Free Enterprise

THE CONCEPT THAT underlies capitalism, free enterprise is the economic system based on private rather than public ownership of the means of production. Investment of capital and employment of labor generate personal profit, which benefits society. According to free enterprise theorists and advocates, economies work best when left free to respond to fluctuations in supply and demand, and government intervention should be limited if not eliminated.

The theory is primarily the work of Adam Smith, who wrote The Wealth of Nations in 1776 as a reaction to the then-current philosophy of mercantilism. The profit motive that drives free enterprise has been present in virtually all economies, but its fullest expression came in the 18th century when the Industrial Revolution shifted power to merchants, bankers, and industrialists (sometimes known as the bourgeoisie or middle class) from the traditional landowning elites. The transfer of power came first in Great Britain and it came in all spheres—politics, economics, and society. Free enterprise, in practice, has always required some restraints by government; it does tend toward abuses, including slavery (Great Britain and the United States), apartheid (South Africa), fraud, and monopoly.

Free enterprise capitalism can arise in different social and political systems; it can take the form of democratic socialism, as in Scandinavia, or state-sponsored industrialization, as in South Korea and the Asian states (Malaysia and others.) It can exist under democracies as well as totalitarian regimes.

Free enterprise dominated in the United States during the Gilded Age of rapid and ruthless industrialization in the last decades of the 19th century. And it became excessive again by the 1920s, leading to government restraints after the Great Depression discredited it. The United States, since the 1930s, has provided exemptions, incentives, subsidies, and tax breaks. Other countries, such as Japan and Germany, have centrally planned industrial policies negotiated through meetings of labor, industry, and government at which agreements are negotiated about such things as interest rates and wages.

The former communist states of the late Soviet Union and its satellites shifted from socialism to some form of free market capitalism after the break up of the Soviet Union between 1989 and 1991. China, late in the 20th century and early in the 21st, shifted its economy to at least a semblance of free enterprise.

Advocates claim that capitalism promotes the well being of all humans. They rely on such advocates as John Locke, Ludwig von Mises, and Ayn Rand. They equate free enterprise with individual freedom from crime, from government oppression, from force. Besides freedom “from,” there is freedom “to.” Freedom to do whatever each person deems to be in his or her own interest: freedom to work where one wants, buy what one wants, keep all that one makes. Freedom to do anything but force another. Free enterprise is presumed to be the source of maximization of use of infinite resources as each free person converts nature into economic goods and wealth. Production improves the environment by rearranging natural chemical elements for human well being. The division of labor allows expansion of the total knowledge by allowing each to learn more about her specialty, and this expanded knowledge benefits all individuals.

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