Limited Role of Government: Foundations of Free Enterprise

The Foundations of Free Enterprise
by Allen, Armstrong, and Wolken

Limited Role of Government
Contrary to what some believe, government plays an important role in a market economy. As mentioned earlier, a key idea underlying a free enterprise system is that we, as individuals, know best how to pursue our own well-being. As we saw in our discussion of competitive markets, a free enterprise system is largely self-regulating. Therefore, government plays a limited, but important, role, allowing individuals to make most of the economic decisions.

Specifically, government has two roles: rule maker and umpire. In its role as rule maker, government makes and enforces laws governing the conditions under which voluntary transactions are made. These laws are designed to protect the rights to private property and individual freedom and to preserve and promote competition. As an umpire, government acts to settle disputes resulting from conflicting interpretations of the rules. Beyond this, government has no other major economic responsibilities. Indeed, in a pure free enterprise system the governmental role is clearly and specifically limited to keeping the system free and competitive. Government participation in day-to-day economic decision making is not a part of a free enterprise system.

This is really quite similar to the structure of organized sports today. In football, for example, the rules committee determines the rules of the game. The officials enforce them. The commissioner settles disputes over conflicting interpretations of the rules. This provides a framework that allows the teams to compete with each other on an equal footing. What would our reaction be if an official intercepted a pass, made a tackle, or kicked a field goal? Similarly, the government in a free enterprise system provides a framework that allows individuals an equal opportunity to compete in the market place. It may not participate in answering the “what to produce,” “how to produce,” and “how to divide” questions.