionism
- American Economy of the 1990s and Beyond
- The Importance of Monetary Policy
- The 1980s American Economy
- Colonization of the United States
- What Caused the Post-War Economic Housing Boom After WWII?
- The American Economy in 2000
- The U.S. Economy of the1960s and 1970s
- Bimetallism Definition and Historical Perspective
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Time Essay: The Future of Free Enterprise
THE U.S. is universally recognized as the capital of capitalism, the land of free markets and the home of resourceful entrepreneurs. More than any other country, it has been known for leaving an entrepreneur free to decide prices for his products and set wages for his workers, free to grow and prosper—and free to go bankrupt if he failed. Historically, the U.S. Government has often done much to strengthen those twin pillars of free enterprise, private ownership and unfettered competition. Americans have grown so accustomed to living under free enterprise that they rarely even think in terms of class struggles, expropriation, the proletariat or other concepts that mark national debate elsewhere.
Only in the U.S. are airlines, radio and television networks, telephone systems, power companies and all other major industries owned primarily by private individuals. By contrast, Japan is a corporate state in which government and industry are so closely interrelated that it is difficult to tell which segment is in control. Half of France’s auto industry is owned by the state; 35% of Italy’s industrial production is state controlled.
Recently, however, free enterprise in the U.S. has been under heavy pressure—not so much from the New Left or consumerist critics as from some of the system’s primary defenders, namely the Republican Party and private businessmen. By ordering the first controls in the nation’s history (outside of a military emergency) clamped on wages, prices and rents, President Nixon made one of the boldest encroachments so far on the free-enterprise system. Nixon’s New Economic Policy is, in fact, only the latest and most dramatic in a series of events that seem to challenge the principle of free enterprise. In business, the role of Government is fast growing larger—as savior, subsidizer, owner, regulator, decision maker.
It is business leaders themselves who often urge the Government to step in. When the aerospace industry tumbled into trouble last year, its generally conservative captains importuned Washington for subsidies to bail out Lockheed (successful) and save the SST (unsuccessful). When the housing industry slumped in the late 1960s, home builders pressured the Government to increase subsidies greatly; under the present Administration, the number of federally assisted housing starts has jumped 150%, to almost 400,000. After passenger rail service had become a hopeless drain on profit, Congress last year relieved the railroads of that burden by creating Amtrak, the Government-sponsored rail corporation.
The Government’s recent actions raise troubling questions. Does free enterprise have much of a future? If so, what should be done to preserve and strengthen the system? If not, what will replace it?
Actually, the system has never been as free as its folklore suggests. Business and Government have often been partners in a common-law marriage. What is happening now is largely an intensification of a long process of Government involvement.
Many early American capitalists built their fortunes by prying favors and subsidies out of the Government, including publicly financed roads and canals that were tailored to their needs, direct land grants and protective tariffs. The first steps toward Government regulation of industry were prompted not primarily by bureaucrats or muckrakers but by businessmen themselves. Around the turn of the century they persuaded the Government to referee ruinous competition, stabilize markets and guarantee a steady line of credit by creating the Interstate Commerce Commission, the Federal Trade Commission, the Federal Reserve System and other agencies of the Progressive era. Some businessmen urged the Government to go even further. As Judge Elbert Gary, first chairman of U.S. Steel Corp., told a somewhat startled congressional committee in 1911: “I believe we must come to enforced publicity and Government control, even as to prices.”
As conservatives have never ceased grumbling. Franklin Roosevelt’s New Deal pushed the Government even deeper into free-market restraints by creating the Securities and Exchange Commission (which regulates the securities business), expanding the Reconstruction Finance Corporation (which started the Government rescuing companies from bankruptcy), and introducing the minimum wage law (which set a precedent for some wage controls). During World War II and the Korean War, the Government imposed temporary wage and price controls.
The most important incursion of all came when Congress passed the Employment Act of 1946, which once and for all committed the Government to take all necessary steps “to promote maximum employment, production and purchasing power.” Using that broad political charter and the economic principles of John Maynard Keynes, every President since 1946 has wielded the powers of Government in attempts to keep the level of jobs high and prices low. Richard Nixon’s controls are by far the most drastic moves toward that goal in the past quarter-century. Yet in the Government’s arsenal, controls are merely one form of economic weaponry, along with fiscal and monetary policy.
The Government’s influence on the private economy will become even greater in the future. But the nation is not creeping toward a corporate state or outright socialism. Aside from the special case of railroads, for example, there is little popular support for having Washington take control of basic industries. Still, the Government will increasingly exert its great power in three ways:
First, Washington will involve itself more and more as a goal setter and rules maker for business—largely because many business leaders want it to do so. Banker David Rockefeller, General Motors’ ex-Chairman James Roche and A.T. & T. Chairman H.I. Romnes are among the prominent nonrevolutionaries who have endorsed the National Urban Coalition’s proposed “counter-budget.” which calls for the Government by the mid-1970s to establish a guaranteed annual income, start a national health-insurance program, and double federal outlays for education. Only the Federal Government is in a position to direct an attack on a wide array of national problems—environmental pollution, urban deterioration, auto and job safety. The business community is too fragmented, and individual managers are too preoccupied with their own companies’ affairs, to undertake the task alone.
At the same time, the federal role will be restricted by the fact that not even the Government is rich or powerful enough to solve all the nation’s needs and problems without help from business and the public. A prime example is pollution control. Businessmen are urging the Government to set clear, firm national standards. Only in that way can entrepreneurs compete on equal terms; no one will be able to use plain self-interest or lax local laws to cut his antipollution costs. But if the Government were to attempt to spend all the billions necessary to clean up the nation’s air and waters, it would break the already deficit-ridden federal budget. The cost of cleanup is so enormous that it can be met only by adding to the prices of the major products of pollution—gasoline, electric energy, steel, fertilizers and others—and thus ultimately making consumers pay the bill. Thus the Government may set the goals and standards, but the problem can be solved in the private market.
Second, the Government will become a sterner policeman of private enterprise. Responding to a surge of rising public expectations about corporate performance, Washington is stepping up its regulatory efforts. Nixon-appointed heads of federal agencies are already outdoing their Democratic predecessors in bedeviling businessmen with tougher rules on auto safety, toy safety, food and drug quality, truth in advertising, disclosure of financial information and other securities practices, as new regulations proposed last week by the SEC indicate (see BUSINESS). In 1970 Congress passed environmental protection and industrial safety acts that empower the Government to seek court orders banning certain methods of production, and even closing down some plants in basic industries—notably autos, steel, oil, electric power and coal mining—when they violate federal pollution or job-hazard standards. By 1975, federal officials will be responsible for almost as many basic decisions in auto design as the auto companies’ engineers. Stiffer regulation, however, is not a constraint on free enterprise. In an increasingly large and complex economy, regulation is what prevents the pursuit of profit from leading to harmful products, destructive dis-economies like pollution, the exploitation of customers and other threats to the stability of the business system.
Third, the Government will likely continue some form of surveillance over wages and prices. In his economic report to Congress two weeks ago, President Nixon implied that controls will remain at least until the end of this year and perhaps longer. Beyond that, the U.S. will probably have some looser form of Government wage-and-price supervision more or less indefinitely. At his farewell press conference in December, Paul McCracken, the President’s outgoing Chief Economic Adviser, said that the Government may have to take steps to moderate prices “for a long time to come, even after Phase II has done its thing.”
Many economists and businessmen favor a system of voluntary wage-price guidelines, such as existed with varying success during the Kennedy-Johnson years. Companies and unions would probably be reluctant to transgress these guidelines, if for no other reason than that the Government, having set a precedent for peacetime controls, could always goback to them. Says Walter Heller, a member of TIME’S Board of Economists: “Things will never be the same again. Even after controls are lifted, there will be the threat of their reimposition. As Al Capone put it: ‘You can get so much farther with a kind word and a gun than with a kind word alone.’ ”
If the Government, whether under Republican or Democratic auspices, can curtail inflation and revive the economy by using such tools as controls and guidelines, free enterprise will be greatly strengthened. When the economy is growing, entrepreneurs have a much greater opportunity to start and enlarge businesses. When costs are stable, established businessmen find it much easier to lower the prices of their own products in pursuit of competitiveness.
Free enterprise should be valued, preserved and strengthened. It is not fundamentally endangered by Government attempts to set rules or goals for business to solve social problems or by efforts to straighten out the economy by setting wage-and-price controls. The real threat comes from quite another source: the steady increase of economic power concentrated in large corporations and large unions. Today the 100 biggest industrial corporations control about half the nation’s corporate manufacturing assets, an even greater percentage than the 200 largest companies controlled 20 years ago. These corporations may be beneficent and efficient, though smaller firms are often better in both categories. The sheer size of the giants, however, hampers new entrepreneurs from entering some industries and expanding in others. A handful of companies dominate auto, aerospace, steel, aluminum and computer manufacturing so thoroughly that new companies find it nearly impossible to break in. If the U.S. wants to expand free enterprise in these and other basic areas, the Government will have to be come more vigorous in pursuing antitrust policies.
Free enterprise is also restrained by giant national unions. Because they are often more powerful than their generally small employers, the building-trades unions can demand — and get — exorbitant wage increases, make-work practices, and restrictions on the use of new methods and materials. Similar abuses are committed by the Teamsters, the maritime unions and the civil service workers. Sooner or later, some U.S. President will have to challenge union power and put an end to such enterprise-sapping practices as the union hiring hall and featherbedding. That man may as well be Richard Nixon, since the great majority of union leaders already vehemently oppose him and he has little to lose.
The U.S. should make free enterprise even more competitive and more responsive to the nation’s needs. That may require some more effective form of Government planning to coordinate the resources of businesses with the spending and taxation policies of federal, state and local governments. The capitalist economy may thus eventually take on some features of socialism, just as socialism over the years has adopted some practices of capitalism. Yet a nation that accounts annually for nearly half of the non-Com munist world’s gross national product, and has more individual business enterprises than many countries have people, is surely strong and diverse enough to accommodate the best features of both systems. ∙ Donald M. Morrison
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The Essence of Free Enterprise: a Foundation for Economic Freedom
This essay about the definition and implications of free enterprise outlines the system as a key component of capitalist economies, emphasizing minimal government intervention and the liberty of individuals and businesses to operate competitively for profit. It explores the concept’s roots in Adam Smith’s principle of the invisible hand, highlighting the system’s capacity to drive economic efficiency, innovation, and growth through entrepreneurship. The discussion also addresses the debates surrounding the government’s role, arguing both for the necessity of some oversight to prevent market failures and for the importance of economic freedom in fostering prosperity. By presenting free enterprise as a reflection of values such as freedom and opportunity, the essay acknowledges the system’s potential to improve living standards while recognizing the need for a balance between economic freedoms and social responsibilities.
How it works
In a realm where economic paradigms mold the fates of nations, the notion of unbound enterprise emerges as a guiding light of autonomy and ingenuity. Fundamentally, unbound enterprise epitomizes an economic structure wherein private individuals and enterprises wield the freedom to engage in profit-driven endeavors within a competitive marketplace, with minimal governmental intervention. It stands as a cornerstone of capitalist economies, championing the liberty of commerce, the prerogative of private ownership, and the pursuit of pecuniary gain.
Embedded within unbound enterprise is the belief that the intangible hand of the market serves as the optimal arbiter of economic conduct.
This principle, initially elucidated by Adam Smith in the 18th century, posits that individual pursuits of self-interest inadvertently contribute to the economic welfare of society at large. Within this framework, enterprises vie to offer commodities and services that cater to the needs and predilections of consumers, fostering innovation, efficacy, and the judicious allocation of resources.
One of the most compelling facets of unbound enterprise is its ability to nurture entrepreneurship. By affording individuals the latitude to initiate and cultivate their own ventures, it engenders a vibrant milieu wherein novel concepts flourish and economic expansion is sustained. Entrepreneurs are galvanized by the allure of financial gain and, consequently, propel job creation, product innovation, and technological progress.
Nevertheless, the role of government in an unbound enterprise system remains a topic of perpetual contention. Advocates contend that minimal governmental intervention safeguards economic liberty and forestalls the consolidation of authority in a central entity. They espouse a regulatory framework that safeguards property rights, enforces contractual agreements, and upholds currency stability, while eschewing interference in market affairs. Conversely, detractors posit that a modicum of governmental oversight is indispensable to avert market failures, safeguard public welfare, and ensure societal equity.
Amidst these deliberations, the principle of unbound enterprise has exhibited remarkable resilience and adaptability. It has evinced an unparalleled capacity to engender prosperity and ameliorate living standards. However, it also presents challenges, such as fostering equitable wealth distribution and addressing ecological concerns. Consequently, contemporary economies often function as hybrid systems, amalgamating facets of unbound enterprise with strategic governmental intervention to redress these quandaries.
In summation, unbound enterprise transcends its identity as a mere economic blueprint; it mirrors the principles of liberty, individualism, and opportunity. It has sculpted the global economic panorama, propelling innovation, efficiency, and affluence. While not devoid of imperfections, the tenets of unbound enterprise persist as a potent framework for comprehending and navigating the intricacies of the global economy. As we journey forward, the crux lies in harmonizing the freedoms it affords with the obligations it imposes, ensuring that the fruits of economic endeavor are equitably distributed across society.
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Free enterprise systems have been adopted by many countries as the main form of business model. This model allows people to transact businesses without excessive government control and external influences from third parties (Hayek and Hamowy, 2011).
Free enterprise requires a legal framework that recognizes and protects the private ownership of property—the right to create it, the right to use it, the right to trade it away—so long as in doing so, the private owner does not infringe on the equal rights of other property owners.
Free enterprise refers to business activities that are not regulated by the government but are defined by a set of legal rules such as property rights, contracts, and competitive bidding.
Free enterprise, also known as capitalism, is an economic system characterized by private ownership of resources and the means of production, where individuals and businesses have the freedom to compete and operate with minimal government interference.
Throughout the twentieth century, “free enterprise” has been a contested keyword in American politics, and the cornerstone of a conservative philosophy that seeks to limit government involvement into economic matters.
Free enterprise is an economic system based upon a free and open market for anyone who wants to fill a demand. Capitalists pursue profit. They do this by deploying privately owned capital assets, such as factories and mines, and employing labor to earn profits for themselves.
This essay dives into the heart of free enterprise, portraying it as a thrilling journey of economic freedom and entrepreneurial spirit. It paints a vivid picture of a dynamic marketplace driven by supply and demand, where individuals have the steering wheel of their own destinies.
Americans disagree about the appropriate role of government in the economy. Examine the relationship between government and free market in US history.
The U.S. should make free enterprise even more competitive and more responsive to the nation’s needs.
This essay about the definition and implications of free enterprise outlines the system as a key component of capitalist economies, emphasizing minimal government intervention and the liberty of individuals and businesses to operate competitively for profit.