case study 3 american free enterprise system

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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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View the Executive Summary for this brief.

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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Explore the series.

This brief is part of a series of recommended conversations designed for circle's wishing to pursue a specific focus for the year. Each series recommends "5" briefs to provide a year of conversations.

The Business Series

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Chapter 3: American Free Enterprise

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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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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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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.

Stand Up for Free Enterprise

The facts on free enterprise.

Data shows free markets and free enterprise improve economic mobility, equality, safety, production, life expectancy, and overall happiness across the globe.

Jenna Shrove Executive Director of Strategic Advocacy and Advisor to the Chief Policy Officer Lindsay Cates Senior Manager, Communications and Strategy, U.S. Chamber of Commerce

January 18, 2024

While naysayers may say otherwise, free enterprise and free markets have improved economic mobility, equality, safety, production, life expectancy, and overall happiness across the globe for years.

The myths and facts on free markets explained below are highlights from Johan Norberg’s “ The Capitalist Manifesto: Why the Global Free Market Will Save the World .” These statistics aren't just numbers—they represent lives changed, opportunities created, and problems solved for people all over the world. 

Economic Mobility and Inequality

Myth: Those born into the lower income quintiles face a daunting challenge to move up the economic ladder.  

Free Market Fact: The chance of upward mobility remains strong.  

• Recent data shows that among Americans born in the lowest quintile,  37% rise to one of the three highest quintiles . Even in the second lowest quintile, nearly half successfully climbed the economic ladder.  

Myth: The American middle class is shrinking due to a decline in prosperity.  

Free Market Fact: The common narrative of a shrinking middle class is actually a result of upward mobility.  

• Individuals once considered part of the middle class have moved into higher income brackets , challenging the traditional understanding of class dynamics. 

Myth: Those in the top quintile earn 16.7 times more than those in the bottom quintile. 

Free Markets Fact: When accounting for taxes and transfers, the income gap is reduced from 16.7 times to a more modest four times . 

Myth: Scandinavian countries like Sweden and Denmark have better economic mobility and equality.    

Free Market Fact: The comparison often overlooks the fundamental differences in wage structures.  

• In Scandinavian countries, where wages are more compressed, a modest increase in income can propel individuals to a higher quintile. In the U.S., the bar is set higher, requiring a more substantial income boost for upward mobility. 

Myth: Dynastic wealth is perpetuated through generations.  

Free Markets Fact: Looking at the Forbes 400 in 1982, only 69 individuals or their heirs retained their positions in 2014. 

Join us in supporting American free enterprise.

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Global Improvements  

Free Markets Fact: Over the last twenty years, our world has witnessed a remarkable transformation—a reduction of 70% in extreme global poverty .  

• Each day, a staggering 138,000 people have risen out of extreme poverty. 

Free Markets Fact: There are many other numbers that tell a compelling story of progress and positive change on a global scale over the last 20 years. 

• Global life expectancy increased from 64 years to almost 73 years . 
• Illiteracy dropped from 25.7% to 13.5% .  
• Child labor (5-17) decreased from 16% to just under 10% . 

Production, Globalization, and the Workplace  

Myth: American manufacturing has been wiped out with companies moving jobs overseas.    

Free Markets Fact: American industrial production has doubled since 1980 .  

• American manufacturing has produced more due to improved production processes, despite shedding jobs. 
• Over the past few decades, wages at every income level have increased by 50% , American industry expanded its output by more than half, and unemployment fell to record lows. 

Myth: China is taking away American jobs.    

Free Markets Fact: American companies that work with Chinese imports have grown their workforce by 2% or more per year compared to their counterparts.  

• Jobs were added not just in production lines but also in higher-skilled, better-paying jobs in the company.  

Free Markets Fact: The safety of American workplaces has seen significant improvements.  

• In 1972, there were 10.9 workplace injuries per 100 workers. Fast forward to 2019, and this number has dropped dramatically to just 2.8 . This remarkable decline underscores the strides made in ensuring the well-being of the American workforce. 

'The State of American Business is optimistic'

Concentration and monopoly  .

Myth: Industrial concentration leads to a rise in stagnant monopolies dominating our markets. 

Free Markets Fact: Stagnant monopolies do not dominate our markets. The U.S. has a complex and ever-evolving dynamic business landscape. Companies rise and fall in an ecosystem of competition and innovation, ultimately driving economic growth.  

• In 2020, only 51 companies on the Fortune 500 list were there since its inception in 1955.  
• The average duration businesses spend on the S&P 500 has decreased by over 40% since 1970 , plummeting from around 35 years to approximately 20 years today. 

Free Markets Fact: Each year there are thousands of mergers in the U.S., which strengthens our economy.  

• Mergers play a crucial role in enhancing global competitiveness, improving products and services, and fostering efficiencies that ultimately benefit consumers. 

Free Markets Fact: For over four decades, the U.S. has maintained a bipartisan consensus in favor of market-based competition and antitrust enforcement, guided by the consumer welfare standard and robust economic analysis.

These past headlines highlight the constant churn: 

• “’Will the dominant social network of our time ever lose its monopoly?... Users have invested so much social capital in putting up data about themselves it is not worth their changing sites.’” - The Guardian in 2007 describing MySpace. 
• “How Yahoo! won the search wars.” - Fortune Magazine in 1998. 
• “One billion customers. Can anyone catch the cell phone king?” – Forbes in 2007 describing Nokia. 

Competition Data Center

The environment  .

Myth: Economic growth hurts the environment.  

Free Markets Fact: In our interconnected world, it's the faster-growing, wealthier nations that have spearheaded advancements in processes and technologies and transportation that reduce waste and environmental impact.  

• Wealthier nations have a strong track record of minimizing plastic pollution. The rigorous waste management systems in place significantly limit the amount of plastic ending up in nature or oceans.  
• If every citizen in Europe and America were to completely halt their use of plastic, the impact on plastic emissions into the oceans would be negligible—underscoring the need for a broader, global approach. 

Free Markets Fact: The global effort to address the health and environmental consequences of pollution has seen substantial progress. 

• From 1990 to 2017, life years lost to air pollution decreased by 49% , while water pollution-related life years lost dropped by an even more substantial 65% .    

Happiness, Culture Wars, and Capitalism  

Myth: Free markets may be efficient and may create growth, but it is at the expense of the happiness and well-being of those at the bottom of the income ladder. 

Free Markets Fact: Free markets become a beacon of autonomy and freedom of choice, particularly for low-income earners, offering them avenues to exercise choice and control in their lives.  

• The significance of this effect diminishes for high-income earners, as their financial standing already affords them many choices. 

Free Markets Fact: Capitalism contributes to the creation of growing societies that offer greater opportunities for all groups to embrace and express their unique identities. It paints a picture of a world where diverse visions and projects find room to flourish within the framework of a thriving capitalist society. 

• In a world increasingly susceptible to culture wars, it is a zero-sum game to impose a single, homogeneous identity on everyone, which contrasts sharply with the positive-sum game of capitalism. 

About the authors

Jenna shrove.

Jenna Shrove is the Executive Director of Strategic Advocacy and Advisor to the Chief Policy Officer at the U.S. Chamber of Commerce.

Lindsay Cates

Lindsay is a senior manager on the communications and strategy team. She previously worked as a writer and editor at U.S. News and World Report.

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Mathematics, health & fitness, business & finance, technology & engineering, food & beverage, random knowledge, see full index, chapter 3: the american free enterprise system flashcards preview, economics > 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

Decks in Economics Class (10):

• 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
• Econ Semester Review
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Chapter 3 The American Free Enterprise S...

Social studies.

Chapter 3 The American Free Enterprise Systems

30 questions

Introducing new   Paper mode

No student devices needed.   Know more

When an economy is capitalist and has free markets, it can be said that the economy is based on? (Hint: The US is this system...)

free enterprise

Limited Government

Great Recession

profit motive

private property rights

This is one of the characteristics of the U.S. economies role of the government?

This allows people to own and control their possessions as they see fit, as long as it does not interfere with the rights of others?

The dollar value of all final goods, services, and structures produced in a country in a year is known as _______ .

Gross Domestic Product

Gross National Product

The struggle among sellers to attract consumers by offering the best products at the lowest prices is known as _______ .

voluntary exchange

property rights

competition

What gives people and businesses the opportunity to make their own decisions?

economic freedom

command economy

risk-taking individual in search of profits

entrepreneur

mixed economy

ruler of the market in determining goods and services produced

The phrase "the customer is always right" is most often associated with what term?

entrepreneurship

consumer sovereignty

regulatory government

Who ultimately determines the success of a product?

the government

the business producing the product

the consumer

the store selling the product

Social Security is one example of how Americans have modified their free enterprise economy.

In general, people do not want their economic system to create as many jobs as possible.

What is the name of the federal health insurance program for senior citizens?

Social Security

Social Care

Which of the following is currently considered one of the major economic and social goals in the United States?

conservation

preserving endangered species

clean environment

price stability

What is one of the benefits related to economic equity?

conserving resources

living on a fixed income

receiving equal pay for equal work

unemployment compensation programs

Protection from layoffs, illnesses, injuries or disabilities falls under the goal of _______ .

economic equity

economic efficiency

economic growth

economic security

• 17. Multiple Choice Edit 30 seconds 1 pt The concept that people may decide what and when they want to buy and sell goods & services voluntary exchange legal equality private property open opportunity
• 18. Multiple Choice Edit 30 seconds 1 pt This is the study of the behavior/decision making of entire economies, not individuals. microeconomics macroeconomics finite economics economic models
• 19. Multiple Choice Edit 30 seconds 1 pt A period of macroeconomic expansion followed by a period of contraction.  boom/bust economic growth business cycle recession
• 20. Multiple Choice Edit 30 seconds 1 pt This is the study of the behavior/decision making of individuals & businesses.  microeconomics macroeconomics recession expansion
• 21. Multiple Choice Edit 30 seconds 1 pt A shared good/service that government builds because it would be impractical for an individual  private good public good military good market failure
• 22. Multiple Choice Edit 30 seconds 1 pt What is the best measure of the economic well-being of a country? net worth GDP open market value of goods the daily stock market performance
• 23. Multiple Choice Edit 30 seconds 1 pt A situation where the market does not distribute resources efficiently is a private sector problem a positive externality a negative externality  a market failure
• 24. Multiple Choice Edit 30 seconds 1 pt True/False:  Government safety nets are called welfare or aid to the poor. True False
• 25. Multiple Choice Edit 30 seconds 1 pt The income level that is needed to support a household is the poverty threshold the standard of living a cash transfer an in-kind benefit
• 26. Multiple Choice Edit 30 seconds 1 pt A _______________ is an exclusive right to a new product or invention for a number of years. copyright patent incentive legal equality
• 27. Multiple Choice Edit 30 seconds 1 pt A _______________ is an exclusive right to publish or sell a piece of written material (ex. need permission to produce a movie based on a book). copyright patent invention incentive

What is the role of producers?

Make the product

Buy the product

to carry out a government economic program

to increase the profit of other established retail stores

Most people are inspired to start a business by the

free contract clause

marginal benefit

open opportunity clause

• 30. Multiple Choice Edit 30 seconds 1 pt True or False: The government can't take your property without just compensation. True False

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