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Free enterprise

Free enterprise is a common term, but do you know what it means? Find out more.

What is free enterprise?

Free enterprise, also known as free market or capitalism, is an economic system driven by supply and demand. Private businesses and consumers control the marketplace with little to no interference from the government. In this type of system, the government does not have a central plan for the nation’s economy.

Deeper definition

The components of free enterprise include:

  • Freedom to choose which business to open and how it operates.
  • Right to own private property.
  • Driven by the desire to maximize profits.
  • Competition among the producers of goods and services.
  • Right of consumers to spend their money freely.

In a free enterprise system, consumers are the people who pay for products and services. Ultimately, it is their self-interest that helps drive this type of economic system. Consumers decide what they want to spend their money on and which businesses they want to purchase goods and services from. They shop around for the best possible goods at the lowest prices.

One of the biggest components of free enterprise is that people are free to choose. This also extends to workers, who have the freedom to choose the type of employment they wish to have. They not only get to choose which field they want to work in, but also which employers they wish to work for.

Businesses are the producers in a free market system. It is the businesses that are responsible for producing the highest quality goods and services at prices that maximize profits. Businesses respond to what consumers want and what consumers are spending their money on. While free enterprise allows entrepreneurs to open any kind of business they choose, it offers no guarantees that the business will succeed.

Free enterprise promotes economic growth by encouraging entrepreneurs to start new businesses. Multiple businesses offering the same or similar goods and services leads to competition, which is good for the consumer. When businesses compete with each other to produce better products at better prices, the consumer reaps the benefits. Likewise, competition can lead to innovation as businesses strive to come up with new ways to maximize their profits.

Free enterprise example

In free enterprise, there are three types of markets: resource, product and financial. Resource markets are marketplaces where businesses can obtain labor, raw materials and capital. Businesses tap into the resource market when they need to find new employees to work for their company. Product markets are the marketplaces where businesses sell their finished goods and services. This does not include the sale of raw materials or other intermediate goods needed to produce the final product. Financial markets are marketplaces where buyers and sellers exchange assets such as stocks, bonds, securities, currencies and more.

Whereas a free enterprise system has very little government interference, a socialist economic system comes with heavy government regulations. In between free enterprise and socialist economies are mixed economies. The United States has a mixed economy. While it is largely a free market, it is not unregulated. The government does impose some regulations to protect consumers and workers without infringing on the freedoms awarded to businesses in a free enterprise economic system.

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