1. What is “Free Enterprise”? 

 According to the dictionary:
“Free”                     =          Having liberty; not controlled by others.
“Enterprise”            =         a) An undertaking or project.
                                             b) Readiness for daring action.

 So, Free Enterprise must mean: 

Being at liberty to undertake a daring action without being controlled by others.

 The idea of individual freedom is paramount in a Free Enterprise, or Capitalistic, system, and is based on the view that the right of the individual to pursue his own self-interest will bring about the greatest benefit to society as a whole.

 Let’s back up, however, and talk about how humans behave; some call this the “Rational Man Theory”.  Human behavior is based on the fact that humans:

a)      Prefer more to less.
b)      Want it sooner rather than later.
c)      Want it themselves rather than for somebody else to have it.

 Pause for a moment and ask yourself how you honestly feel about these ideas, and try to remember that society attempts to harness what are considered “primitive” and “selfish” human urges by applying moral judgments to behaviors that are considered “bad”.  If left to our own devices, we would all act like toddlers and pursue our own selfish interests! 

 How can this type of behavior help society?

 Read the first two excerpts from this web site about Adam Smith, who in 1776 wrote a book called AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS.

http://econc10.bu.edu/economic_systems/theory/classical pe/adam_smith.htm

 The second paragraph, especially, suggests that if men are allowed to pursue their own selfish interests, society as a whole will benefit.

 BECAUSE:

With Free Enterprise, individuals will be free to buy and sell what they want, where they want, for whatever price they want.  At the same time, other individuals will be free to decide whether or not they want to buy the products at the prices being offered.  These countervailing forces work to encourage efficiency and productivity so that an optimum amount of goods and services are available at the best possible prices for both buyer and seller.  Society, as a whole, has more goods and services available at the best possible prices.

 Who would take away the freedom that Adam Smith says is essential to the betterment of society?  Government.

 Adam Smith said that the role of government should be to ensure two things:

a)      Respect of property rights
b)      Freedom of choice

 In this country are property rights secure?  Is what I own always mine under all circumstances?  What if I don’t pay my car tabs, or my property taxes?

 Do we have complete freedom of choice? Can I set up a meth lab wherever I want?

 Obviously, the role of government in our lives is important – government tries to protect us from being murdered, from having property stolen, from eating tainted beef.

 But what about legislation that takes away property rights, such as wetlands restrictions.  Landowners cannot use their property as they wish, which may result in higher prices on some products because not all land can be utilized to produce the goods and services.  (We will be discussing the laws of demand and supply a little later – for now just assume that if less of something is available that prices will be higher.)

 So am I saying that ALL government activity is hindering Free Enterprise?  No, but what I DO ask you to think about is when government action no longer is benefiting society, but in fact is hindering improvements that might have arisen as individuals sought to produce products that did not pollute or harm, knowing that by doing so they would pull business from those that were.

 The following link has more information about the philosophy behind Capitalism.

http://www.capitalism.org/tour/index.htm
 

 2. What is a business? 
A business is an organization that provides goods and/or services to earn a profit.

So in Free Enterprise, the individual forms a business in order to pursue his own selfish interests – he wants to make a profit.  (Of course there are those who are seeking things other than money, but the point is that even if I am doing something in order to feel I am helping society, I am still pursuing my own selfish interests.  And how will I eat, I wonder?  Somewhere along the line somebody pursued money so I could be free to pursue other interests.)

Profit = Revenues minus Expenses.  In other words, it’s what’s left over after I pay all the bills.

Is profit good, or bad?  I think it’s good, because being able to earn a profit is what makes individuals want to take that daring action we talked about above.  Profits are the reward for taking risks.

 So how much profit is good?  Let’s look at the idea of risk vs. reward.

 Consider:  I have $100 to invest.  I can invest it in a savings account that is risk free, or in my buddy’s new business idea that is very risky.  If I can get 3% in the savings account, would I take my Buddy’s offer also at 3%?  Well, you get the idea that if I take more risk I should be getting more in return for taking the risk.

This is why the dot.com investors did so well – they took extreme risks in a new industry, but were rewarded handsomely for doing so.  Otherwise, they might have decided to stay in a nice secure job, and we wouldn’t have this great thing called the Internet on which to browse, shop, and take classes!

So, then, we have individuals forming businesses in order to make profits, society is benefiting, and government is watching over the whole thing. 

What is this called?
An economic system.

3. Economic Systems
An economic system is a nation’s method of allocating resources among its citizens.  “Resources” are also known as Factors of Production.  These are the things that are used in the production of goods and services.

Factors of Production:

·  Natural Resources (raw materials like coal, steel, water)

·  Labor (people)

·  Capital (money)

·  Entrepreneurs (the people who start new businesses)

Types of Economic Systems

a)      Planned Economy – a planned economy relies on the government to control all or most of the factors of production, and to make all, or most allocation decisions.  Example: Communism.

Under Communism, the government owns everything, and makes all decisions about where resources are to be used.  This type of economic system was envisioned in the late 1800s by Karl Marx, and refined in the Soviet Union by Lenin and in China by Mao Tse Tung.  In a strict Marxist/Leninist sense, government is only playing a temporary role, and eventually there will be a “withering away of the state” as workers take over the “means of production” (factors of production).

      HAS IT WORKED?

b)      Market Economy – a market economy relies on markets, not governments, to decide how to allocate the factors of production.  In this system the factors of production are privately owned, and entrepreneurship is actively encouraged by allowing profits, tied to the risk taken, to work as an incentive.  Example: Capitalism.

      Pure, unregulated capitalism can best be seen in Black Markets that arise as individuals pursue their own selfish interests – look at the drug trade, and at markets that have arisen in newly emerging capitalist countries like the former eastern-block countries for scarce products like fuel and western-style clothing. 

      It’s because of the problems that arise with unregulated free markets (drug addiction, child labor, pollution) that government gets involved.  This type of economic system is called a Mixed Market Economy.

c)   Mixed Market Economy – mixed market economies have characteristics of both market and planned economies.  Government may step in to control some of the resources to ensure there is not abuse or harm done to citizens or the environment.  Example: American, Western European, and Asian (except for China, North Korea, and a few others) capitalism.

      We refer to the two elements in a mixed market economy – private ownership and government supervision – as the “public vs. private sectors”.

      In this country has the “public sector” (government) done a good job offering goods and services to citizens?  Have you had to wait in line at the Post Office lately?  :>)

Role of Government

An ongoing theme in business will be to ask ourselves at what point government regulation is no longer helping improve society as a whole, but instead is limiting the opportunities of individuals to better themselves.  Examples are minimum wage, where a few benefit but others lose their jobs;  the Americans with Disabilities Act, which required improvements to facilities to accommodate the disabled, but that drive some small businesses out of business.

In the latter case, the free market might provide a mechanism to solve the problem – we could start a restaurant that caters to the handicapped.  Eventually, citizens would feel we were so socially responsible that more and more people would patronize our restaurant.  Finally, in order to compete, other restaurants would have to improve their own facilities or go out of business.  We pursued our own selfish interest, thinking (rightly) that we would make a big profit by creating a new product (a handicapped-friendly restaurant) that would find a niche (place) in the market.  In the process, society benefited as the market became more handicapped-friendly.

Alternative views of Capitalism.

So, does everyone think that society is better off when people pursue their own self-interest?  No.  Are they right sometimes?  Maybe, but I think you need to make up your own mind.  Below are links to some alternative views of Capitalism – not very flattering views, I might add.

The first link is a lecture given in Canada in 1998.  Read the first five paragraphs (more, if you wish).

http://www.ratical.org/many_worlds/capitalism.txt

This next link is to a site called “Anti-Capitalist Texts” that has readings and suggests acts of civil disobedience against “the society that we despise”.

http://www.webcom.com/maxang/ANTICAPL/PBA/welcome.html

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