What is Free enterprise system? A free enterprise is basically a kind of economy where products, prices, and services are determined by the actual market, not by the government. It’s capitalism, not socialism. Things that are free are unconstrained, and a business is an enterprise. So, free enterprise system refers to an economy where businesses are free from the hand of government control.
BASIC PROBLEMS OF FREE ENTERPRISE SYSTEM
Nothing created and operated by man is ever perfect. This is true of the enterprise type of economic organization—and of every other type of economic organization. Hence there are always problems. Some of the problems of the enterprise system are unique to that system; others are found in most or all economic systems.
One group of problems is related to maintaining the conditions necessary for the enterprise system to operate effectively. Two problems from this group were identified in the discussion of the role of government: maintaining competition and providing a sound money system. These two problems never seem to be solved in any permanent sense. They require continuous attention and constant vigilance on the part of the citizens and their elected representatives.
We shall stress the role of the citizen in problem-solving because government action is often the source of the particular problem rather than the solution of the problem. This is not a criticism of the democratic form of government. Rather it is a recognition of the fact that short-run political expediency and good economics do not necessarily coincide. They can be brought into rough correspondence if the citizens understand the operating requirements of an enterprise system and really want their representatives to protect and promote these requirements.
The maintenance of this rough correspondence is made more difficult by the fact that it is always to the advantage of a particular economic group to escape from the disciplines of competition. At the same time, it is to the advantage of each group that all other groups should remain subject to these disciplines. Workers seek to escape competition in their own activities but usually insist that the business firms of the country be exposed to competition. In the same way businessmen (or farmers or professional men) seek to escape competition, but insist that workers shall compete for jobs.
This struggle may force all groups to accept the disciplines of competition, or it may result in each group acquiring some degree of monopoly control of its own market. This second result is described with delightful satire in a book by A. S. J. Baster entitled, The Little Less.2 Baster describes how the economy of Great Britain was converted into a caricature of an enterprise system between the two World Wars. This came about by the simple process of allowing each economic group to try to get ahead by offering less for more, rather than more for less.
Output restriction was permitted, even encouraged, in one activity after another. The result: all elements in the economy were reduced to a lower level of living. Whether we shall continue to use an enterprise system in the United States depends largely upon whether the interplay of so-called “pressure groups” produces a workably competitive economy or a restrictions’, monopolistic economy.
To understand the activities of pressure groups it is necessary to understand the problems of economic life as they are seen by the individuals who make up the groups. These problems are usually related to one or more of the following considerations: the absolute size of each man’s income; the size of his income relative to that of others; the relative continuity of his income; the conditions under which the income is earned; and the prospects of improvement over time in both the amount of the income and the conditions of employment.
These general problems are reflected in the specific problems which we shall discuss in later chapters: the business cycle; labor-management relations; distress in agriculture; the insecurities due to age, unemployment, industrial accidents, etc.; and international economic relations.
In analyzing each problem, the authors will begin by asking if the problem arises out of some inherent shortcomings of the enterprise system or out of some remediable failure in the operation of the system. If the problem can be reduced or eliminated by improving the operation of the system, the proper line of action is relatively easy to define, although it may be difficult to enact. If the problem would exist even if the system were operating just as it should, the solution will involve difficult decisions. In this event, it may well be that the best alternative is to accept the problem and learn to live with it. This will be true if the people decide that the cure changing to another type of economic organization—is worse than the disease. No economic system can solve all problems, and the people must decide which system on balance is best suited to their purposes. This statement will take on more meaning after we have examined the advantages and the disadvantages of other economic systems. At this point, it is important only to warn the reader not to expect that the enterprise system can solve all the social and economic problems of life.
A note on self-interest. The discussion of this chapter has made it clear that the force which moves men to action under the enterprise system is self-interest. This motivation has been partly responsible for the widespread doubts concerning the ethical rightness of the enterprise system. No thoughtful person can defend a system that he believes to be ethically wrong. This idea of ethical Tightness is so important that it is well to see how one man at least reconciled the motive of self-interest with his own strong concepts
of right and wrong. The Adam Smith who wrote The Wealth of Nations was also the man who earlier wrote (1759) The Theory of Moral Sentiments. He was deeply concerned with questions of morality, of right and wrong. How did this man of strong moralistic bent reconcile his ethics and his economics? His reasoning ran somewhat as follows:
Man is a normal animal, animated by sympathy for his fellow as well as regard for himself and his immediate family. He wants the respect and esteem of his neighbors; he wants to serve the general welfare. But he has no intuitive way of knowing how he can best do this. Fortunately, the prices which come into existence in a regime based on private property and private enterprise tell him where his services will prove most useful. If a thing is scarce relative to the wants of consumers it will command a high price; if abundant it will command a low price. The individual who shifts his resources from the making of things that are in relative abundance to the making of things that are relatively scarce serves his fellows, and the fact that he prospers by doing this in no wise detracts from the usefulness of his act.
At the same time, this same principle of self-interest permits an individual not to devote his resources to the making of something that is scarce, if he is convinced that he should do something else that would be still more useful. He is free to compose poetry or paint pictures or preach to the souls of men if he thinks that the world will be better for his doing so. But he must not ask the State to force those who do not like his poetry, who find no beauty in his pictures or who seek salvation through other doctrines, to support him. If he really wants to provide his fellows with something which he thinks they need, he must be prepared to pay for his conviction in material privations. There is nothing moral in providing the public with what it does not want if one also insists upon being rewarded as well as if one devoted oneself to providing them with what they do want. In the centrally directed mercantilist society of his time, Adam Smith argued, there is less opportunity for men to voluntarily serve the long-run spiritual interests of their fellows than there is in one based on freedom of choice. For in a centrally directed society the planning authority simply cannot permit individuals to do what they choose; hence it cannot permit them to do what they think is right.
Regardless of whether one accepts or rejects this concept of self-interest, it is important to realize that all thoughtful defenders of private enterprise accept the idea of self-interest as an essential feature of the system because of their conviction that it serves highly moral ends.