What is free enterprise?
Free enterprise, or free market, refers to an economy where the market determines prices, products and services rather than government. Businesses and services are free from government control. Alternatively, free enterprise could refer to an ideological or legal system by which commercial activities are mainly regulated by private measures.
Free enterprise as law and economy
In principle and in practice, free markets are defined by private property rights, voluntary contracts and invitations to tender for goods and services on the market. This framework contrasts with public ownership of property, coercive activity and the fixed or controlled distribution of goods and services.
In Western countries, free enterprise is associated with laissez-faire capitalism and philosophical libertarianism. Free enterprise, however, is distinct from capitalism. Capitalism refers to a method by which scarce resources are produced and distributed. Free enterprise refers to a set of legal rules regarding business interaction.
Another definition of free enterprise is in economic terms and has been proposed by Nobel Prize-winning economist Friedrich Hayek. Hayek described these systems as “a spontaneous order”. Hayek’s point was that free enterprise is not unexpected or unregulated; rather, planning and regulation arise from the coordination of decentralized knowledge between countless specialists, not bureaucrats.
Key points to remember
- Free enterprise refers to commercial activities which are not regulated by the government but which are defined by a set of legal rules such as property rights, contracts and tendering.
- The argument for free enterprise rests on the belief that government interference in business and the economy hampers growth.
- A free enterprise legal system tends to lead to capitalism.
The origins of free enterprise
The first written intellectual reference to free enterprise systems may have emerged in China in the fourth or fifth century BCE, when Laozi, or Lao-tzu, argued that governments hinder growth and happiness by interfering with people. people.
Legal codes resembling free enterprise systems were not common until much later. The original home of contemporary free markets was England between the 16th and 18th centuries. This growth coincided with, and probably contributed to, the first industrial revolution and the birth of modern capitalism. At one time, the English legal code was completely free of barriers to international trade, customs duties, barriers to entry into most industries, and limitations on private commercial contracts.
The United States also used a largely free-market legal approach during the 18th and 19th centuries. In modern times, however, the United States and the United Kingdom are better classified as mixed economies. Countries like Singapore, Hong Kong and Switzerland are more reflective of free enterprise.
Example from the real world
In the absence of central planning, a free enterprise legal system tends to produce capitalism, although it is possible that voluntary or even agrarian socialism may result. In capitalist economic systems, such as that of the United States, consumers and producers individually determine which goods and services to produce and buy. Contracts are concluded voluntarily and can even be executed in private; for example, by the civil courts. Tenders determine market prices.
The American economic system of free enterprise is based on five main principles: freedom for individuals to choose companies, the right to private property, profits as an incentive, competition and consumer sovereignty.