Free enterprise is a way of going about meeting our needs and wants by providing for ourselves or by freely entering into transactions with others. The opposite of free enterprise is hampered, restricted, controlled, or prohibited enterprise. The enterprise itself must be conducted in an orderly fashion within the framework of rules, but if the rules inhibit entry or hamper activity they become restrictions on enterprise. It is clear enough, for example, that traffic at an intersection must be regulated in its flow but that reasonable rules promote rather than inhibit the effective use of the street. On the other hand, if a city made a rule that taxicabs were to be limited to those presently in operation it would be equally clear that enterprise was being hampered. In a similar fashion, if a city adopted a rule forbidding any taxi to use the streets within its boundaries, that type of enterprise would be prohibited. Thus, government may be an adjunct or an obstacle to enterprise.
Free enterprise does not exist in a vacuum; it must be institutionally supported and protected. One of these institutions is government. Government is necessary to prohibit and punish the private violation of the rights of those who peacefully use their energies and resources in a productive way. Government is necessary also to punish fraud and deception, to settle disputes, which may arise, and to regulate the use of public facilities such as highways. Another basic institution for free enterprise is private property For enterprise to be free, those who engage in it must be free; that entails having property in themselves and what they produce. Enterprisers must have title to their goods in order either to consume them or trade with others. Real property in land and buildings is essential to have a place to produce and to market goods and services. Private property not only supplies opportunities for the individual to provide for himself but it also places inherent limits on his activity. He can only rightfully sell and convey to another what is his in the first place. Private property also sets bounds to enterprise by restricting the owner to the use of what is his own or to that which the rightful owner authorizes others to use.
A third ingredient of free enterprise is free access to the market. A market is any arena within which buyers and sellers meet to effect their transactions. Under free enterprise neither buyer nor seller is prevented from making transactions by government decree or private threats or use of force.
The motor of free enterprise, indeed, of all enterprise, is individual initiative. Individuals provide the energy for the making of goods and providing of services. They conceive, invent, design, engineer, produce, and market goods through their endeavor. The great spur to produce is the increase of one’s goods or the profit he may make by selling them. Here again, the importance of private property and free access to the market may be seen. If men cannot keep as property what they produce, if they cannot market it, their incentive to produce is lessened or removed.
The great regulator of free enterprise is competition. Competition among sellers keeps prices down and tends to assure that the customer will be served. Competition among buyers provides a market in which those goods that are wanted can be sold at a profit. Prices are the result of this competition. Although any owner may offer his wares at a price acceptable to him, he can only sell when he has found a buyer willing to pay his price.
Cooperation and Competition
Competition is not a kind of warfare. To the extent that it pits men against one another it does so by stimulating them to excel. When each man is doing his best all may benefit: those who participate by producing and excelling, the rest of society by what is produced. There are no necessary victims in competition. Of course, not everyone can excel or even compete at the same level. But any man is a winner who discovers that way and level at which he can effectively produce and serve. Most people cannot run the four-minute mile. That does not mean that we put weights on the faster racers in order to enable the slower runners to keep up. People do well to compete at their own levels of ability.
Competition does not prevent or even downgrade cooperation, either. Under free enterprise people must and do cooperate in many ways to provide us with the amenities of life. Industrial production today requires cooperation of a very high degree. The assembly line is the epitome of organized cooperation. The making and selling of automobiles, for example, requires the cooperation of all sorts of entrepreneurs, financiers, service providers, manufacturers, assembly line workers, transportation workers, designers, engineers, and mechanics.
On a less grandiose scale, we usually take for granted that any one of a hundred items will be available when we want it. I may decide, for example, that I need a new box of pencils. I go to the nearest store which carries sundries and discover that the store not only has pencils but a considerable variety of them as well. How did this happen? Did the store know that I was about out of pencils and that they should stock some in case I should come by? Not at all, yet a lot of foresight had gone into providing them for my convenience. Not only had companies brought together in factories those who could make pencils but also the need had been predicted, the capital set aside for producing them, supplies ordered, raw material prepared, and the pencils produced and placed by wholesalers with my local store. True, businesses in direct competition with one another may not do a great deal of cooperating with one another, but that may be largely because of the antitrust laws.
The extensive nature of competition is not generally well understood, and certainly not by most who write about imperfect competition. Most critics talk of competition as if it involved only direct competition among the suppliers of a particular kind of product. That kind of com petition is only the tip of the iceberg of competition. For example, if General Motors were the only maker of automobiles in the United States, there would still be competition. The Chevrolet division would still be competing with Pontiac, Pontiac with Buick, Buick with Oldsmobile, these with Cadillac, and all of them with foreign imports.
What Are the Practical Advantages of Free Enterprise?
It is not necessary to rely on theory alone to determine the superiority of free enterprise over other methods in providing for people’s needs. There is historical evidence that when enterprise is freed from the restrictive hand of government and when property is rigorously protected, production increases along with general economic well being. It needs to be understood, however, that much of economic history is a record of government interventions and restraints and that there are al ways some. Consequently, restriction is usually a matter of degree, not of absolutes. Nonetheless, there have been periods in the life of nations when enterprise has been freed from many of the restraints, and these provide favorable evidence for free enterprise.
England in the 19th century is a striking example of what can happen when enterprise is freed. In the early 1700s there were still numerous restrictions and special privileges hampering enterprise in that land. Beginning in 1689, however, the British made almost continuous progress in the direction of freer enterprise. By the 1820s, enterprise was substantially free in Great Britain, though the movement for free trade is usually thought of as culminating with the repeal of the Corn Laws in 1846. It is worth noting, too, that this freeing of enterprise was accompanied by the general establishment of widespread liberty, the limiting of the monarch, the toleration in religion, and protections of speech and of the press. These things go hand in hand.
The economic results were not long in coming. It has been estimated that England’s industrial output increased tenfold between 1820 and 1913. Coal production was approximately 10 million tons in 1800, 44 million tons in 1850, and 154 million tons in 1880. Iron production was about 17,000 tons in 1740. By 1840 it had reached 1,390,000 tons, and a few years later had nearly tripled from that. Population increase did not quite keep up with industrial production, but there was unprecedented population growth as well. By the end of the 19th century, English-men were generally better off materially than ever before in history.
Suggested Discussion Questions:
1. What is a free market economy?
2. What is the meaning of "free" in free market?
3. Discuss globalization and free trade agreements. Do the students believe that absolute free trade is a good thing or should there be quotas on imports?
4. Discuss the differences between capitalist, socialist, and communist ecomonies. Which one is the United States and why?
5. Is competition in markets a good thing?
6. What are the benefits of competition?
7. Proponents of free market systems argue that free enterprise leads to more efficient production and better response to changing consumer preferences. But others point to the fact that markets are not perfect. Why aren't markets perfect?
CRITICAL THINKING:
1. What is money and how does it originate?
2. What is the proper size and scope of government?
3. What causes economic growth?
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