American Free Enterprise Economic Concepts Pt.4: American Free Enterprise

A) Free Enterprise Capitalism Capitalism, America’s traditional type of Economy, has become the economic system of choice in many parts of the world. Why? Capitalism, as you have learned, is an economic system in which private individuals own and use the factors of production to generate profits. Americas Capitalist economy is based on the idea of free enterprise. Free Enterprise is the unhindered use of privately owned resources to earn profits. Under a Free Enterprise system, competition in the business world is allowed to flourish with a minimum of Govt. interference.

B) Characteristics of Free Enterprise A capitalistic free enterprise economy has five important characteristics: Economic Freedom, Voluntary Exchange, Private Property Rights, the Profit Motive and Competition. Businesses enjoy considerable Economic Freedom. They are free to hire the best workers, and they are free to produce the products they feel will be the most profitable. Businesses can make as many items as they want, sell them whenever, & charge whatever they want.  A second characteristic of capitalism is Voluntary Exchange, the act of buyers and sellers freely and willingly engaging in market transactions. Voluntary transactions benefit both the buyer and the seller, or the exchange would never occur. For example, when buyers spend their money on a product, they act on a belief that the item that they purchase is of greater value than the money they give up – or they would not make the purchase in the first place. Another major feature of capitalism is Private Property Rights, which allows people to own and control their own possessions as they wish. Because of Private property rights, people have the Incentive to work, save and invest. Under free enterprise capitalism, people are free to risk any part of their wealth in a business venture. If all goes well, they will earn rewards, or profits, for their efforts. If all goes poorly, however, they could lose part or all of their investment. Profit is the extent to which persons or organizations are more financially well-off at the end of a specific period of time than they were at the beginning of that time period. The Profit Motive is the incentive that encourages people and organizations to improve their material well-being, is largely responsible for the growth of a free enterprise system. Capitalism thrives on Competition, which is the struggle among sellers to attract buyers. Competition is possible because individual entrepreneurs have the freedom to produce the products they think will be the most profitable by selling them to buyers.

C) The Role of the Entrepreneur The Entrepreneur plays one of the most important roles in the free enterprise economy. The Entrepreneur organizes and manages land, capital and labor in order to seek the rewards called profit. Entrepreneurs are the people who start up new businesses such as factories, restaurants, automobile repair shops, Internet stores and movie theatres; to name a few. They also include people who may have worked for others at one time and then decided to quit and start their own business. Entrepreneurs want to “be their own boss” and are willing to take risks to make their dreams come true. Many entrepreneurs fail. However, some survive and manage to stay in business with varying degrees of success. A few, and only a very few, manage to become wealthy. Despite the high rate of failure among entrepreneurs, the dream of success is often too great to resist. The entrepreneur is both the spark plug and the catalyst of the free enterprise system. In the end, entrepreneur’s search for profits can lead to a chain of events that bring new products, greater competition, more production, more jobs, higher quality of goods and lower prices for consumers in America.

Entrepreneur

D) The Role of the Consumer Consumers, or buyers, have great power in America’s economy because ultimately they determine which products are produced. If consumers like a new product, the producer will be rewarded with profits. If consumers do not buy it, the producer may lose money or even go out of business. The term Consumer Sovereignty recognizes the role of the consumer as sovereign, or ruler, or the market. Because of this buying power, consumers play an important role in the American free enterprise economy. The phrase, “The customer is always right” reflects this power in America’s economy. Furthermore, consumers are constantly advancing new ideas and products, because producers are always trying to create new types of goods or services that were previously not available to Consumers.

Consumer

E) The Role of Government The role of Govt., whether national, state, or local, stems from the desires, goals and aspirations of its citizens. Today, Govt. has become involved in the economy because the majority of American citizens want it that way. Because of this, Government has become a protector, provider, regulator and consumer in the American business world. As protector, the U.S. Govt. enforces laws such as those against false and misleading advertising & unsafe food and drugs. It also enforces laws against abuses of individual freedoms of workers and prevents discrimination in the workplace. Furthermore, the national Govt. gives funding to state and local Govt.’s for some programs such as road construction, as well as funding for education, parks, libraries and public welfare. In its role as regulator, the national Govt. is charged with ensuring competition in the marketplace. It also overseas communications, interstate commerce and even entire industries, such as banking and nuclear power. The regulatory role of the Govt. is controversial. Most businesses do not like to be told how to run their affairs. Consumers, however, sometimes need to be protected when they are at risk from bad business decisions, such as food poisoning or unsafe products. As a Consumer, all levels of Govt. use huge amounts of scarce resources to fulfill their functions. Govt. has grown so much in recent years that it is now the second-largest consuming unit in the economy, after the consumer sector. Perhaps an unintended consequence of Govt.’s role as protector, provider, regulator, and consumer is the emergence of a mixed, or Modified Free Enterprise Economy. In this economy, people and businesses carry on their economic affairs freely, but they are subject to some Govt. intervention and regulation. However, some Americans would prefer to have no Govt. involvement in the economy but this is not possible. Unfortunately, there is no clear answer to the question of how much Govt. involvement is necessary, but if it does changes in anyway, if will be because the American voting public wants it that way. (Famous Quote: “Americans vote with their wallet”).

Government

Voting with their wallets