The free enterprise characteristics are the features that distinguish this particular economic system from other economic systems such as communism, socialism, etc. Before we discuss the various characteristics of a free enterprise let us understand what it means.
Free enterprise refers to an economic system where the factors of production such as labor and capital are controlled by the private sector. Market forces of demand and supply are also key factors in determining the prices of goods and services and the market operates with minimal government interference.
The free enterprise system allows citizens to make their own choice about what kinds of jobs or businesses to get involved in, where to buy or sell products or services, how to invest their money, their ability to own property, and to make several other decisions without coercion or influence from the government. In this economic system, everyone has equal opportunity irrespective of their background, status, or gender.
As a result, these economies generally have increased economic growth due to a wide range of economic activity that occurs on a daily basis and also due to the many freedoms the citizens have. Thus, most countries that practice the free enterprise system are known to be economically prosperous nations. Let us discuss the various free enterprise characteristics below:
Demand and supply
Although demand and supply exist in every kind of economy, it is especially prevalent in a free enterprise because it is not only one of its key features, it is also one of its major building blocks. Products and services are created based on the demand for them. Thus the various companies that exist in a free trade aim to meet the needs of the people who live within the society by producing goods and services which they know the people require. These products or services are then sold to people that need them.
For instance, Pepsi produces different soda flavors based on the demand for different soda flavors by individuals who patronize the brand. As such, in order to keep up with the demand for their product and also not lose customers to other soda producers, the company creates different soda flavors to meet the needs of the consumer. Demand and supply are also closely linked to the pricing of goods and services and we shall further discuss that aspect later on.
The free enterprise system affords everyone in the society equal opportunity to participate and also benefit from the various economic activities that are taking place within the society as there are no restrictions on who can engage in the processes of manufacturing, selling, or buying particular products or engaging in the rendering or reception of services. Because of this, all citizens have an equal opportunity to better their lot and improve their social class through actively engaging in various productive activities in society.
Simply put, there is fair opportunity in the market place for individuals who live in societies that practice this economic system. Hence whether a person is rich, middle class or poor is inconsequential in a free enterprise system because the same opportunity that is available to the poor is also available to both the middle class and the rich. The benefits accruing from any opportunity, therefore, go to anyone among them who has efficiently made use of the opportunity.
Limited role of government
The free enterprise system is theoretically supposed to be an economic system in which the government has no role in the marketplace. However, the continuous evolution of free enterprise and the propensity of individuals to abuse a system that has no government function in any way, has made it pertinent that the government has some kind of role in current free enterprise systems. Thus, in societies that practice this economic system, the government has a limited role to place. The role of the government in a free market comprises of:
- The enforcement of contracts between the parties that have begun a transaction.
- Ensuring that the rights of the citizens are not violated in the processes that occur in the marketplace.
- Regulating the prices of certain products and services which are necessities for the citizens such as electricity, gas, food, shelter, and clothing.
When the government steps into the market place in a free enterprise system, it is not to coerce individuals into getting involved with transactions that they do not originally want to make, it is rather to ensure that all transactions go on as planned.
For instance, when individuals get involved in buying and selling call or put stock options, the government through the Securities and Exchange Commission (SEC) ensures that the parties fulfill their obligation to either buy or sell the stock options. Additionally, the government ensures that illegal businesses do not take place. In essence, the government’s role is not to influence the market in any form but to ensure that transactions go on smoothly and within acceptable legal standards.
One of the key reasons why a lot of individuals start businesses is to make profits from the product or service they will offer to people, it is also one characteristic of free enterprise. Individuals create businesses that cater to the need of the people in society with the aim of making a profit in the end. Individuals make profits when the cost of production such as raw materials and labor is lesser than the amount at which the finished product is sold.
For instance, when a restaurant makes meals for sale, they aim to sell the meals at prices that can cover for their expenses while still making a profit. Hence if the cost of making a meal is $9, they may sell the meal for $11 or more to cover their cost and still make a profit from the sale.
The quest for profit-making is not only limited to business owners, investors also seek investment opportunities such as the buying of different kinds of stocks or purchasing assets; whether tangible or intangible, with the aim of either getting dividends from the stocks or having a return on their assets which can serve as a profit from the investment made. Hence, a key characteristic of a free enterprise economy is the opportunity for profit-making that exists.
When people have economic freedom, it means that these individuals can choose the kind of career they want, decide where they want to live, the economic activities that they want to engage in, who they want to patronize or do business with, etc. The economic freedom a person enjoys lets them be themselves and also allows them to make their decisions themselves without compulsion from anyone.
For instance, a person living in a country like America can choose which company they want to work with, they can also decide to quit their job if they no longer want to keep working with the organization. They can also invest their money in any venture they see fit provided it is within the confines of legally acceptable business ventures. All these freedoms are enjoyed by the individual because America practices the free enterprise economic system.
Private property rights
Unlike in the communist economic system where the property is collectively owned by all members of the community, in the free enterprise system, individuals can own property. Due to this private ownership of property, individuals also have certain property rights which enable them to determine the use of the property they own. Hence, property owners and not the government determine what their property would be used for. They can further decide to sell the property when they want to whoever they decide.
Having full control of your property without interference from anyone, be it government or other individuals is another characteristic of the free enterprise system. This means that provided your property is not located within areas that have been already earmarked either as business or residential areas, you can choose to put your property to any use you desire and deem fit.
For instance, a person that owns a piece of land can choose to either use it for agriculture, build a house on it, rent it out, develop it into a shopping mall, use it for recycling purposes or sell it. Whatever the owner of the property decides to do with it is done of free will and without the interference of the government.
Furthermore, expropriation rarely occurs in free enterprise. Expropriation refers to a situation whereby a person’s land is taken over by the government; usually with the aim of creating either a park, hospital, or any feature that will be used by the community. In a situation where expropriation does occur, the owner has to agree and is often compensated by being paid the market value of the property.
See also: Features of capitalism
When it comes to having an economy that is economically diverse, free enterprise encourages such. This is because this economic system encourages creativity and innovation which leads to the creation of diverse business ventures by individuals. Since there are no restrictions on the creation of businesses, entrepreneurship thrives in such societies with individuals creating different kinds of businesses to cater to the diverse needs of people within the society. Hence, the ease with which individuals can register and start new businesses within a particular country tells to what extent the country practices this economic system.
In a free enterprise economy, different sectors are represented in the businesses that exist and even in the same sectors, there are various differentiating factors that exist which create diversity. For instance, two individuals may both be operating restaurants but one may cater strictly to vegetarians while the other may cater to those who eat animal-based meals and products like meat pie, Mac and Cheese, chicken and dumplings, eggs, spaghetti bolognese, etc. Therefore, diversity is encouraged by the free enterprise system.
Another characteristic of the free enterprise system is that buying and selling occur voluntarily. Buyers and sellers interact freely and willingly with each other to start and complete various business transactions. Restrictions do not exist on where to buy or sell products or whom to sell to or buy from. Hence individuals or corporate organizations that need a product or require a service can make their purchase from any manufacturer or retailer and can also engage the services of any service provider that they want on their own terms. When individuals freely buy goods or services without coercion, it is referred to as consumer freedom.
In a free market, individuals can purchase goods and services from any vendor of their choosing, in quantities and qualities that they want. This is further made possible by the presence of several producers of different goods and services within the society in which this economic system is practiced. Hence all transactions that occur in a free enterprise are done freely and willingly by the parties involved.
For instance, a person that wants to buy groceries has several options to choose from; they can shop online and have it delivered to their home; they can shop online and then go to the shop to pick up their order; they can buy the groceries from the grocery store themselves; they can use an errand service to get them the groceries. Additionally, the person also has a wide variety of grocery sellers to buy from. At the end of the day, it is left to the person to decide who they want to buy from, how they want to buy, and in what quantity they will buy.
Perhaps competition is the most distinct free enterprise characteristic that arises as a result of the individuals that live within a society. Since individual needs vary, so also do the businesses that cater to these varying needs. Companies that exist in a free enterprise normally compete with each other to get customers. They do so by offering products and services that they feel will meet the customer’s expectations best. Hence, companies keep improving the products they offer for sale. They also continuously carry out further research and development with the aim of creating newer and better products that the consumers will find more appealing.
The existence of different retailers of the same products further increases the completion for patronage from individuals, thus, these retailers often strive to bring the same products to the buyers at the least possible prices. This is because consumers have a wide variety of vendors to buy from and often choose to buy from vendors who offer them the best deals at the cheapest prices.
For instance, parents wanting to buy baby products have a variety of options of who to buy from such as Dr. Brown, Amazon, Target, Cool baby buy, Walmart, Baby list, etc. Hence, competition can be stiff depending on the sector in which a business operates. Therefore, a free enterprise economy is characterized by steep competition between companies that offer similar kinds of products and even between the consumers that buy these products since the producers also seek to sell to people who are willing to buy their products at better prices.
The high rate of competition that is prevalent in free markets makes a lot of businesses that exist in such communities become specialized in the particular products or services they offer. This specialization is often spurred by the need for profit and the elimination of competition or outdoing the competition. Companies often offer products or services that are distinct from other products or services that are readily available in the market to increase their profit margin. It should be noted that these products or services offered are not only distinct but they are products and services that consumers readily require.
For instance, in order to become more specialized and to move with the current global warming concerns and the need to create cars that are environmentally friendly, a car producer like Tesla produces electric cars. Although they are not the only automobile producers in the industry and are also not the only ones that produce electric cars, Tesla car designs are distinct from other cars that are available in the market.
Furthermore, when companies specialize, they can sell their products and services at higher prices since consumers will not be able to get the same product or service from any other producer. This additionally increases the company’s overall profit and reduces or eliminates competition for them. In the same vein, the company can also offer their employees better compensation for the work they do which further motivate the employees to be more productive members of their team.
Even before the existence of dollar notes, the exchange of goods and services has been at a price. In the past, this price was settled by barter, with consumers exchanging products for products, services for services, products for services, or services for products. In a free economy, the prices of goods and services are not determined by the government, instead, the producers of the products or services often determine the price at which they will sell to consumers. The producers often determine the price based on how much they spent to make the product or how much time it takes to render a particular service.
In the United States, for instance, quite a number of hired help and those who carry out cleaning services are mostly paid by the hours spent at work. The pricing of a product or service is sometimes also determined by the value that consumers place on a product or service and sometimes, on where it was purchased too. Hence, it is not strange to buy the same product at different prices from different retailers in a free market.
Additionally, the perceived value of a product could also make it more expensive thus products that are branded luxury items are often more expensive than regular products. In some instances, custom products and those which cater to a particular gender or demography may also cost more than generic products. Demand and supply play a major role in the pricing of goods and services. Generally, when supply outways demand, it often leads to a reduction in the price of a product or service whereas a limited supply often leads to an increase in price.
For instance, if there are 10 different data providers in the market and there are just two people who want to buy data, the price of data is going to be cheap because there are more sellers than buyers. On the other hand, if there are only two data providers and over a thousand people need data, the price is likely going to be higher since there is a large demand and little supply. Furthermore, in a free enterprise, the price of a product or service is often not fixed, instead, it fluctuates and is often agreed upon by bargaining between the parties that want to carry out a transaction.
In conclusion, the characteristics of free enterprise include demand and supply, competition, specialization, consumer freedom, etc. These characteristics determine the extent of economic freedom that is in play in a particular society. Generally, free enterprise societies have been known to have higher economic growth rates when compared to more conservative economies or economies where government control is very high. The higher economic growth further brings about prosperity to the country which in turn improves the living standards of the citizens and creates more employment opportunities with the teeming entrepreneurship and new businesses that spring up as a result.
The presence of competition encourages innovation and creativity which bolsters the specialization of companies and consequently increases their profit margins when compared to similar companies that are not specialized. Although the government plays a limited role in a free market, its role is an important one as it maintains the balance of the market and ensures no one gets cheated.
Below is a video explaining some major free enterprise characteristics.
- Capitalism vs Liberalism Differences and Similarities - January 23, 2023
- Features of Socialism - January 19, 2023
- LME vs CME: Coordinated Market Economy vs Liberal Market Economy - January 18, 2023