Free Enterprise

Meaning of Free Enterprise

The free enterprise system allows for competition and choice in the pursuit of jobs, the creation of businesses, and investing options. Primarily, the ability of owners and workers to make money is the highlight of free enterprise.

The ability to choose one's job based upon agreed-upon pay/salary allows a worker to earn money and spend freely in society. Business owners set their prices for goods and services to generate profits while providing products that are beneficial to consumers' needs and wants.

Free Enterprise System

In this system of capitalism, the free market allows businesses to operate free of government control. The American economic model has been emulated globally and is credited with creating vast wealth and individual prosperity.

Fig. 1 Graphic of the relationship of capital to business

In a capitalist, free-market economy, individuals rather than governing authority decide what they will produce and where they will work to earn income. The basis of this system are core concepts embedded in the U.S. Constitution. The founders of the U.S. political system designed an organized governmental structure with the following:

• The sanctity of contracts
• Freedom of expression and association
• Limits on government regulation and taxation
• Emphasis on paying debts

The concept of free enterprise is often viewed as a core value of the U.S., alongside individualism, equality of opportunity, rule of law, and limited government.

The notion of limited government connects to a laissez-faire (French for "let it be" or "leave alone") economic system in which the government exhibits a "hands-off" relationship to business ownership and operation. The federal government is limited in the affairs of economic transitions between consumers and businesses.

Free enterprise stands in sharp contrast to command-and-control economies such as North Korea or Cuba. The U.S. government does not set prices, wages, or regulate the production of goods or availability of services, unlike more socialist economies where governments direct people's work and the ability to own businesses. Typically, these governments limit choices in the marketplace as well.

Free Enterprise and U.S. Government

Free enterprise is enshrined in various parts of the U.S. legal system.

In the Constitution, congress is given the authority in Article 1, Section 8 to grant copyrights and patents to regulate intellectual property and promote fair commerce. Federal statute also explicitly endorses a free enterprise system:

The Founding Fathers also envisioned limited federal government involvement in business. This is reflected the 10th Amendment, for example, which references the omission of specifically delegated powers:

Pros and Cons of the Free Enterprise Model

The ability to make money is the hallmark of free enterprise systems. Over America's history, economic growth has been based on the economic model of capitalism.

Pros of Free Enterprise

Proponents of this model highlight the moral argument that individuals should be free to achieve success based on their own merits. By this rationale, work exchanged for pay results in citizens gaining a sense of accomplishment while also meeting their financial needs, and is preferable to people receiving economic resources from a governmental entity.

Cons of Free Enterprise

Critics of this system point to the inequities that result from capitalism. Profits generated by corporations and businesses create high amounts of wealth for ownership, while workers make proportionally much less than owners.

Free Enterprise Economy

A free enterprise economy is marked by the following conditions:

• Ability to own private property with legal, individual control of money earned.

• Limited government restrictions that are not cost-prohibitive and focus mainly on public safety

• A free market of exchange for goods and services with competition and flexible wages.

• A system of profit and loss where businesses create value and attempt to create more revenue than expenses.

Supply and Demand

One of the central themes of a free enterprise system is competition. When an economic system promotes competition, the quality of goods must be high to attract and retain customers and prices must be fair, otherwise, citizens will seek other options. Consumers have choices for products and services, which allows pricing to fluctuate according to the supply and demand of goods. When the availability of a product is high and demand is low, prices drop. Conversely, high demand and low supplies of a product result in high prices.

Investing in the Free Enterprise System

Citizens in a free market economy can also invest money to create profits and earn more money. From savings accounts, savings bonds, stocks, and cryptocurrencies to real estate, gold, and collectibles, options exist beyond working for or owning a business. The government similarly regulates but does not control these options, allowing individuals to accumulate wealth.

Free Enterprise Examples

America's industrial and entrepreneurial past demonstrate the growth and expansion of a free market economy.

Over time, more citizens have been able to choose their profession or job and negotiate wages. As industrialization in the 19th century expanded, a push to form labor unions resulted in rising wages and working conditions when factory workers confronted factory owners in a unified manner.

Fig. 2 Computer Industry Entrepreneur Workshop

Voluntary work and financial success related to employment have allowed the U.S. economy to grow to the world's largest as a result of job growth but also business creation. American entrepreneurs have been among the leaders in worldwide innovation for centuries.

There are over 30 million small businesses in America, and each year over 3 million new businesses are created. Since the free market system encourages business ownership, new companies range from one-person service enterprises to start-up companies and large corporations.

Many entrepreneurs have their first taste of free enterprise as a child, operating small businesses including babysitting services, lawn-mowing, and lemonade stands. The essential components of start-up capital, risk, pricing, competition, and supply costs factor into the equation for business owners young and old.