what is free enterprise 
the term free enterprise refers to an economy where the market determines prices products and services rather than the government businesses and services are free from government control in a free enterprise environment free enterprise is characterized by different factors including private property rights alternatively free enterprise could refer to an ideological or legal system whereby commercial activities are primarily regulated through private measures investopedia zoe hansenunderstanding free enterprisefree enterprise is a system wherein market forces determine the production supplies and prices of goods and services as such it is also referred to as a free market free markets are in principle and practice defined by private property rights voluntary contracts and competitive bidding for goods and services in the marketplace this is contrasted with public ownership of property coercive activity and fixed or controlled distribution of goods and services another definition of free enterprise is in terms of economics and was offered by the nobel winning economist friedrich hayek hayek described such systems as spontaneous order hayek s point was that free enterprise is not unplanned or unregulated instead he said that planning and regulation arise from the coordination of decentralized knowledge among innumerable specialists not bureaucrats 1a free enterprise legal system tends to produce capitalism in the absence of central planning this may lead to voluntary socialism or even agrarianism in capitalist economic systems think of the united states consumers and producers determine which goods and services to produce and which to purchase contracts are entered into voluntarily and may even be enforced privately competitive bidding determines market prices in western countries free enterprise is associated with laissez faire economies and philosophical libertarianism however free enterprise is distinct from capitalism capitalism refers to a method by which scarce resources are produced and distributed free enterprise refers to a set of legal rules regarding commercial interaction free enterprise may also be referred to as free trade or free market goals of free enterprisea free enterprise society hopes to achieve different goals when a free enterprise society in fully operational consumers often have freedom efficiency stability security growth opportunities and justice history of free enterprisethe first written intellectual reference to free enterprise systems may have emerged in china in the fourth or fifth century bc when laozi or lao tzu argued that governments hampered growth and happiness by interfering with individuals 2legal codes resembling free enterprise systems were not common until much later the original home of contemporary free markets was england between the 16th and 18th centuries this growth coincided with and probably contributed to the first industrial revolution and the birth of modern capitalism at one time the english legal code was completely free of international trade barriers tariffs barriers to entry in most industries and limitations on private business contracts the united states also used a largely free market legal approach during the 18th and 19th centuries in modern times however both the united states and the united kingdom are better classified as mixed economies countries like singapore hong kong and switzerland are more reflective of free enterprise the opposite of a free enterprise economy is a planned controlled or command economy free enterprise in the united statesthe u s economic system of free enterprise has five main principles the freedom for individuals to choose businesses the right to private property profits as an incentive competition and consumer sovereignty advantages and disadvantages of free enterprisein a free enterprise the market faces no bureaucracy processes are theoretically more efficient and may be administratively less expensive to operate a business and interact with consumers this is especially true in highly regulated markets though increased competition may shift costs elsewhere market participants are usually allowed greater expression and flexibility entrepreneurs aren t constrained by public policy or dictated on what goods need to be produced a cornerstone theory of free enterprise is that the best companies will innovate to continue to meet market demand while companies that fail will cease to exist as they no longer have a place in the market instead of government policy deciding how resources are allowed a free enterprise s large benefit is that consumers have a greater voice in the economy the consumer determines the ultimate prices of a good which products are needed in a market and what goods fail or succeed it is up to a firm in a free enterprise to understand these consumer preferences and adjust their operations accordingly goods that are generally not profitable to manufacture will not be produced in a free enterprise this is because there is no economic incentive for a firm to produce these goods unless there is government aid or a stipend this may also include limitations on where goods are delivered for example government funds may partially pay for telecommunication services to be distributed to rural areas without this funding those communities may not receive service a free enterprise may also spur unfavorable activity due to the prioritization of profits consider enron which didn t follow public financial reporting regulations resulting in financial ruin when there are little to no rules to follow entities within a free enterprise may sacrifice worker safety environmental standards or ethical behavior in favor of making more money a free enterprise doesn t come with bailouts this means economic downturns are theoretically more severe as public funds can t be used to aid failing institutions that would cause major ripple effects by dissolving this is especially true in today s interconnected society where one large bankruptcy could negatively financially impact firms around the world less bureaucraticmay be less expensive to operate a businessallows for greater entrepreneurial freedomprioritizes consumer demand and preferencesmay result in unprofitable products being dissolvedmay restrict where goods are distributed tomay entice illicit behavior due to prioritizing profitsmay result in greater market crashes due to no bailoutsexamples of free enterpriseconsider the differences between two companies apple aapl a public company and sungard data systems a private company because both companies transact within the united states neither is truly in a free enterprise environment imagine each company wants to raise capital the securities and exchange commission sec has outlined regulations that public companies like apple must meet to sell additional shares and be listed on public exchanges this also includes meeting public reporting and filing requirements with fewer restrictions in place as a private company sungard data systems may raise capital more freely as it does not experience as many government restrictions another example of free enterprise or lack thereof is the financial crisis that led to the great recession in response to the economic calamity congress authorized the use of the trouble assets relief program tarp emergency funds for distressed financial institutions 3 in a truly free enterprise governments would not intervene to aid struggling businesses instead these companies would be allowed to fail allowing for the market to resolve itself with new market participants entering the space to claim the newly vacated market opportunity 