case study 3 american free enterprise system

Free Enterprise

How does the u.s. free enterprise system operate.

The U.S. Free Enterprise System, synonymous with capitalism, is a beacon of economic dynamism that has paved the way for the nation’s prosperity and global influence. At its core, it revolves around individual freedoms, market-driven decisions, and minimal government intervention. While often praised for its ability to foster innovation, generate wealth, and provide a plethora of choices to consumers, it’s also critiqued for its inherent challenges. Grasping how this system operates requires delving into its historical roots, foundational pillars, and the intricate balance between freedom and regulation.

Historical Context of the U.S. Free Enterprise System

The roots of capitalism can be traced back to Europe, but it found fertile ground in the vast landscapes of America. As early settlers sought economic independence from European monarchies, the foundation for a market-driven economy was laid. Over time, with westward expansion, industrialization, and the embrace of laissez-faire economics, the U.S. cultivated its distinct brand of capitalism. It integrated the entrepreneurial spirit of pioneers, the vast resources of a new continent, and the ideals of individual liberty from the nation’s founding principles. This rich tapestry of history culminated in the modern U.S. Free Enterprise System, tailored to the nation’s unique socio-political fabric.

Pillars of the Free Enterprise System

Private ownership.

Central to the U.S. Free Enterprise System is the sanctity of private ownership. Individuals and corporations have the intrinsic right to own assets, ranging from personal property to vast business empires. This privilege is not just about possession but is tied deeply to the belief in personal freedoms and individual rights. Such ownership offers palpable incentives. When people possess the fruits of their labor, they’re more inclined to invest, innovate, and expand. This system, therefore, thrives on the human desire to better one’s circumstances and achieve success, underpinned by ownership rights.

Freedom of Choice

The market’s pulse is dictated by the freedom of choice, enjoyed both by consumers and producers. On one side, consumers navigate the market landscape, making purchasing decisions based on preferences, needs, and economic capacities. This freedom ensures that businesses remain attentive to consumer demands, continually adapting to their evolving desires. On the flip side, producers enjoy the liberty to decide which goods to produce, the methods of production, and the pricing strategies. Such mutual freedoms ensure an organic alignment of supply with demand, fostering market efficiency.

Competitive Markets

Competition is the lifeblood of the free enterprise system. Businesses constantly jostle for market share, compelled to refine their offerings, innovate, and maintain competitive pricing. This relentless pursuit ensures that consumers are beneficiaries of improved products, technological advancements, and often, more reasonable prices. However, competition is not just about market dominance; it’s about resilience and adaptability. Companies, regardless of their size, are nudged into a perpetual state of self-improvement, ensuring that they remain relevant in the ever-shifting market sands.

Profit Motive

Tied closely to the principle of private ownership is the profit motive. The allure of profits propels businesses to operate efficiently, cater to market demands, and innovate. Profits aren’t merely a sign of business success but are indicators of the alignment between consumer demands and business offerings. The continuous quest for profits pushes businesses to explore uncharted territories, innovate, and introduce products or services that might redefine market landscapes. Conversely, the fear of losses ensures businesses remain vigilant, agile, and responsive to market changes.

With these pillars, the U.S. Free Enterprise System has crafted a dynamic and responsive economic ecosystem that’s been instrumental in driving the nation’s growth and global influence. While these foundations remain constant, their interpretations and applications have evolved, ensuring the system remains contemporary and relevant.

Role of Government in Free Enterprise

While the essence of the U.S. Free Enterprise System leans toward minimal government interference, the government’s role is indispensable for maintaining a healthy economic environment. This role manifests in several ways:

Limited Government Intervention:

At the core of free enterprise is the principle of laissez-faire – let things take their own course. The government, thus, generally refrains from dictating market behaviors, allowing the invisible hand of the market to guide economic outcomes. However, government intervention becomes vital in cases of market failures, like monopolies that stifle competition, or when public goods, which the market might undersupply, need provisioning.

Regulations and Their Importance:

The government steps in to ensure that the playfield remains level. Through antitrust laws, it prevents unhealthy monopolies or oligopolies. Consumer protection laws safeguard against fraudulent practices, while environmental regulations ensure sustainable business practices. Such regulations aim to balance the interests of businesses, consumers, and the planet.

Fiscal and Monetary Policies:

Beyond the market dynamics, the government employs fiscal (taxation and spending) and monetary (control of the money supply and interest rates) policies to influence economic health, address unemployment, manage inflation, and steer economic growth.

Benefits and Criticisms of the U.S. Free Enterprise System

The free enterprise system has catapulted the U.S. to global economic leadership. It champions innovation, fostering an environment where new ideas and technologies flourish. This dynamism translates into job creation, diverse consumer choices, and a high standard of living. The system’s adaptability means it can recalibrate in the face of challenges.

Criticisms:

Detractors, however, point to inherent flaws. Income and wealth inequalities have become stark, leading to socio-economic divides. Additionally, the system’s relentless pursuit of profits sometimes overlooks environmental sustainability and worker rights, leading to ecological and social challenges.

Modern Challenges and the Future of Free Enterprise

With globalization, digitalization, and heightened environmental concerns, the U.S. Free Enterprise System faces evolving challenges. Balancing profits with sustainability and ensuring equitable growth in the digital age are now paramount for the system’s continued relevance and success.

Case Study: A Real-world Example of Free Enterprise in Action – Tesla, Inc.

When examining the U.S. Free Enterprise System, one company stands out not just for its innovative products but for how it’s reshaped an entire industry: Tesla, Inc. With its founder Elon Musk at the helm, Tesla serves as a testament to the power of the free market, innovation, and entrepreneurial spirit that defines American capitalism.

Tesla’s Origins and Vision

Tesla, founded in 2003, embarked on a mission seemingly contrary to prevailing market trends. At a time when electric vehicles (EVs) were a niche segment, often mocked for their limited range and quirky designs, Tesla envisioned a world dominated by sustainable energy and transport. Their vision was ambitious: produce a mass-market EV that was both desirable and affordable.

Tesla’s Challenging the Status Quo

While most legacy automakers were comfortably settled into their internal combustion engine paradigms, Tesla dove headfirst into the uncharted waters of electric mobility. They began with the high-end Roadster, showcasing that electric cars could be stylish, fast, and have a decent range. This model effectively challenged misconceptions surrounding EVs.

Tesla’s Innovation at its Core

Tesla’s free enterprise spirit is not just confined to its vehicles. The company revolutionized the auto industry’s sales model by selling directly to consumers, bypassing traditional dealerships. They’ve also invested heavily in supercharger networks, battery technology, and even ventured into solar energy solutions and energy storage. Their gigafactories are a testament to their commitment to scale and sustainability.

Tesla’s Consumer-Centric Approach

What makes Tesla a quintessential free enterprise exemplar is its unwavering focus on consumers. Feedback is taken seriously, with real-time software updates addressing issues and adding features. This direct relationship with customers, devoid of middlemen, ensures that Tesla remains agile and responsive to consumer needs, a hallmark of the free enterprise model.

Tesla’s Challenges and Adaptation

Tesla’s journey hasn’t been devoid of challenges. From production bottlenecks to skepticism from market pundits, the company faced its share of hurdles. However, the free enterprise system thrives on adaptability, and Tesla exemplifies this. By raising capital through stock offerings, innovating constantly, and expanding globally, they’ve turned challenges into growth opportunities.

Tesla’s Influence on the Broader Market

Perhaps the most significant validation of Tesla’s impact is the ripple effect it created. Legacy automakers are now heavily investing in EVs, charging infrastructures are becoming commonplace, and discussions about sustainable transport are mainstream. Tesla’s bold moves in the free market forced an entire industry to pivot, showcasing the power of innovation in the free enterprise system.

Tesla, Inc. is more than just a car manufacturer; it’s a beacon of what’s possible in the U.S. Free Enterprise System. With a combination of vision, innovation, and an unyielding commitment to challenging the status quo, Tesla has not only carved its niche but has also influenced the trajectory of the automotive industry. It underscores that in a free market, even entrenched industries can be revolutionized when vision meets determination.

Final Thoughts on “How does the US Free Enterprise System Operate:

The U.S. Free Enterprise System, with its intricate balance of freedoms and regulations, has sculpted the nation’s economic narrative for centuries. While it has brought unparalleled prosperity and innovation, it also beckons introspection and evolution to address its critiques. As challenges metamorphose, so will this system, adapting and recalibrating, ensuring its enduring legacy in the annals of economic history.

Frequently Asked Questions about how the US Free Enterprise System Operates

What exactly is the u.s. free enterprise system.

The U.S. Free Enterprise System, often termed as capitalism, is the economic model that emphasizes minimal government intervention, private ownership, and the freedom of individuals and businesses to make decisions about production, distribution, and consumption. At its core, it trusts the “invisible hand” of the market to determine prices, allocate resources, and drive innovation based on supply and demand dynamics.

In essence, it’s an economic playground where businesses compete freely, with success or failure largely determined by their ability to serve consumers effectively and efficiently. This competition drives innovation, efficiency, and consumer choice, while also leading to the natural fluctuation of markets and industries over time.

How does competition work in the Free Enterprise System?

Competition is fundamental to the U.S. Free Enterprise System. It’s the mechanism that pushes businesses to innovate, improve their offerings, and cater to consumer needs. Companies compete for customers by offering better products, services, or prices than their rivals. This, in turn, benefits the consumer, as they get access to improved goods and services at competitive prices.

For instance, if a company introduces a groundbreaking product, it might initially enjoy significant profits and a dominant market position. However, competitors will soon attempt to launch similar or superior products, which can lead to better features, improved quality, or reduced prices for consumers.

In a free enterprise environment, businesses that cannot keep up with competition or fail to meet consumer needs might eventually lose market share or exit the industry. This Darwinian nature ensures that only the most efficient and adaptive businesses thrive, leading to a constantly evolving marketplace.

How does the government regulate the Free Enterprise System?

While the free enterprise system is rooted in minimal government intervention, it doesn’t mean the government doesn’t have a role. The government steps in to ensure a level playing field and protect public interests. This involves implementing and enforcing regulations, such as antitrust laws to prevent monopolies, consumer protection laws to guard against fraud, and environmental regulations to ensure sustainable practices.

Additionally, the government plays a role in managing the overall economy through fiscal and monetary policies. For example, during economic downturns, the government might increase its spending to stimulate growth or the central bank might adjust interest rates to influence borrowing, lending, and investment.

How does the U.S. Free Enterprise System promote innovation?

The U.S. Free Enterprise System is inherently geared towards fostering innovation. The profit motive drives businesses to constantly seek new ways to satisfy consumer needs, reduce costs, or tap into unexplored markets. Companies that innovate successfully often enjoy greater market shares, higher profits, and a stronger reputation.

Because businesses are in a constant race to outdo competitors, there’s a perpetual push to develop new technologies, refine processes, and offer novel solutions. This cycle of competition and innovation ensures that industries continuously evolve, leading to advancements that often have ripple effects across other sectors and even globally.

What are some criticisms of the Free Enterprise System?

While the U.S. Free Enterprise System has led to economic prosperity, technological advancements, and a plethora of consumer choices, it’s not without its critiques. One major criticism revolves around income and wealth inequality. The system inherently creates winners and losers, and over time, this can lead to significant disparities in wealth and access to resources.

Another critique points to the potential for businesses to prioritize profits over other important factors, such as environmental sustainability or worker rights. This can lead to over-exploitation of resources or conditions where employees might be underpaid or work in substandard conditions.

Lastly, the free enterprise system can sometimes result in short-term thinking, where companies prioritize immediate profits over long-term sustainability or broader societal benefits.

It’s important to note that while these critiques exist, proponents argue that with the right balance of regulation and market freedom, many of these issues can be addressed or mitigated.

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Free Enterprise & Economic Freedom

The free-enterprise system is the only system that has been proven to create opportunities for everyone, even the most vulnerable. This brief is a compilation of foundational work helpful for understanding and articulating the power of free markets and individual freedom in unleashing what human creativity can accomplish in a free market economy.

Table of Contents

Introduction, putting it in context, the role of government, current challenges and areas for reform, ways to get involved/what you can do, thought leaders and resources.

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After Brandon Boynton was badly bullied in middle school, he couldn’t help the depressive thoughts and self-doubt. But with encouragement from his parents, Boynton joined the Young Entrepreneurs Academy (YEA!) when he was a sophomore in high school. YEA! is a national program sponsored by the U.S. Chamber of Commerce Foundation that shows young people how to “‘generate business ideas, conduct market research, write business plans, pitch to a panel of investors and launch their very own companies’.”

By the age of 14, Boynton had taken the resources, skills, and contacts he gained from YEA! and started his own company, an app-making startup called MostBeastlyStudios LLC. One app is BullyBox, which “provides students with a safe, anonymous outlet to tip teachers and administrators off” to safety concerns ranging from bullying to drug and weapons related threats.

Take a look at Brandon’s story and startup here (3 min):

Explore the U.S. Chamber Foundation’s Campaign for Free Enterprise for other stories of impact about how Free Enterprise can fuel innovation, create opportunity, build community, share advice, and solve problems.

What is Free Enterprise?

Free enterprise refers to an economy in which “the market determines prices, products, and services rather than the government. Businesses and services are free of government control.” Nobel-winning economist Friedrich Hayek described a free enterprise system not as unplanned, but rather that “planning and regulation arise from the coordination of decentralized knowledge among innumerable specialists, not bureaucrats.”

Free Enterprise systems have a few key components :

Economic Freedom

Economic freedom allows individuals to buy what they want, choose their occupation, employer, and job location. It allows businesses to choose which workers to hire, which products to produce, and how much to charge.

Consumer Sovereignty and Voluntary Exchange

Buyers and sellers can freely and willingly exchange goods and services in market transactions that benefit them both. This applies not only to money individuals pay to buy things, but also resources such as labor.

Private Property

Private property allows people to own their possessions and do with them what they wish (as long as they do not interfere with others’ rights). This enables them to take risks such as through investments and entrepreneurship.

Incentives and Profit

Individuals have a strong desire to improve their well-being . This incentive “stimulates employees to produce more and employers to use resources efficiently,” because everyone wants to bring to fruition the promise of rewards they can benefit from. The promise of profit also prompts efficient productivity to best answer the “‘what to produce’” and “‘how to produce’” questions, so resources are allocated to produce goods and services people value most.

Competition

Competition “takes the form of better products and, usually, lower prices – both of which promote progress.” The end result is a huge variety of products, the market prices of which are determined through supply and demand.

Why it Matters

The free enterprise system relies on economic freedom, which goes hand-in-hand with individual freedom, succinctly summarized in the Declaration of Independence as “ Life, Liberty, and the pursuit of Happiness .” Economic freedom allows individuals to “ pursue what they believe to be best for them, ” as long as they are not infringing upon the rights of others. This provides both quantitative and qualitative benefits for all. Nations with higher levels of economic freedom have an average per capita GDP roughly six times greater than those with lower levels of economic freedom, as well as higher life expectancy, political and civil liberties, gender equality, and happiness. It is the diversity of economic freedom that helps us thrive both as individuals and as a society, as Milton Friedman explains in this PolicyEd video (1 min):

We are intrinsically motivated by our passions and extrinsically motivated to improve our material well-being. Free enterprise allows us to bring the two together in the market and use the combination to earn our own success and be self-sufficient. Earning our own success through our pursuits is a defining feature of free enterprise and economic freedom. Through creativity, productivity, and innovation, we as individuals have the power to improve our lives and the lives of others by producing the goods and services that generate higher standards of living for all. As AEI’s Jonah Goldberg explains, “The government can improve your net worth, but not your self-worth, and your self-worth comes from earned success and the good character that allows you to recognize what that means.”

For more on earned success, listen to AEI’s Arthur Brooks explain (2 min):

Milton and Rose Friedman, in their popular book and 1977 TV series, Free to Choose , describe the story of the United States as “the story of an economic miracle and a political miracle that was made possible by the translation into practice of two sets of ideas both, by a curious coincidence, formulated in documents published the same year, 1776.” Learn more about Free to Choose Network , and watch Free to Choose Under 2 , which breaks down the original episodes into 2-minute videos.

The first set of ideas was from Adam Smith’s The Wealth of Nations , which analyzed how a market system could “combine the freedom of individuals to pursue their own objectives with the extensive cooperation and collaboration needed in the economic field to produce our food, clothing and housing.” This PolicyEd video explains (1 min):

The second set of ideas came from the Declaration of Independence, which established “the principle that every person is entitled to pursue his own values.” No other country was founded on this principle.

Dr. Deidre McCloskey, author of Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World , writes in the Wall Street Journal that the improvement in the last 200 years in terms of the availability of goods and services is “stunning,” and that real income has increased by a factor of 10 in countries around the world. During that same time period, she notes, countries like Japan, Sweden, and the U.S. that fully embraced free trade saw real income increase by a factor of 30.

Swedish academic and medical doctor Hans Rosling shows this enrichment, plotting the evolution of 200 countries over 200 years (5 min):

In a free enterprise system, individuals “ pursue what they believe to be best for them .” The government’s role, then, is to allow individuals to make the most of their economic freedom. This involves defining and enforcing the rules of society , such as protecting people’s right to own property, and settling disputes that result from conflicting interpretations of the rules. Much like in sports, the government plays the role of a rules committee to determine the rules; an official, to enforce the rules; and a commissioner, to settle disputes. Just as an umpire wouldn’t play shortstop, the government’s role is also limited to off the field.

Today, there are no economies that are pure, free enterprise systems . Sometimes, the government does step into play to provide certain goods and services the market would have trouble producing on its own , such as national defense. This is true in many countries including the U.S., where the role of the government has gone beyond rule maker.

Key Stakeholders

Households own most of the economic resources and determine how to best use them. For example, households own their labor and can choose which businesses they give their labor. In return for labor, they receive the wages and salaries that allow them to act as consumers and purchase the goods and services they want businesses to provide.

Businesses organize resources, such as labor and material, into products. With the incentive of profits, businesses seek ways to efficiently use resources to satisfy customers’ wants and needs.

Businesses and consumers interact in the market , “any place or any way that buyers and sellers can exchange goods, services, and resources or money.” This includes households selling their labor to businesses, businesses selling goods to households, and both households and businesses using financial markets (banks, etc.) to borrow or save money.

Market Failures and Externalities

Even the systems that work the best cannot promise perfection. A market failure is “a problem that causes the market economy to deliver an outcome that does not maximize efficiency.” One example is when the quantity of supply does not equal the quantity demanded. Another example is externalities , which occur “when one person’s actions affect another person’s well-being and the relevant costs and benefits are not reflected in market prices.”

Externalities can be positive or negative . A positive externality occurs “when there is a positive gain on both the private level and social level,” such as when research and development increases a companies’ profits while also adding knowledge to society. A negative externality, “when the social costs outweigh the private costs,” can result, for example, when pollution from a factory negatively affects the environment and the health of those living nearby.

Particularly in the case of negative externalities, costs are not often included in market prices, prompting many to “advocate for government intervention to curb negative externalities through taxation and regulation.” Government measures often include subsidies to offset costs of negative externalities; taxation meant to discourage the activities imposing an externality, such as a carbon tax ; or regulations, such as environmental or health-related legislation, like the development of the Environmental Protection Agency . This PolicyEd video breaks it down (1 min):

Subsidies and Taxes

A subsidy is “a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the government or a targeted tax cut.” The purpose of a subsidy is to offset market failures and assist struggling industry, help achieve economic efficiency, or provide incentives that can encourage new developments. Direct payments include actual payments, whereas indirect payments include price reductions so items can be purchased below the market rate. For example, a healthcare subsidy is funding sent to insurance companies to lower the premium amount required from households. Other businesses that receive subsidies in the U.S. include the agricultural industry, financial institutions, and utilities companies. Good Jobs First tracks the total subsidy amounts given to companies through state and local economic development programs.

The Cost of Regulation

U.S. economic and individual freedom allows people to be entrepreneurs and follow their passions as economic pursuits, and a significant portion of Americans do just that. According to t he U.S. Small Business Administration , almost half (47%) of U.S. workers are employed by small enterprises. The U.S. Chamber foundation also estimates there are some 23 million non-employer businesses, from “‘old-fashioned family-run corner stores to home-based bloggers.’” These businesses fuel economic growth and job creation: approximately 45% of U.S. GDP is driven by the small business sector and small businesses created 1.6 million net jobs in 2019. As the heart of America’s economy and communities, these businesses and entrepreneurs also feel the effects of bad policies and regulatory complexity first.

What makes regulations even more difficult is the lack of standardization. Randy Fifield of Fifield Companies explains how in real estate, for example, “State by state mandates vary greatly,” which forces projects to be done on a case by case basis. This applies even to those within the same state, as “there are no universal norms to distinguish city by city mandates.” When entrepreneurs need to spend their time and resources discerning and adhering to regulations from rent control to zoning ordinances , it leaves fewer resources available for projects, making them harder to complete or even preventing them from getting off the ground. Such deterrents to investment hurt individuals and the overall economy. For more on how this affects local businesses and neighborhoods, see The Policy Circle’s Stitching the Fabric of Neighborhoods Brief .

Egalitarianism and Central Planning

Even though governments often step into the economic system and assume a greater role, this does not mean those societies have turned to central planning. In a centrally planned economy , a central authority makes all economic decisions regarding product manufacturing and distribution, such as determining how much a product will cost, how much of a product to produce, and how to allocate labor and resources. Advocates of central planning believe that a central authority, rather than the market, can best address issues such as inequality and corruption, but does this actually solve more problems than it generates? This Free to Choose video explains (2 min):

Central planning limits the individual and economic freedom that are key to free enterprise systems. Critics maintain this is the case because businesses cannot freely choose how much to produce, workers cannot freely choose where to dedicate their labor, and consumers cannot freely choose which products they want to buy. This means many individuals will not have access to the goods and services they may want or need because no one is allowed to produce these things and it is not where the resources have been allocated.

Leonard E. Read (1898–1983) established the website of the Foundation for Economic Education in 1946. One of his best-known pieces, I, Pencil , published in 1958, illustrates the main point that “economies can hardly be ‘planned’ when not one soul possesses all the know-how and skills to produce a simple pencil.” Watch the video version of I, Pencil here (6 min):

Central planning also skews the price system , “the link that connects consumers, producers and markets.” In a free enterprise system, the price of a good or service is based on its scarcity (the supply) and how much people value it (demand). This information is vital to making economic decisions by telling producers how much to produce and what to charge.

Too much control by a central authority can result in policies on pricing, inflation, interest rate controls, foreign exchange controls, and artificial exchange rates that damage the market, as was the case in Latin America and Africa in the 1980s and 1990s . For example, centralized control in Ghana meant the nation’s cacao exporters only received 6% of the world price of cacao. The tiny country that had dominated the world cacao market since the early 1900s lost its market share by 1982 because its cacao exporters had no incentive to produce.

Russ Roberts , research fellow at Stanford University’s Hoover Institute and host of the podcast EconTalk , explains the dilemmas posed by central planning in terms of something we all know and love: Bread (6 min).

Monetary Stability

Maintaining a stable dollar is crucial for increases in production and economic growth. It gives investors and entrepreneurs confidence that their investments and returns will not be depreciated by inflation or destabilized by swings in the business cycle.

Economic freedom is what fuels the success of America and access to hundreds of thousands of products and services. It is also what allows our citizens to pursue their own interests and even turn these passions into a path to personal and financial wellbeing. The power of the free enterprise system is in actuality the power of individual freedom and creativity. Our examples of a mobile application, loaves of bread, and pencils represent the idea that we all have a natural passion and a desire to succeed, and a free enterprise system allows Americans to do just that.

Measure : Find out what your state and district are doing about economic freedom

• Do you know the state of economic growth and economic freedom in your community or state?
• What are your state’s laws involving taxes or regulations for businesses and entrepreneurship, and how do they compare to regulations in other states ?
• How much has your state given in subsidies ? Does your municipality disclose subsidies ?

Identify: Who are the influencers in your state, county, or community? Learn about their priorities and consider how to contact them, including elected officials , attorneys general, law enforcement, boards of education, city councils, journalists, media outlets, community organizations, and local businesses.

• Who are the members of your local Chamber of Commerce ?
• Who are the entrepreneurs and small businesses in your community ? 
• What steps have your elected and appointed officials taken to make your state or community more business-friendly?
• Which Federal Reserve district is your state part of?

Reach out: You are a catalyst. Finding a common cause is a great opportunity to develop relationships with people who may be outside of your immediate network. All it takes is a small team of two or three people to set a path for real improvement.

• Find allies in your community or in nearby towns and elsewhere in the state.
• Foster collaborative relationships with community organizations, local businesses, or local chambers of commerce.

Plan: Set some milestones based on your state’s legislative calendar .

• Don’t hesitate to contact The Policy Circle team, [email protected] , for connections to the broader network, advice, insights on how to build rapport with policy makers and establish yourself as a civic leader.

Execute: Give it your best shot. You can:

• Consider the steps someone would need to take to start a business with the SBA’s Small Business Guide .
• The U.S. Chamber of Commerce and the Small Business Administration have resources for starting, running, and growing your business.

Working with others, you may create something great for your community. Here are some tools to learn how to contact your representatives and write an op-ed .

ECONSTORIES is a media channel dedicated to exploring the world of economics with visual storytelling and entertainment.

AEI’s Free Enterprise Fact Sheet

Free Market Revolution: How Ayn Rand’s Ideas Can End Big Government, Yaron Brook

Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World ,  Deidre McCloskey (2016)

Free to Choose , Milton and Rose Friedman (1980)

The Wealth of Nations , Adam Smith (1776)

The Road to Serfdom , Friedrich Hayek (1944)

Short Reads: Foundational Readings for the Free Market Woman , The Policy Circle (2017)

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Free Enterprise: An American History

An incisive look at the intellectual and cultural history of free enterprise and its influence on American politics.  Throughout the twentieth century, “free enterprise” has been a contested keyword in American politics, and the cornerstone of a conservative philosophy that seeks to limit government involvement into economic matters. Lawrence B. Glickman shows how the idea first gained traction in American discourse and was championed by opponents of the New Deal. Those politicians, believing free enterprise to be a fundamental American value, held it up as an antidote to a liberalism that they maintained would lead toward totalitarian statism. Tracing the use of the concept of free enterprise, Glickman shows how it has both constrained and transformed political dialogue. He presents a fascinating look into the complex history, and marketing, of an idea that forms the linchpin of the contemporary opposition to government regulation, taxation, and programs such as Medicare.

https://yalebooks.yale.edu/book/9780300238259/free-enterprise

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5.4: Role of Government in the Free Enterprise System

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So you trekked all the way to Wyoming to see Yellowstone National Park in the beautiful month of December 2018, only to find it closed. Closed! Why?

In December 2018, the U.S. federal government shut down because an agreement could not be reached regarding federal funding and immigration issues. Many federal services, like the national parks, closed and 800,000 federal employees were furloughed. Tourists were shocked and so was the rest of the world: Congress and the President could not agree on a budget.

The shutdown was caused by disputes over the status of protection of persons affected by the Deferred Action for Childhood Arrivals (DACA) immigration policy, and therefore whether those covered under the program should face deportation. There was also a dispute over whether funding should be funded towards building a Mexico–United States border wall, a keystone policy during Donald Trump's presidential campaign.

Shutdowns cause the disruption of government services and programs, including the closure of national parks and institutions (in particular, due to shortages of federal employees). A major loss of government revenue comes from lost labor from furloughed employees who are still paid, as well as the loss of fees that would have been paid during the shutdown. Shutdowns also cause a significant reduction in economic growth (depending on the length of the shutdown).

Video: What the Government Shutdown Means for Travel, Mail, and Social Security

Why does the federal budget create such intense debates? What would happen if the United States actually defaulted on its debt? In this section, we will examine the federal budget, taxation, and fiscal policy. We will also look at the annual federal budget deficits and the national debt.

All levels of government—federal, state, and local—have budgets that show how much revenue the government expects to receive in taxes and other income and how the government plans to spend it. Budgets, however, can shift dramatically within a few years, as policy decisions and unexpected events shake up earlier tax and spending plans.

Fiscal Policy

In this section, we review fiscal policy. Fiscal policy is one of two policy tools for fine-tuning the economy (the other is monetary policy). While monetary policy is made by policymakers at the Federal Reserve, fiscal policy is made by Congress and the President.

The discussion of fiscal policy focuses on how the federal government taxing and spending affects aggregate demand. All government spending and taxes affect the economy, but fiscal policy focuses strictly on the policies of the federal government. We begin with an overview of U.S. government spending and taxes. We then discuss fiscal policy from a short-run perspective; that is, how the government uses tax and spending policies to address recession, unemployment, and inflation; how periods of recession and growth affect government budgets; and the merits of balanced budget proposals.

Government Spending

Government spending covers a range of services provided by the federal, state, and local governments. When the federal government spends more money than it receives in taxes in a given year, it runs a budget deficit.

In contrast, when the government receives more money in taxes than it spends in a year, it runs a budget surplus. If government spending and taxes are equal, it is said to have a balanced budget. For example, in 2009, the U.S. government experienced its largest budget deficit ever, as the federal government spent $1.4 trillion more than it collected in taxes. This deficit was about 10 percent of the size of the U.S. Gross Domestic Product (GDP) in 2009, making it by far the largest budget deficit relative to GDP since the mammoth borrowing used to finance World War II.

Total U.S. Government Spending

The major federal spending categories: national defense, Social Security, health programs, and interest payments. From the graph, we see that national defense spending as a share of GDP has generally declined since the 1960s, although there were some upward bumps in the 1980s buildup under President Ronald Reagan and in the aftermath of the terrorist attacks on September 11, 2001. In contrast, Social Security and healthcare have grown steadily as a percent of GDP. Healthcare expenditures include both payments for senior citizens (Medicare), and payments for low-income Americans (Medicaid). Medicaid is also partially funded by state governments. Interest payments are the final main category of government spending shown in the figure.

Federal Spending, 1960–2010

Since 1960, total federal spending has ranged from about 18 percent to 22 percent of GDP, although it climbed above that level in 2009. The share spent on national defense has generally declined, while the share spent on Social Security and on healthcare expenses (mainly Medicare and Medicaid) has increased. (Source: Economic Report of the President , Tables B-80 and B-1, http://www.gpo.gov/fdsys/pkg/ERP-201...nt-detail.html )

Each year, the government borrows funds from U.S. citizens and foreigners to cover its budget deficits. It does this by selling securities (Treasury bonds, notes, and bills)—in essence borrowing from the public and promising to repay with interest in the future. From 1961 to 1997, the U.S. government has run budget deficits, and thus borrowed funds, in almost every year. It had budget surpluses from 1998 to 2001, and then returned to deficits.

The interest payments on past federal government borrowing were typically 1–2 percent of GDP in the 1960s and 1970s but then climbed above 3 percent of GDP in the 1980s and stayed there until the late 1990s. The government was able to repay some of its past borrowing by running surpluses from 1998 to 2001 and, with help from low interest rates, the interest payments on past federal government borrowing had fallen back to 1.4 percent of GDP by 2012.

These four categories—national defense, Social Security, healthcare, and interest payments—account for roughly 71 percent of all federal spending, as Figure 2 shows. The remaining 29 percent wedge of the pie chart covers all other categories of federal government spending: international affairs; science and technology; natural resources and the environment; transportation; housing; education; income support for the poor; community and regional development; law enforcement and the judicial system; and the administrative costs of running the government.

Slices of Federal Spending, 2012

About 71 percent of government spending goes to four major areas: national defense, Social Security, healthcare, and interest payments on past borrowing. This leaves about 29 percent of federal spending for all other functions of the U.S. government. (Source: Economic Report of the President , Table B-80, http://www.gpo.gov/fdsys/pkg/ERP-2013/content-detail.html )

In 2015 the total government expenditures, by all levels of government was $6.2 trillion. On a per capita, or per person basis that would have been $19,386/person. The pie chart shows the total spending, or the percentage of spending by categories, for the U.S. in the fiscal year 2015.

Government spending is often described as spending in the "public sector" or the part of the economy that is made up of the federal, state, and local governments. Economists agree that government spending began to grow significantly during the Great Depression (1929-1939), and then grew exponentially during World War II.

The economic crisis of the Great Depression and the programs instituted by Franklin D. Roosevelt changed public opinion about what the government's role should be in everyday economic affairs. The success of the New Deal programs to provide relief, recovery, and reform for Americans, set the stage for the unprecedented growth in government spending.

Over the years, many Americans have accepted the expansion of government spending as part of the increase in government regulation of the free market economy and the development of social programs since 1932.

What the government does not provide, the private sector, or the part of the economy made up of private individuals and privately owned businesses, provides. So the economy is either categorized as either the public sector (government) or the private sector (not government).

Types of Spending

Spending is also termed expenditures, and the government spends money in the form of purchasing goods and services or as transfer payments. The government is a significant "consumer" in the private sector. It purchases vast amounts of goods to be used by its employees in its office such as computers, paper, copy machines or tables. It buys equipment for schools and universities, for the military and even for various departments that the government has created such as the Department of the Interior, or the Department of Transportation. The government also provides services to the public by spending money to hire workers that staff the various departments, agencies, and the military.

Transfer payments are another form of expenditure. Transfer payments are paid out to certain individuals, such as those who receive Social Security, disability for military service, welfare, or unemployment compensation. The government does not receive a good or service for these payments, however, the money that the government provides to these recipients makes it possible for them to participate in the economy.

Another type of transfer payment is known as a "grant in aid" where one level of government transfers money to another level of government. The federal government grants money to the states and local governments for specific purposes such as road construction, education, and urban renewal. The money generally has "strings attached" which means that it can only be spent for the reason that it was given and that recipient must follow the rules for how it is to be spent. If the money is not spent correctly, the money must be repaid to the federal government.

The size of the expenditures from "public sector" has an enormous impact on the allocation of resources. When the government spends money it impacts both state and local economies. If the government decides to fund a particular state program or local agency it can bring jobs and growth to that area, however, the opposite is also true. If the government cuts a program or ends funding for a project it may increase unemployment or impact a local economy.

Another way that funding impacts the economy is the distribution of income. When the government increases or decreases transfer payments it directly impacts those who receive those payments. If the government decides to spend money on defense and the military, then it can shift which part of the economy will benefit. In addition, the government can help a particular group that may be in need, such as farmers.

Finally, some economists believe that the government can compete with the private sector when it provides goods and services. For example, public schools and universities compete with private educational facilities; or veteran's hospitals have the same health services that public hospitals provide.

Study/Discussion Questions

1. Explain why and how government expenditures have grown since the 1940s.

2. Describe the two kinds of government expenditures.

3. Explain how government spending impacts the economy.

4. Why has the federal government’s role in the national economy grown over the last 100 years?

5. Has the national government helped or hindered the nation’s economic growth since the 1940s?

6. How have current economic goals of the government impacted government spending?

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Economics: Concepts and Choices

Holt mcdougal, the american free enterprise system - all with video answers.

How Does Free Enterprise Allocate Resources?

Why is the U.S. economy sometimes referred to as a modified free enterprise system?

How does the profit motive work to allocate resources?

How do households and business firms interact in the product and resource markets?

Describe how the government interacts with the product and resource markets.

Study the circular flow models on pages 53 and $80 .$ How are the two models different?

Using Your Notes Explain how producers, consumers, and the government interact to allocate resources in a free enterprise system.

Applying Economic Concepts Think of several examples in which consumers have voted with their dollars and driven a product from the market or into high demand. Record your ideas in a table like the one below.

Comparing and Contrasting Economic Information Compare and contrast the role of consumers and producers in allocating resources. Which do you think has the greater power?

Interpreting Economic Models Use the circular flow chart on page 80 and what you have learned from this section to explain the ways in which government allocates resources.

Challenge What industries in today's world do you think would be wise to make changes given consumers' preferences? Give reasons for your selections.

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Economics > Chapter 3: The American Free Enterprise System > Flashcards

Chapter 3: The American Free Enterprise System Flashcards

ability to enter, compete in market of one’s choice

open opportunity

everyone has same economic rights under the law

legal equality

right to decide which legal agreements to enter

free contract

incentive to gain from economic activities

profit motive

promoter of free markets

• free to choose
• believed government should only control money supply
• 1976: won Nobel Peace Prize for economics

Milton Friedman

capitalist system

• anyone is free to start a business
• choose how to use resources
• managers choose workers
• government protects/encourages competition, enforces contracts
• consumers choose which goods and services to buy

free enterprise system

money left after production costs subtracted from sale price

government protections, protections, provisions, regulations against communism

modifies free enterprise economy

branches of government that make production decisions

public sector

outsiders benefit from or pay for marketplace interaction

market failure

products provided by government, consumed by public

- funded with taxes

public goods

person who benefits but does not pay for public good or service

• no incentive for business to produce public goods (people would not pay)
• only way to have public goods is for government to fund with taxes

goods and services needed for society to function

Ex. highways, mass transit, water, sewer, health care, fire department

infrastructure

occurs when economic transaction cause externalities

side effect on someone other than producer/buyer

externality

people uninvolved in the transaction pay costs

negative externality

benefits people uninvolved in transaction

positive externality

consumed by public but no people can be excluded

government payment to help cover cost of government activity

government programs designed to protect people from economic hardship

move income from person or group to another

- recipient does not provide product in return

transfer payments

made by government with tax money

• most are in an area of social spending
• usually go to poor, aged, disabled, or people who lose their jobs

public transfer payment

Economics (10 decks)

• Chapter 1: The Economic Way of Thinking
• Chapter 2: Economic Systems
• Chapter 4: Demand
• Chapter 6: Demand and Supply
• Chapter 3: The American Free Enterprise System
• Chapter 12: Economic Indicators and Measurements
• Chapter 13: Facing Economic Challenges
• Chapter 7: Market Structures
• Chapter 5: Supply
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