Today's global economy is built on the idea of free enterprise. Classical liberal principles combined with a spirit of entrepreneurship allow free enterprise to increase the well-being of societies; capitalism and democracy are consistent with rises in living standards for populations. The pursuit of free enterprise sometimes creates contrasts in ideals, particularly between public policy makers and the business community.
Definitions
At its core, free enterprise is defined by voluntary activity. You may choose to start a business selling groceries, for example; I may choose to purchase apples from your grocery store with money I have earned from employment I chose to engage in. Investors who find your business model to be successful may choose to buy stock in your grocery store chain. Free enterprise works because businesses, consumers, employees and investors make rational decisions about what is best for themselves. This activity creates supply and demand for products and services, or markets.
Function
Free enterprise works when ownership, capital and entrepreneurship are combined to create economic activity. Markets of supply and demand provide a majority of the economic activity in capitalist societies. In the United States, for instance, consumer spending accounts for the majority of economic activity--about 70 percent of the overall total, historically.
Although free enterprise mainly functions through business activity, governments and other organizations such as labor unions influence the free flow of goods and services. Governments affect free enterprise function through policies such as tariffs, which place additional duties on imports of goods, and through corporate tax rates, among other laws. Labor advocacy groups, including unions, may use lobbyists and financial support for political candidates to influence or restrict public policy seen as detrimental to a given industry.
Benefits
Free enterprise has the primary benefit of making a nation wealthier, overall. Standards of living in countries that embrace capitalist systems have increased, particularly since 2000. Goldman Sachs, an investment bank, noted in 2005 that industrial advances and increased free enterprise in countries like Egypt, Indonesia, Iran, South Korea, Mexico and Nigeria would place these nations among the next economies to follow Brazil, Russia, India and China into greater prosperity.
Proponents of free enterprise also cite the benefits of liberty that are inherent in free enterprise. Because free enterprise is based on voluntary activity, capitalism encourages individuals to decide for themselves what they might buy, where they might work or what companies they will start or invest with. A major cause of the downfall of communism in the late 20th century is because free enterprise was so inhibited in communist countries. Central planning, or governments telling individuals where they will work or what they may buy, ultimately limits economic growth.
Considerations
Free enterprise is said to produce "winners" and "losers"; that is, capitalist systems often include very wide margins between the richest and poorest members of a given society. In America, for instance, the income gap between rich and poor has grown since 2000, according to the Organization for Economic Cooperation and Development. This suggests that free enterprise, although it may raise the overall standard of living for a nation, cannot eradicate poverty.
Another consideration of free enterprise are the limitations on what is for sale. Even the most open economies place some restrictions on the sale of certain goods or services, especially those that raise moral objections. Just because an economy embraces free enterprise, this does not mean that everything and anything can be legally bought and sold. Illicit substances, people, and human organs are examples of things that are normally excluded from the free market.
Outlook
As the Internet era continues to spur global trade, free enterprise is in an expansion mode. Emerging economies such as China, India and Brazil have large populations that are only now becoming fully industrialized; business sectors and governments alike see opportunities for investment and the need to reduce barriers to free trade. The best recommendation for the free enterprise system is an overall reduction in poverty. As nations become more interconnected through the spread of technology and increases in trade, free enterprise will retain its global prominence.
