argumentative essay about free enterprise

Free Enterprise System and the Development of Individuals Argumentative Essay

• To find inspiration for your paper and overcome writer’s block
• As a source of information (ensure proper referencing)
• As a template for you assignment

Introduction

Features of a free enterprise system and effect on individuals and development, private property, rule of law, price determination, competition.

Free enterprise is an economic system that provides individuals the opportunity to make their own economic decisions, free of government constraints, and as private profit potential businesses. It equates to a capitalist system of economy which is completely different from a socialist or communist system.

It is, however, important to note that a free enterprise system is not simply the absence of government. It is therefore wrong for any one to simply assume that a free enterprise system automatically comes into existence when government interference is removed. There is a heavy dependency on the law to determine what should be traded (JTF, 2008).

The system allows for the privilege of individual ownership of property and the means of production. The key ingredient of the free enterprise system is the right of individuals to make their own choices in the purchase of goods, the selling of their products and their labor, and their participation in business structure (Lewis, 2001).

The system is based on a number of principles that include the right to private ownership of property, the rule of law, free prices, and competition among others.

A free enterprise system operates in a democratic environment and allows private citizens to freely go into business, produce whatever they choose to produce, and distribute whatever they produce.

Some government restrictions may, however, exist to make sure that the marketplace is orderly and causes no harm to the public. It is through government controls that smaller companies are protected from any form of exploitation by the giant companies.

This paper looks at how a free enterprise system affects the moral and economic development of individuals in a society. The above principles of a free enterprise system and their effects will be examined.

By and large, free enterprise systems are considered responsible for the moral decay in certain areas. Although this is the case, there are other instances where the morality of individuals in the society is enhanced. However, it all depends on an individual’s judgment regarding what constitutes a good life.

As observed by JTF (2008), a free enterprise system leads to more than simply creating and spread wealth. It also results in better moral character among its participants.

Critics are, however, of the opinion that a free enterprise system is a stumbling block to social and ethical agendas, such as the desire to reduce child labor and poverty in poor countries and the promotion of gender equality and environmental protection globally (JTF, 2008).

Private property consists of items of value that individuals have the right to own, use, and sell. It is different from public property which is provided by the government for the common use by all. The right to own property gives individuals the freedom to control productive resources such as land, labor, and capital. These productive resources can be used to produces commodities to be sold.

Apart from being allowed to control the productive resources, the producer also owns the goods produced. Locke (2008), however, argued that only God owns property and it is improper for any single individual to claim ownership to any form of property.

The more property rights a person has in a good, the closer his or her private cost is to the social costs of using that good, and the more incentives that person has for seeking the highest-valued use for the asset.

That is, different property rights in goods create their own incentives through the impact they have on the relationship between the private and social costs of using those goods, which, in turn, affect human behavior in specific and predictable ways.

Private ownership also encourages vigorous competition and economic efficiency. Private ownership ensures that entrepreneurs have a right to the profits generated by their own efforts. This gives entrepreneurs an incentive to search for better ways of serving consumer needs.

That may be through introducing new products, by developing more efficient production processes, by pursuing better marketing and after-sale service, or simply through managing their businesses more efficiently than their competitors.

In turn, the constant improvement in product and process that results from such an incentive has been argued to have a major positive impact on economic growth and development. The market alone puts the whole social system in order and provides it with sense and meaning.

Although proponents tend to think that a free enterprise system lets individuals think about others, it is impossible to imagine how people who thinks so much about their own success and how they can outdo opponents, will work for the benefit of others.

There is a general belief among proponents that a free enterprise system creates room for individuals to advance personal interests while thinking about the good of others. Proponents also consider greed and envy that are prevalent in a free enterprise system as necessary vices that can aid the development process.

Law is regarded as the collective organization of an individual’s right to lawful defense and is the greatest threat to liberty (Bastiat, 2004). The law allows every individual to protect what rightfully belongs to him or her. This includes freedom as well as property.

According to Rawls (1999), justice is the first virtue of any social institution and it is guaranteed through the rule of law. Every single individual possesses and inviolability founded on justice that even the welfare of a society as a whole cannot override.

As observed by John Templeton Foundation, free enterprise systems always involve moral constraints which are controlled by governments through the rule of law. The property rights on which free enterprise systems rely are also enforced by the government (JTF, 2008).

Even though freedom is guaranteed to a certain degree, the government regulates certain aspects of the market to ensure that business is undertaken fairly. The state will make use of every means available to coerce people into submission so as to prevent unhealthy practices that may end up inflicting harm to others.

The life and property of each individual is protected by the government through the rule of law. In summary, the government does quite a bit to ensure that effective operation within a free enterprise system.

Generally, changes in price send various signals to entrepreneurs. Entrepreneurs understand quite well that if prices are too high, customers refuse to buy their products. On the other hand, if prices are too low, the products will sell out very quickly. In most cases, the price of commodities is determined by the laws of supply and demand.

Demand refers to the number of products that will be bought at a given time for a given price. It is not the same as want. When a person wants a luxury car without the ability to pay for it, no demand is generated. The demand for an item is represented by people who want an item, have the money needed to purchase the item, and are willing to spend the money on the item.

As the price of commodities goes up, the quantity demanded by consumers subsequently goes down. A tight relationship exists between price and demand. Prices usually rise with increased demand, and as demand decreases, prices will usually come down. Supply refers to the number of products that will be offered for sale at a particular time and at a particular price.

In case there a shortage in the supply of a commodity, prices will generally rise. As the price for a given product goes up, producers are more willing to make the product available in the market. There is also the market clearing price which is that price at which the quantity of the product the consumer is willing to buy equals the number of products the producer is willing to supply.

In any business, the goal of sellers is to make a profit while consumers want to be supplied with quality goods at a reasonable price. Usually, this conflict is settled through competition. Competition is the rivalry among product sellers for the consumers’ money. Benefits of competition to society include improved quality of products as sellers strive to attract customers, development of new products, efficient operation to keep prices down and conserve scarce productive resources.

Healthy competition ensures that customers get new and quality products at very fair prices. A number of ways exist through which companies compete. One such approach is price competition where a company takes a competitor’s business by lowering its own prices.

The other approach is non price competition where a company aims to produce better quality products or adding a feature that the competition doesn’t have or can not provide. Businesses may use unique shapes and colors among others to compete.

To critics, however, a free enterprise system creates room for moral decay. In the presence of fierce competition, and when survival is at stake, people tend to think less about issues morality. The system forces individuals to do whatever it takes, without thinking about the repercussions, to exist.

Despite the seemingly cruel nature of a free enterprise system, it can improve the well being of the society in two major ways. To begin with, an individual who considers morality as being valuable will tend to advocate for it. Companies may find it necessary to give part of their profits towards charity work with an intention of enhancing the level of competitiveness.

A good reputation in the face of the public that results from giving back to the society can be of great benefit to a company. Secondly, when the economy grows to such an extent that there is a surplus of resources, it is possible that individuals will want to protect their moral standing.

There is increased concern for the welfare of others. As individuals continue to benefit from others, they will be inclined to act morally. In the same way, companies that succeed because of reliable employees or customer loyalty will be forced to carry out their operations with honesty and a high level of integrity.

Bastiat, F. (2004). The Law . Irvington-on-Hudson, NY: Foundation for Economic Education.

John Templeton Foundation (JTF). (2008). Does the Free Market Corrode Moral Character? West Conshohocken, PA: John Templeton Foundation.

Lewis, C. S. (2001). The Abolition of Man, Or, Reflections on Education with Special Reference to the Teaching of English in the Upper Forms of Schools. New York, NY: HarperSanFrancisco.

Locke, J. (2008). Two Treatises of Government . United Kingdom: Jonathan Bennett.

Rawls, J. (1999). A Theory of Justice, Revised Edition . USA: Harvard University Press.

• Entrepreneurs' Strengths and Weaknesses
• Free Enterprise Systems
• Combating Commodity Price Volatility in Canada
• The Balance Between Sustainable Construction and Project Success in the Current Economical Situation in the UK
• Beijing Consensus Becoming an Attractive Political Economy Paradigm
• Business economics: The market mechanism
• Natural Selection Among the Foraging Blue Jays
• Opinions on Corporate Social Responsibility
• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2019, June 4). Free Enterprise System and the Development of Individuals. https://ivypanda.com/essays/free-enterprise-system-and-the-development-of-individuals/

"Free Enterprise System and the Development of Individuals." IvyPanda , 4 June 2019, ivypanda.com/essays/free-enterprise-system-and-the-development-of-individuals/.

IvyPanda . (2019) 'Free Enterprise System and the Development of Individuals'. 4 June.

IvyPanda . 2019. "Free Enterprise System and the Development of Individuals." June 4, 2019. https://ivypanda.com/essays/free-enterprise-system-and-the-development-of-individuals/.

1. IvyPanda . "Free Enterprise System and the Development of Individuals." June 4, 2019. https://ivypanda.com/essays/free-enterprise-system-and-the-development-of-individuals/.

Bibliography

IvyPanda . "Free Enterprise System and the Development of Individuals." June 4, 2019. https://ivypanda.com/essays/free-enterprise-system-and-the-development-of-individuals/.

• Search Search Please fill out this field.

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 ."

Mises Institute. " The Ancient Chinese Libertarian Tradition ."

United States Treasury. " Troubled Assets Relief Program (TARP) ."

• Terms of Service
• Editorial Policy
• Privacy Policy

• Skip to main content
• Keyboard shortcuts for audio player

Author Interviews

'road to freedom': moral debate for free enterprise.

Analysts expect this fall's election to turn on the economy. President of the American Enterprise Institute Arthur C. Brooks wants to deepen the debate on the economy by discussing which economic policies are morally right. Brooks talks to Steve Inskeep about his book, The Road to Freedom: How to Win the Fight for Free Enterprise.

Copyright © 2012 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

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.

What Exactly is Free Enterprise?

How does a free enterprise system work, what are the characteristics of a free enterprise system, is free enterprise the same as capitalism, examples of free enterprise, does the united states have a free enterprise system, what are the dangers of a free enterprise economy, free enterprise.

A market-based economic system driven by market forces rather than by government interference

Free enterprise is an economic system where market forces determine prices, supply, and demand of goods and services without interference from the government.

Key Highlights

• Free enterprise refers to a market-based economic system driven by market forces rather than by government interference.
• Free enterprise is often confused with capitalism, which is not the same.
• While free enterprise has its benefits, it is not without its pitfalls.

Free enterprise refers to a market-based economic system driven by market forces, rather than by government interference. Often referred to as a free market system, the private sector is given the economic freedom to make its own economic decisions on what to buy and sell, how much it wants to work or risk, and how it chooses to participate in businesses.

A free enterprise system follows the “ laissez-faire ” concept of economic freedom, where the optimal functioning of markets needs minimal government intervention.

Free enterprise is built upon four economic units, or components, each with its own role to play:

• Households : These units own most of the country’s economic resources and voluntarily decide how to use them—such as labor and consumption.
• Companies : These economic units are started by entrepreneurs , who look to innovate, compete, and organize resources of the households and turn that into economic profits.
• Markets : Markets act as agents, or brokers, to bring buyers and sellers together so they can exchange goods, services, resources, or money. Prices should be set with little government interference.
• Governments : Their role is to act as a protector and to define, maintain, and protect the rule of society—not to control supply and demand.

Free enterprise is based upon personal freedom. No one is forced to buy or sell anything they don’t want to. Both buyers and sellers are better off in a transaction—the seller can make a profit and the buyer can obtain a good or service that they want. This mutual benefit for companies and households is meant to drive entrepreneurialism.

Free markets benefit a society as households are able to express individual tastes and preferences, rather than have a central authority determine what is produced or consumed.

The American economics system of free enterprise has four basic principles :

• Freedom of choice : Buyers and sellers have the freedom of choosing with whom and at what price they transact.
• Private property rights : In a free enterprise system, the property rights of the individual or business are guaranteed.
• Profit motive : The goal of a free market system is to allow individuals and businesses to maximize profits, eliminating inefficiencies in the economy.
• Owner control : Sometimes referred to as voluntary exchange, an owner of an asset or good has the right to choose whether or not to exchange that asset or good and not be forced into a trade. Likewise, consumers should not be forced to purchase something they don’t want to buy.

No, capitalism and free enterprise are not the same. 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.

Unlike free enterprise, capitalism can exist with controls and restrictions. For example, as far back as 1936, John Maynard Keynes argued that state intervention and capitalism can co-exist. In the extreme, capitalism can exist even when there are strict government controls, called state-guided capitalism, deciding which sectors of the economy are allowed to grow.

So, one could say that free enterprise allows for capitalism to exist, the opposite is not always true. Capitalism can and does thrive even without free enterprise or free markets.

Most countries have some form of free enterprise, but there are no economies that have a completely hands-off, free enterprise system.

A country may have restrictions to protect consumers, the environment, or domestic industries. The country also may control what can be freely imported into the country or what may be exported. Furthermore, it may also enact fiscal and monetary policies to control the pace of growth in the economy.

Therefore, most free enterprise economies have some level of government control. Generally speaking, there are three levels of free market economy:

• Liberal Market Economy (“LME”) : A liberal market economy aims to function with the least amount of government interference with respect to regulations, prices, and wages. Countries such as Singapore, Switzerland, and Hong Kong are considered some of the most liberal, although the United States is often cited as a classic LME.
• Coordinated Market Economy (“CME” ): While generally free enterprise economies, these countries also have formal institutions that regulate the market and coordinate the interaction between businesses and households, such as unions. Often cited examples of countries that are CMEs are Japan and Germany.
• Mixed-Market Economy (“MME”) : This economic system combines the elements of a free market economy with elements of a planned economy. While most MMEs have a free enterprise market system, the government regulates the market or owns key industries. Cuba and China are commonly considered MMEs and are sometimes known as a “command economy.”

There is a belief that the United States is a free enterprise economy, but that isn’t true. While it might have been true in the past, the United States is better described as a hybrid nowadays. While most industries in the US are dominated by private enterprises, they have certain levels of government intervention, such as subsidies and tariffs, as well as environmental and financial regulations that stifle competition.

According to The Heritage Foundation 2023 Index of Economic Freedom , the US ranks 25th in the world, far below countries such as Singapore, Switzerland, Ireland, and Taiwan.

The US fares much better in the Fraser Institute’s 2022 Economic Freedom of the World report, where it comes in at number seven.

While in theory, a completely free enterprise economy where the government is not involved in competitive markets sounds alluring, it is also not without potential problems.

Lack of economic incentives

Without government intervention, a free market economy will attempt to maximize profits above all else. Without economic incentives, certain economic activity might not happen.

For example, the recent COVID-19 pandemic demonstrated that many countries did not have adequate drug manufacturing facilities domestically. As a result, governments have prioritized building these facilities within their borders to ensure supply for their citizens.

Misallocation of resources

In a true free enterprise system, there may be certain groups of consumers who may be underserved. For example, internet providers might not be willing to invest in infrastructure for remote parts of a country, where a small population might not warrant the expenditure.

Deficient regulation

Without government regulation, there might be an incentive for bad actors to cut corners or engage in dangerous behavior. The tainted milk powder scandal in China of 2008 is a prime example of how greed and lack of regulation endangered consumers.

Absence of government backstops

If governments were truly not allowed to interfere in a free enterprise system, they would also not be allowed to step in when there is a real systemic risk to the economy.

In 2009, when the European Sovereign Debt Crisis threatened to spiral out of control, other European nations and supranational organizations had to step in to bail them out. In a truly free enterprise system, this sort of government interference would not have happened, potentially causing a much larger crisis.

Thank you for reading CFI’s guide to Free Enterprise. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

Economics for Capital Markets

Keynesian Economic Theory

Market Economy

Socialism vs. Capitalism

See all economics resources

• Share this article

Create a free account to unlock this Template

Access and download collection of free Templates to help power your productivity and performance.

Already have an account? Log in

Supercharge your skills with Premium Templates

Take your learning and productivity to the next level with our Premium Templates.

Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.

Already have a Self-Study or Full-Immersion membership? Log in

Access Exclusive Templates

Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.

Already have a Full-Immersion membership? Log in

Home — Essay Samples — Economics — Capitalism — The Key Characteristics of the Free Enterprise System

The Key Characteristics of The Free Enterprise System

• Categories: Capitalism

About this sample

Words: 669 |

Published: Mar 6, 2024

Words: 669 | Page: 1 | 4 min read

Table of contents

Competition, private property rights, limited government intervention.

Cite this Essay

Let us write you an essay from scratch

• 450+ experts on 30 subjects ready to help
• Custom essay delivered in as few as 3 hours

Get high-quality help

Prof Ernest (PhD)

Verified writer

• Expert in: Economics

+ 120 experts online

By clicking “Check Writers’ Offers”, you agree to our terms of service and privacy policy . We’ll occasionally send you promo and account related email

No need to pay just yet!

Related Essays

2 pages / 1176 words

5 pages / 2459 words

1 pages / 497 words

2 pages / 793 words

Remember! This is just a sample.

You can get your custom paper by one of our expert writers.

121 writers online

Still can’t find what you need?

Browse our vast selection of original essay samples, each expertly formatted and styled

Related Essays on Capitalism

In conclusion, the battle between mercantilism and capitalism represents an ongoing struggle to define the economic landscape. While mercantilism sought to consolidate wealth and power within individual nations, capitalism [...]

Socialism and capitalism are two distinct economic and political ideologies that have shaped the world in profound ways. They represent contrasting approaches to the organization of society, the distribution of resources, and [...]

Socialism and capitalism represent two different economic and political systems that have been the subject of much debate and controversy. Understanding the key differences between these systems is crucial for gaining insight [...]

In the documentary film Capitalism: A Love Story directed by Michael Moore, the filmmaker explores the impact of capitalism on American society. Through interviews with individuals affected by corporate greed, financial [...]

The concept of alienation plays a significant role in Marx's early political writing, especially in the Economic and Philosophical Manuscripts of 1848, but it is rarely mentioned in his later works. This implies that while Marx [...]

Capitalism and communism have long been at the center of political and economic debates, with proponents of each system arguing for its superiority. While both systems have their merits, capitalism has proven to be the most [...]

Related Topics

By clicking “Send”, you agree to our Terms of service and Privacy statement . We will occasionally send you account related emails.

Where do you want us to send this sample?

By clicking “Continue”, you agree to our terms of service and privacy policy.

Be careful. This essay is not unique

This essay was donated by a student and is likely to have been used and submitted before

Download this Sample

Free samples may contain mistakes and not unique parts

Sorry, we could not paraphrase this essay. Our professional writers can rewrite it and get you a unique paper.

Please check your inbox.

We can write you a custom essay that will follow your exact instructions and meet the deadlines. Let's fix your grades together!

Get Your Personalized Essay in 3 Hours or Less!

We use cookies to personalyze your web-site experience. By continuing we’ll assume you board with our cookie policy .

• Instructions Followed To The Letter
• Deadlines Met At Every Stage
• Unique And Plagiarism Free