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Check out the first 12 minutes of this video.

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A video on Adam Smith

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In this educational animated movie about Math learn more about the man who is considered the father of modern day economics.

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The basis of the free enterprise system

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In this educational animated movie about Math learn about goods, services, consumers, producers, selling, prices, buying, selling, purchase, cost, market, and economics.

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What is 'Free Enterprise'?

Free enterprise, or the free market, refers to all voluntary business activities in a given economic area. Alternatively, free enterprise could refer to an ideological or legal system whereby commercial activities are primarily regulated through private measures rather than through political means.

BREAKING DOWN 'Free Enterprise'

In principle and in practice, free markets are defined by private property rights, voluntary contracts and competitive bidding for goods and services in the marketplace. This framework is in contrast to public ownership of property, coercive activity and fixed or controlled distribution of goods and services.

In western countries, free enterprise is associated with laissez-faire capitalism and philosophical libertarianism. However, free enterprise 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 commercial interaction.

Free Enterprise as Law

The first written intellectual reference to free enterprise systems may have been in China in the 4th or 5th century B.C., when Laozi, or Lao-tzu, argued that governments hampered growth and happiness by interfering with individuals.

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 coincided with and probably contributed to the first industrial revolution and birth of modern capitalism. At one time, the English legal code was completely free of international trade barriers, tariffs, barriers to entry in most businesses and limitations on private business contracts.

The United States also used a largely free market legal approach during the 18th and 19th centuries. In modern times, however, both the United States and United Kingdom are better classified as mixed economies. Countries such as Singapore, Hong Kong and Switzerland are more reflective of free enterprise.

Free Enterprise as Economics

In the absence of central planning, a free enterprise legal system tends to produce capitalism although it is possible that voluntary socialism or even agrarianism could result. In capitalist economic systems, consumers and producers individually determine which goods and services to produce and which to purchase. Contracts are voluntarily entered into and may even be enforced privately; for example, by civil courts. Market prices are determined by competitive bidding.

Another definition of free enterprise economics was offered by the Nobel-winning economist Friedrich Hayek, who described such systems as "spontaneous order." Hayek's point was that free enterprise is not unplanned or unregulated; rather, the planning and regulation arise from the coordination of decentralized knowledge among innumerable specialists, not bureaucrats.

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Free enterprise, or the free market, refers to all voluntary business activities in a given economic area. Alternatively, free enterprise could refer to an ideological or legal system whereby commercial activities are primarily regulated through private measures rather than through political means.

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HOW DOES THE U.S. FREE ENTERPRISE SYSTEM OPERATE?

The U.S. economic system of free enterprise operates according to five main principles: the freedom to choose our businesses, the right to private property, the profit motive, competition, and consumer sovereignty.

Freedom to Choose Our Businesses

In this country, the decision whether or not you should go into computer services or any other kind of enterprise (business) is basically yours alone to make. You will decide what fees to charge and what hours to work. Certain laws prohibit you from cheating or harming your customers or other people. But, in general, you will be left alone to run your business as you see fit.

Right to Private Property

Private property is a piece of land, a home, or a car owned by an individual, a family, or a group. It differs from a public building, or public property, such as the city hall, a park, or a highway, all of which provide a government service for all citizens. In the U.S. economic system, people's right to buy and sell private property is guaranteed by law. People must use the property in safe and reasonable ways, of course. In setting up computer systems for your customers, for example, you do not have the right to interfere with the electrical, telephone, or computer systems of other people.

The main reason why you or any enterprising person organizes a business is to make money. You do this by earning more money than you spend. The amount of money left over after subtracting your business expenses from your business income is known as your profit. In the free enterprise system, business firms try hard to keep costs down and increase their income from sales. The better they succeed at this, the higher are their profits. Economists describe the efforts by business firms to earn the greatest profits as the profit motive.

Just as you are free to start a computer business, so is everyone else. The rivalry between sellers in the same field for consumers' dollars is called competition. If your business is profitable, it is likely that others will enter the same business hoping to be as successful as you are. They will be competing with you for the same customers. To win a share of the computer business, other sellers may try to offer more and better services, or services at lower prices. Because of the pressure of competition, business firms must constantly try to provide the best services and create the best products at the lowest possible prices.
Consumer Sovereignty
In the end, it is the customers, or consumers, who determine whether any business succeeds or fails. In the U.S. free enterprise economy, consumers are said to have sovereignty-the power or freedom to have final say. Consumers are free to spend their money for Product X or for Product Y. If they prefer Y over X, then the company making X may lose money, go out of business, or decide to manufacture something else (perhaps Product Z). Thus, how consumers choose to spend their dollars causes business firms of all kinds to produce certain goods and services and not others.

Back To Class Page

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HOW DOES THE U.S. FREE ENTERPRISE SYSTEM OPERATE? The U.S. economic system of free enterprise operates according to five main principles: the freedom to choose our businesses, the right to private property, the profit motive, competition, and consumer sovereignty.

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On a foldable, answer the following questions about free enterprise. Be as detailed as you can.

(note: free enterprise is sometimes called a free market or just market economy)

What is a free enterprise economy?

How does it work?

Give as many detailed examples of how you see the free enterprise economy in Lemonade Day

Draw a picture that explains free enterprise.

Below are a few resources to help you out.