Free enterprise which is also known as a free market economy refers to business activities that are not regulated by the government. There are several free enterprise benefits such as increased freedom, consumer rights, market efficiency, financial security and stability, and economic opportunities. This system is based on the belief that government interference in business and the economy hampers growth.
Even though free enterprise is not regulated by the government, it is defined by a set of legal rules like property rights, contracts, and competitive bidding. A free enterprise legal system tends to result in capitalism and even though it grants more freedom, without government intervention, there is a higher risk of several economic crises. Nonetheless, in this article, we will be discussing the benefits of a free enterprise system.
Free enterprise system explained
A free enterprise system is an economy whereby the market determines prices, products, and services rather than the government. That is, businesses and services are not controlled by the government. It could also be referred to as a legal system whereby commercial activities are primarily regulated through private measures.
In principle and in practice, free enterprise systems are characterized by voluntary contracts, private property rights, and competitive bidding for goods and services in the marketplace. This system is in contrast to public ownership of property, coercive activity, and fixed or controlled distribution of goods and services.
Furthermore, free enterprise systems can vary and differ in how ‘free’ they actually are. For instance, the United States and Singapore are two kinds of countries that reflect the freest enterprise systems. Many European countries are also considered free enterprise systems, but usually have more government regulations and involvement in business transactions when necessary.
Even though free enterprise is associated with laissez-faire capitalism and philosophical libertarianism in western countries, it is however distinct from capitalism. Capitalism and free enterprise differ in some ways even though they usually co-exist. Capitalism is a method by which scarce resources are produced and distributed whereas free enterprise refers to a set of legal rules regarding commercial interaction.
Free enterprise tends to favor free and open markets accessible to any entrepreneur whereas capitalism tends to move in the direction of monopoly. Hence, capitalism refers more to the production of wealth, while free markets focus more on the exchange of wealth in various methods.
See also: Disadvantages of Free Market Economy
What are the benefits of a free enterprise economy?
There are several benefits of a free enterprise economy. When a free enterprise society is fully operational, there are various advantages; the consumers often have freedom, and there is usually efficiency, stability, security, growth opportunities, and justice. Explained below are some of the free enterprise benefits and importance.
Free enterprise benefits
- Less bureaucratic
- Unlimited profit margins
- The market is driven by consumers
- Encourages competition
- High economic growth rates
- Right to private property
One of the benefits of a free enterprise system is that the market faces no bureaucracy. That is, in this system, market participants are usually allowed greater flexibility and expression. Entrepreneurs are not constrained by public policy and are not controlled in terms of what goods need to be produced.
Instead of government policy deciding how resources are allowed, a free enterprise system allows consumers to have a greater voice in the economy. The consumers determine the ultimate prices of a good, the products that are needed in a market, and also determine what goods fail or succeed. Hence, in this system, it is up to a company or firm to understand these consumer preferences and adjust their operations accordingly.
Hence, a theory of a free enterprise system is that the best companies will innovate to continue to meet market demand, while companies that fail will cease to exist because they will no longer have a place in the market.
Freedom is definitely one of the advantages of a free enterprise system. In this system, there is the freedom of choice, the freedom to charge or pay what one prefers, and the freedom to express oneself through the creation of any product one would like.
The freedom that comes with a free market system allows individuals to transact with little to no restricting barriers, especially those set by policy or trade regulation. Hence, one of the prominent benefits of a free enterprise economy is the ability to allow individuals to creatively express and transact based on a seemingly endless range of consumer choices.
Unlimited profit margins
The goal and primary motive of a free enterprise are to make money in a freely-flowing society. This happens to be one of the free enterprise benefits as individuals have the right to buy and sell goods for personal profit. In this system, there are fewer restrictions compared to other restrictive forms of economies. Hence, in a free enterprise system, a business owner is able to keep all the money he earns.
This, therefore, brings about a large financial incentive to work hard and create successful businesses. For example, in a free market system, a contractor could work overtime and make extra money, whereas, in a different economic system like a communist system, no matter how much a worker works, he might just only be given a certain wage by the government.
The market is driven by consumers
In a free enterprise system, the market is driven by consumers. This is one of the major benefits of a free enterprise system. In this economy, the value of various goods and services is determined by the market (all the potential buyers of that good or service). Consumers determine the prices of goods in the sense that if a certain good is scarce and is high in demand, the price of the good will be high. Whereas if a good is plentiful and demand is low, the price of the good will be low.
This means that a free enterprise system tends to lead to socially optimal prices as far as there is adequate competition in the economy. If there are multiple market suppliers, consumers have the ability to choose who to transact with. They also have the freedom to choose what they want to pay, though for the transaction to occur, the seller must agree to this price.
Furthermore, the voluntary exchange that consumers enjoy is definitely a major benefit of a free enterprise system. Consumers have the right to choose to or not to exchange goods and can’t be forced into trade or be required to consume any products.
One of the free enterprise benefits is that it encourages competition. An economy that is based on the relationship between supply and demand definitely promotes healthy competition. In a free market system, buyers and sellers compete; the buyers attempt to purchase goods for lower prices or more favorable terms, whereas the sellers attempt to sell goods for higher prices. When these two parties eventually agree to come together, market equilibrium is met.
Companies also strive to offer goods or services that are better than other competitors. When one company offers more extensive goods and its profit margins increase, its competitors get inspired to be innovative in order to retain or gain some of that market. This lively symbiosis is the backbone of a free enterprise and is a huge advantage to consumers. Consumers tend to benefit from a free enterprise system because companies compete to offer more products or services in varied, and more efficient ways.
The competition that comes with a free enterprise nurtures efficiency. This is no doubt one of the free enterprise benefits to consumers. When a company knows it is up against another company that offers similar products or services, it tends to use the resources at its disposal to maximize all benefits, as it also reduces the cost of any risks.
Since consumers dictate the demand in a free market, businesses must regulate the supply, both output, and containment, in order to not flood the market. Hence, free-enterprise systems force manufacturers of goods and services to produce efficiently. If one business creates products very efficiently, and another business produces a similar product less efficiently, the more efficient business tends to make a profit while the other will lose money and unless they increase efficiency, they will eventually be forced out of the market.
Therefore, in a free enterprise, the competition between businesses definitely puts pressure on them to innovate and create new ways to produce better products as efficiently as possible in order to outsell their competitors.
High economic growth rates
Countries that operate a free enterprise system such as the U.S. traditionally have a higher economic growth rate. This is one of the benefits of the U.S. free enterprise system. Generally speaking, this system leads to a country’s citizens being wealthier.
A larger market encourages more competition, which means that more companies are established, thus, creating a greater number of jobs, as the healthy cycle continues to prosper. More jobs would mean more money, which is then poured back into the economy by consumers.
Right to private property
One of the benefits of a free enterprise is consumers have the right to acquire private property. That is, the property is owned by individuals and companies, and not the federal government. Therefore, the advantages of a free enterprise system are that individuals can own and make decisions about the use or sale of private property, land, and other assets. Hence, they control their property rather than using or renting property belonging to the government.