Free Enterprise System and Its Importance
Who Established the Free Enterprise System?
Historically, the free enterprise economy was described by the French term “laissez-faire,” which means “leave it alone.” The laissez-faire message was a call to governments to stay out of market affairs and give private businesses a free rein. Coined originally by Adam Smith, an 18th century Scotsman, the laissez-faire economic theory became the foundation of classic economics. Later economists built upon Smith’s ideas to establish classical economic theory. As a result, Adam Smith was given the title “father of economics.”
Other names for laissez-faire are free enterprise, capitalism, free economy and free market. Basically arguing that the government should not control people’s economic choices, Smith’s contentions were spurred by his strong opposition to mercantilism, the predominant economic system during the 16th-18th centuries. Mercantilism is a system with strong government regulation of all commercial interests. It featured the imposition of heavy tariffs on imports while exports were maximized. Reminiscent of feudalism, gold-hoarding and protectionism were also hallmarks of the time. Smith was among the first to call mercantilism a regressive system that promoted trade imbalances between people and their rulers and between countries, where one prospered at the expense of the other. Instead, Smith advocated an economic system that would serve as a force of change and development.
Smith’s notions of a free enterprise that would benefit all of society rather than just the upper class were based on his belief that competition was self-regulating. He believed that governments should stay out of the picture except for setting basic rules to protect the free market. Among his most famous laissez-faire philosophies were his notions of an “invisible hand” that guided supply and demand. According to the laws of supply and demand, when prices rise, customer demand for products decreases. Conversely, when customers buy more of a product, prices rise. Prices fall when they buy less. Hence a natural balance is achieved wherein supply and demand achieves the maximum benefit for all.
Adam Smith maintained that when individuals are free to pursue their own business interests and when markets are free and competitive, self-interest works for the greater good. In other words, as individuals look out for themselves they inadvertently benefit others. As expressed by Adam Smith, “It is not from the benevolence of the butcher, the brewer or the baker that we can expect our dinner but from their regard to their own interest.”
Smith’s free enterprise ideas were able to flourish with the advent of the Industrial Revolution that took place in the 1800s after the Civil War. The mechanization of industry became the new gold mine of the age as technology did away with craft shops to open up factories and scores of new businesses. Industrialists began building in cities where the population was able to supply labor for businesses that would produce more goods for consumers to purchase. With this economic boom, industrial tycoons and the common person were able to amass their own wealth for the first time.
Adam Smith is particularly famous for his two written works, “The Theory of Moral Sentiments” (1759) and “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776). His second publication, known today as simply “The Wealth of Nations,” cemented Smith’s legacy in history as the individual who established free enterprise. It remains a major contributor to modern-day academic economics. This work consists of two volumes divided into five books. It documents the history of economic and industrial development in Europe as well as Smith’s critiques and innovative ideas. As another example, it was here that Smith envisaged the assembly line production featuring the division of labor in order to increase productivity. Accordingly, Smith noted that the number of pins one man could make, requiring the completion of an 18-step process, could be increased by thousands if the 18 required tasks were divided among 10 men in the manner of an assembly line.
Why is Free Enterprise Important?
Importantly, free enterprise also means that businesses are conducted according to the laws of supply and demand. This is one of the critical factors of a market economy that results in the allocation of resources in the most beneficial way for both buyers and sellers. According to the law of demand, where demand refers to how much a product is desired by consumers, the higher the price of a product the less consumers will demand it. According to the law of supply, the higher the price of a product, the greater the supply provided by sellers. That is because selling large quantities at elevated prices means increased profits. In other words, businesses try to sell goods they think consumers desire at the highest possible price. When consumers buy more of a product, prices rise. When consumers buy less of a product, prices fall. Thus the balance between supply and demand, between the prices of goods and services, is forever fluctuating in order to best meet the needs of everyone involved.
There are many more benefits to a free enterprise economy. Its proponents claim that free enterprise and capitalist systems promote key moral values in that they uphold individual rights, political freedom and private property rights. Moreover, the guiding principles of free enterprise are mutual reciprocity, mutual respect and voluntary cooperation which to most are all core values of an ethical society.
In addition, free enterprise requires a social contract between customers and providers where the end goal is not a collective one. Rather, the goal is one where individuals are permitted to follow their own paths to success. Thus free enterprise economies promote social harmony as well as prosperity. The need to bargain as opposed to dominate is one of the backbones of the free market.
Just as importantly, free enterprise rewards entrepreneurs for meeting consumer demands. Those who improve the quality of life for their customers are granted tremendous wealth. One of the classic examples of this is Henry Ford. Ford’s entrepreneurial brilliance significantly lowered the price of cars while tripling both employee wages and labor productivity. And he became enormously wealthy in the process.
Private businesspeople reap the benefits of free enterprise just as companies do. Individuals who are free to engage in selling directly are offered freedom of expression to engage in any type of business they want and to run their business as they see fit and in their own style. They can choose to work part-time or full-time or not at all, as circumstances demand.
Working independently increases individuals’ confidence. It promotes leadership skills and offers people the opportunity to enhance the quality of their family’s lives. It provides health care and education for their children. It provides them free time to engage in leisure activities. It builds positive relationships with businesses and community members. Successful people with ties to the community often become elected political officials, where they have the added opportunity to better the lives of others. In return, the lives of consumers who benefit from the quality of the products or services they advance are improved as well.
Finally, free enterprise is important globally as it promotes free trade between countries. It thus increases economic growth, cooperation, partnerships in job training, research and development and peaceful relations. With the advent of free trade, nations now have a vested interest in the economic and political stability of their neighbors. Globalization and the modern technology revolution are creating what is considered one of the greatest marketing opportunities of all times. The ability now exists to circulate goods and information and to provide rapid supply to a growing world of buyers and sellers. Through global free enterprise, democracy is enhanced even in countries such as China. There, businesses are pressuring the totalitarian government to meet global business standards.
Resources about Free Enterprise
Teaching lesson plan about free enterprise “A Content For Technology”. To define free enterprise and discuss its relation to personal freedom.
Thinkquest article about free enterprise with fun multiple choice questions
Democracy, Free Enterprise, and Confidence. According to William A. Reinsch, free markets tend to bolster democracy. Sometimes democracy bolsters free markets, sometimes not, he says. Reinsch is president of the National Foreign Trade Council and a member of the advisory U.S.-China Economic and Security Review Commission.
PDF talking about free enterprise from USDA.gov
Annalise Kaylor is a freelance writer, editor, and consultant specializing in search engine optimized content for the web. As a writer, her work has appeared across the United States in print ads for Whirlpool, Maytag, Home Depot, and Lowe's, among others. As a consultant, she has worked primarily in the education sector, helping universities increase their web visibility and construct and implement social media strategy. Annalise is an avid reader, knitter, organic gardener and baker, as well as the author of the popular baking blog, Knead To Be Loaved. Annalise enjoys fly fishing, camping, and hiking.
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