Chapter 19.3 Capitalism and Free Enterprise

Features of Capitalism The U.S. economy is built on capitalism and free enterprise. Capitalism is an economic system in which private citizens own and use the factors of production to seek a profit. Free enterprise is an economy in which competition is allowed to flourish with a minimum of government interference.

continued Markets are places where different sectors of the economy interact and their exchanges determine the prices of goods and services. Businesses try to produce the products people want most. Because of this, we use the term consumer sovereignty to describe the consumer as ruler of the market, the one who determines what products will be produced.

continued Choice is a key element for free enterprise. We are free to choose the occupation we want and where we want to work. We can choose the products we will buy. Businesses can choose the products they will produce and offer for sale. Along with the freedom to choose comes the responsibility to accept the consequences of the decisions. If an entrepreneur starts a business that fails, the government usually won’t help out.

continued Under capitalism, we also have private property rights. We are free to own and use or dispose of, our own property as we choose as long as we do not interfere with the rights of others. These rights give us the incentive to work, save and invest. Capitalism thrives on competition – the struggle between buyers and sellers to get the best products at the lowest prices. Competition between sellers tends to reduce production costs and increase product quality.

continued Competition rewards the most efficient producers and forces the least efficient out of business. Competition results in efficient production, higher-quality products and more satisfied customers. Profit is the money left over after all costs of production have been paid. The profit motive is the driving force behind free enterprise and capitalism. People are willing to invest in a business venture and risk losing their investment for the chance to earn a profit.

continued Voluntary exchange is the act of buyers and sellers freely and willingly engaging in market transactions. As long as exchanges are voluntary, both buyer and seller must feel that they benefit from their exchange, or they will not do it.

The Spread of Capitalism Capitalism developed gradually over hundreds of years. Two concepts underlie the market system: people can work for economic gain and government should have a very limited role in the economy.

continued Trade routes opened between Europe and the East in the 1200s. As trade increased, people began to invest money to make profits. By the 1700s, Europe had a new attitude about work and wealth. It included the ideas of progress, invention and free markets in which buyers and sellers could make unlimited economic decisions.

continued In his book Wealth of Nations, Scottish economist Adam Smith scientifically described the basic principles of economics for the first time. Smith believed that individuals, in seeking profit, end up benefiting society as a whole.

continued From the writings of Smith and other came the idea of laissez-faire, meaning “to let alone”. According to this philosophy, government should not interfere in the marketplace. Government’s role is to ensure free competition. Many American Founders were influenced by Smith’s book.

continued Communism and capitalism have been viewed as opposing political and economic structures. The collapse of communism, however, did not mean a smooth transition to capitalism.