The Foundations of a Free Enterprise Economy: Foundations of Free Enterprise

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

The Foundations of a Free Enterprise Economy
In examining the basic foundations of a pure free enterprise system, we must recognize that the term “free enterprise” cannot be defined adequately in a single sentence. Such a sentence would be impossibly long and complex. So let’s think of free enterprise as an economic system that includes a number of distinctive features and focus our attention on the following five:
1. Private property
2. Economic freedom
3. Economic incentives
4. Competitive markets
5. Limited role of government
(Click on each of the five foundations to learn more about each one)

As we shall see, these five foundations reflect a basic assumption of free enterprise. That is, an economic system should serve its people, and not the other way around. Accordingly, this system places the highest importance on individuals by allowing them to decide for themselves what is in their own best interest. This does not mean that people will not make mistakes. Indeed, mistakes will be made, because no one has total information — no one can predict the future with certainty. But it is believed that each individual will make fewer mistakes deciding for himself than he will if some “planning committee” makes decisions for him.

Keeping this in mind, let’s consider the foundations separately to be sure we understand their functions. (Click on each of the five characteristics to view the discussion of each characteristic.)

As we have seen, the free enterprise system is designed to serve the individual. Each individual is allowed to choose the course of action he feels is in his own best interest. This is guaranteed by economic freedoms and the limited role of government. Private property allows each of us to reap the benefits of property ownership. Private ownership also disperses power throughout society and helps protect us from its abuses. We are allowed to pursue our own self-interest through voluntary exchanges in competitive markets. Competition also provides us with a wide variety of products, while insuring the highest quality and lowest prices possible. And last, but not least, a free enterprise system helps guide scarce resources to their most valuable uses through economic incentives.

This emphasis on individuals pursuing their own self-interest is of great concern to many of us. At first glance, such a system would seem to result in one person gaining at the expense of another. But this is the irony of the free enterprise system. By each of us pursuing our own self-interest, everyone gains. After all, why does a voluntary exchange take place? Because both parties feel they will be better off by making the trade. Economic incentives encourage us to make those voluntary exchanges. This results in an ever-increasing pie, which is beneficial to us all.

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