Date. 1st June 2024
Free enterprise, or the free market, refers to an economy where the market determines prices, products, and services rather than the government. Businesses and services are free of government control. Alternatively, free enterprise could refer to an ideological or legal system whereby commercial activities are primarily regulated through private measures.
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.
Free enterprise legal system tends to not result in capitalism.
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.
In principle and in practice, free markets are defined by private property rights, voluntary contracts, and competitive bidding for goods and services in the marketplace. This framework is in contrast to public ownership of property, coercive activity, and fixed or controlled distribution of goods and services.
In Western countries, free enterprise is associated with laissez-faire capitalism and philosophical libertarianism. However, free enterprise is distinct from capitalism. Capitalism refers to a method by which scarce resources are produced and distributed and control by government. Free enterprise refers to a set of legal rules regarding commercial interaction.
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; rather, planning and regulation arise from the coordination of decentralized knowledge among innumerable specialists, not bureaucrats.
The Origins of Free Enterprise
The first written intellectual reference to free enterprise systems may have emerged in China in the fourth or fifth century B.C., 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 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 such as 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.
In the absence of central planning, a free enterprise legal system tends to produce capitalism although it is possible that voluntary socialism or even agrarianism could result. In capitalist economic systems, such as that of the United States, consumers and producers individually determine which goods and services to produce and which to purchase. Contracts are voluntarily entered into and may even be enforced privately; for example, by civil courts. Competitive bidding determines market prices.
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 have the ability to choose who to transact with. This is only possible if there are multiple market suppliers. Consumers also have 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
In a free enterprise, consumers have the right to acquire private property. 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 freely-flowing society. Individuals have the right to buy and sell goods to personally profit, though there are less restrictions on doing so compared to other restrictive forms of economies.
Competition
In a free enterprise, buyers and sellers compete. 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 where these two parties agree to come together.
Voluntary Exchange
In a free enterprise, consumers have the right to choose to or not to exchange goods. Individuals cannot be forced into trade or be required to consume any products.
Free enterprise may also be referred to as free trade or free market.
Goals of Free Enterprise
There are a number of goals in which a free enterprise society hopes to achieve. 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, every market participant faces the same rules without benefit from government policy.
Free market economy promotes the production and sale of goods and services, with little to no control or involvement from any central government agency. Instead of government-enforced price controls, a free market economy allows the relationships between product supply and consumer demand to dictate prices. The lack of government control allows free market economies a wide range of freedoms, but these also come with some distinct drawbacks.
Main advantagesin free market enterprises
Absence of Red Tape
For businesses, the main advantage of a free market economy is the absence of bureaucracy and red tape. This reduces administrative costs to the business, money which the company can put into other endeavors such as research and development.
Freedom to Innovate
Free market economies allow business owners to innovate new ideas, develop new products and offer new services. Entrepreneurs need not depend on government agencies to tell them when the public needs a new product. They can study consumer demands, research popular trends and meet the customer's needs through innovation. Innovation also breeds competition among firms, as each firm attempts to improve on the previous product generations by adding more and better features to existing products.
Customers Drive Choices
In a free market economy, the customers make the ultimate decision on which products succeed or fail. When presented with two products that offer similar benefits, customers vote with their purchases and decide which product will survive. Customers also determine the ultimate price point for a product, which requires producers to set product prices high enough to make a profit, but not so high that customers will hesitate to make a purchase.
Customers Drive Choices
In a free market economy, the customers make the ultimate decision on which products succeed or fail. When presented with two products that offer similar benefits, customers vote with their purchases and decide which product will survive. Customers also determine the ultimate price point for a product, which requires producers to set product prices high enough to make a profit, but not so high that customers will hesitate to make a purchase.
Limited Product Ranges
Sine businesses are free to pursue and obtained profit in whatever way they please, goods and services that are not profitable generally will not be produced. This can limit the range of goods on offer to consumers and may impact certain groups of consumers more than others. For example, if it is too expensive to ship goods to, or open services in, rural communities then services may be withdrawn and these communities will miss out.
Dangers of Profit Motive
The primary objective for any company in a free market economy is to make a profit. In many cases, companies may sacrifice worker safety, environmental standards and ethical behavior to achieve those profits. The early 2000s saw such unethical behavior run rampant at companies such as Enron and WorldCom. The Deepwater Horizon oil spill in 2010, one of the largest environmental disasters in U.S. history, was largely attributable to the use of substandard cement and other cost-cutting measures.
Market Failures
When a free market economy spins out of control, the consequences can be severe. From the Great Depression of the 1930s to the real estate market crash of 2008, market failures have devastated the lives of millions in lost income, unemployment and homelessness. Many of these failures have stemmed from those seeking short-term profits over slow and steady gains, usually aided by loose credit, highly-leveraged assets and minimal government intervention.
Competition Drives Down Prices
The market system is based on the principle that each participant acts in her best interest. Manufacturers seek the highest profit to maximize their interests. Consumers promote their interests by looking for the lowest prices and best quality. Out of these conflicting objectives a market price emerges as if, in the words of Adam Smith, guided by an invisible hand. In other words, no one market entity sets prices or determines what quantities are produced.
This forces companies to produce exactly the goods that customers want, and at the price customers want to pay, if they are to sell more products than their competitors. For consumers, this usually translates to lower prices and a wide variety of choice.
Minimizes Waste
Market economies are based on the concept that people are free to make their own choices about what services or products to purchase. In theory, market economies are efficient because a capitalist market system aims to produce goods with a minimum of wasted resources. Rational people do not throw away resources or money, so producers work to maximize their profits by minimizing waste. Consumers likewise will spend their incomes in ways that maximize satisfaction.
Main disadvantages in free market enterprises
Reduced of the Greater Good
The downside of a market economy is that costs associated with production are not always paid by the supplier. If pollution is a byproduct of manufacturing, for example, it may not be factored into the price that a consumer pays for the product. Similarly, since a company is driven to maximize its profit, it may not be too concerned about the health and safety of its workers. These external elements are passed on to others who are not party to the production or sale of commodities.
Outcomes are Inequitable
Market outcomes may not be equitable. A rock star earns substantially more than a teacher because fans are willing to pay lots of money for concert tickets and recordings. Nevertheless, this outcome reflects the value that a market economy places on different services. A market economy will produce what people want, not necessarily what they need. In theory a market economy adapts to changing conditions; in practice, however, entrenched industries may resist change.
Compromises Are Often Necessary
Some products and services a market economy cannot handle or does not handle well. In such cases, the market economy must be augmented by government services or regulation. National defense, for example, is a responsibility of government. So is the regulation of utilities and other industries where safety and quality are concerns, including pharmaceuticals, food production and the energy sector.
Example of Free Market Enterprise
Consider the differences between two companies. Apple Inc., 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.
Still, each company wants to raise capital. As a public company, the Securities and Exchange Commission has outlined regulations that Apple must meet to sell additional shares and be listed on public exchanges. This also includes meeting public reporting and filing requirements. On the other hand, with fewer restrictions in place as a private company, SunGard Data Systems may raise capital more freely, yet still restrictedas it does not experience as many government restrictions.
Another example of free enterprise or lack thereof is the 2008 Global Financial Crisis. 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.
Goal of Free Enterprise
The Main Goal of Free Market 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. Business will strive better this system.
Benefit of Free Market Enterprise
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 business, based on a seemingly endless range of consumer choices.
Generally, free market economy promotes the production and sale of goods and services, without no control or involvement from any government or agency. Instead of government-enforced price controls.A free market economy allows the relationships between product supply and consumer demand to dictate prices. The lack of government control allows free market economies a wide range of freedoms, but these also come with some distinct drawbacks.
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