Definition:
Free enterprise is a system of commerce in which individuals can form companies and buy and sell competitively in the marketplace without government interference.
What are the characteristics of a free enterprise system?
The ability to engage in economic activity in accordance with individual freedom is vital. Private property, economic freedom, economic incentives, competitive markets, and a limited role for government are the characteristics of a free enterprise system.
Private property means that individuals can own and make decisions about the use or sale of land, personal property, and other assets. Individuals control their own property rather than using or leasing property owned by the government.
Economic freedom is the freedom to pursue financial gain. This freedom includes the right to create a business, seek employment with a particular company, quit a job, invest as one sees fit, and engage in any other economic activity.
Economic incentives refer to the ability to make individual financial decisions. People can accept a job, quit a job, move to work in another state, choose a higher paying profession, decide what to buy, and more.
Everyone has their own personal preferences and goals. Some prefer a simple lifestyle, while others prefer luxury. Some like chocolate ice cream and some like strawberry ice cream. A competitive market provides consumers with alternatives rather than multiple copies of the same product. Businesses compete with each other to offer products and services that consumers want in a free enterprise system, rather than the government dictating what can and cannot be sold.
While the free enterprise system should not be subject to unnecessary government interference, this does not mean that it is free of government. Government still has a role in enforcing people’s individual rights to personal and property security. Government also enforces the rules of fair play in the economy by enforcing contracts and making sure that consumers are not cheated. In short, the government acts as an arbiter.
How does free enterprise work?
In a free enterprise economy, people engage in economic activity for personal gain. Some see a need, create a business to fulfill that need, others accept a job with the company, others buy the product.
Each stage depends on who is motivated to act and reap the rewards of their efforts. Competition to sell more products, earn the highest wages, and improve personal standards of living drives the activities of each individual involved in free enterprise.
Individual freedom is only tested in cases of disagreement, where the role of government should be that of an arbiter, resolving contract and property disputes to prevent one party from “cheating” to unfairly gain an advantage over another.
Does free enterprise help the rich or the poor?
In theory, the free enterprise system allows people of all economic classes to make their best economic choices without interference. A free enterprise system should not punish the poor or help the rich.
Whether or not the free market system is perfect is an important debate in politics and economics. Generally speaking, free market economies have much higher rates of economic growth, with higher levels of prosperity improving the standard of living for both rich and poor.
However, many believe that free markets lead to the exploitation of the poor by the rich. If a free enterprise system is not accompanied by strong consumer protection and a generous social safety net in terms of anti-poverty programs, it is often perceived as unjust.
Is free enterprise the same as the free market?
Free enterprise and free market are often used synonymously in everyday discussions.
However, there are differences. Simply put: free enterprise is the act of doing business in a free market, and free markets are the arena in which free enterprise takes place.
How does free enterprise differ from a command economy?
Free enterprise is more or less the opposite of a command economy . A command economy is completely controlled and owned by the government, as in communist and totalitarian countries such as Cuba and North Korea, while free enterprise relies on the private sector (private enterprises).
Theoretically, government control in a command economy is aimed at providing citizens with basic necessities. The reason should not be profit for the government or government officials. In practice, however, citizens are usually bypassed and officials become the economic elite.
Which countries have a free enterprise system?
As with free market economies, a free enterprise system in pure theoretical form is hard to find. However, many countries have some version of a free enterprise system. The United States is considered the best example of a free enterprise system, but other countries with some version of a free enterprise system include the United Kingdom, Singapore, Switzerland, Australia, and Canada.
It should be noted that a democratic country does not automatically have a free enterprise system. Many democracies have significant government regulation of free enterprise.