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Introduction

View the Executive Summary for this brief.

Case Study

After Brandon Boynton was badly bullied in middle school, he couldn’t help the depressive thoughts and self-doubt. But with encouragement from his parents, Boynton joined the Young Entrepreneurs Academy (YEA!) when he was a sophomore in high school. YEA! is a national program sponsored by the U.S. Chamber of Commerce Foundation that shows young people how to “‘generate business ideas, conduct market research, write business plans, pitch to a panel of investors and launch their very own companies’.”

By the age of 14, Boynton had taken the resources, skills, and contacts he gained from YEA! and started his own company, an app-making startup called MostBeastlyStudios LLC. One app is BullyBox, which “provides students with a safe, anonymous outlet to tip teachers and administrators off” to safety concerns ranging from bullying to drug and weapons related threats.

Take a look at Brandon’s story and startup here (3 min):

 

Explore the U.S. Chamber Foundation’s Campaign for Free Enterprise for other stories of impact about how Free Enterprise can fuel innovation, create opportunity, build community, share advice, and solve problems.

 

What is Free Enterprise?

Free enterprise refers to an economy in which “the market determines prices, products, and services rather than the government. Businesses and services are free of government control.” Nobel-winning economist Friedrich Hayek described a free enterprise system not as unplanned, but rather that “planning and regulation arise from the coordination of decentralized knowledge among innumerable specialists, not bureaucrats.”

Free Enterprise systems have a few key components:

Economic Freedom

Economic freedom allows individuals to buy what they want, choose their occupation, employer, and job location. It allows businesses to choose which workers to hire, which products to produce, and how much to charge.

Consumer Sovereignty and Voluntary Exchange

Buyers and sellers can freely and willingly exchange goods and services in market transactions that benefit them both. This applies not only to money individuals pay to buy things, but also resources such as labor.

Private Property

Private property allows people to own their possessions and do with them what they wish (as long as they do not interfere with others’ rights). This enables them to take risks such as through investments and entrepreneurship.

Incentives and Profit

Individuals have a strong desire to improve their well-being. This incentive “stimulates employees to produce more and employers to use resources efficiently,” because everyone wants to bring to fruition the promise of rewards they can benefit from. The promise of profit also prompts efficient productivity to best answer the “‘what to produce’” and “‘how to produce’” questions, so resources are allocated to produce goods and services people value most.

Competition

Competition “takes the form of better products and, usually, lower prices – both of which promote progress.” The end result is a huge variety of products, the market prices of which are determined through supply and demand.

 

Why it Matters

The free enterprise system relies on economic freedom, which goes hand-in-hand with individual freedom, succinctly summarized in the Declaration of Independence as “Life, Liberty, and the pursuit of Happiness.” Economic freedom allows individuals to “pursue what they believe to be best for them,” as long as they are not infringing upon the rights of others. This provides both quantitative and qualitative benefits for all. Nations with higher levels of economic freedom have an average per capita GDP roughly six times greater than those with lower levels of economic freedom, as well as higher life expectancy, political and civil liberties, gender equality, and happiness. It is the diversity of economic freedom that helps us thrive both as individuals and as a society, as Milton Friedman explains in this PolicyEd video (1 min):

 

 

We are intrinsically motivated by our passions and extrinsically motivated to improve our material well-being. Free enterprise allows us to bring the two together in the market and use the combination to earn our own success and be self-sufficient. Earning our own success through our pursuits is a defining feature of free enterprise and economic freedom. Through creativity, productivity, and innovation, we as individuals have the power to improve our lives and the lives of others by producing the goods and services that generate higher standards of living for all. As AEI’s Jonah Goldberg explains, “The government can improve your net worth, but not your self-worth, and your self-worth comes from earned success and the good character that allows you to recognize what that means.”

For more on earned success, listen to AEI’s Arthur Brooks explain (2 min):

 

 

Putting it in Context

History

Milton and Rose Friedman, in their popular book and 1977 TV series, Free to Choose, describe the story of the United States as “the story of an economic miracle and a political miracle that was made possible by the translation into practice of two sets of ideas both, by a curious coincidence, formulated in documents published the same year, 1776.” Learn more about Free to Choose Network, and watch Free to Choose Under 2, which breaks down the original episodes into 2-minute videos.

The first set of ideas was from Adam Smith’s The Wealth of Nations, which analyzed how a market system could “combine the freedom of individuals to pursue their own objectives with the extensive cooperation and collaboration needed in the economic field to produce our food, clothing and housing.” This PolicyEd video explains (1 min):

 

 

The second set of ideas came from the Declaration of Independence, which established “the principle that every person is entitled to pursue his own values.” No other country was founded on this principle.

Dr. Deidre McCloskey, author of Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World, writes in the Wall Street Journal that the improvement in the last 200 years in terms of the availability of goods and services is “stunning,” and that real income has increased by a factor of 10 in countries around the world. During that same time period, she notes, countries like Japan, Sweden, and the U.S. that fully embraced free trade saw real income increase by a factor of 30.

Swedish academic and medical doctor Hans Rosling shows this enrichment, plotting the evolution of 200 countries over 200 years (5 min):

 

 

The Role of Government

In a free enterprise system, individuals “pursue what they believe to be best for them.” The government’s role, then, is to allow individuals to make the most of their economic freedom. This involves defining and enforcing the rules of society, such as protecting people’s right to own property, and settling disputes that result from conflicting interpretations of the rules. Much like in sports, the government plays the role of a rules committee to determine the rules; an official, to enforce the rules; and a commissioner, to settle disputes. Just as an umpire wouldn’t play shortstop, the government’s role is also limited to off the field.

Today, there are no economies that are pure, free enterprise systems. Sometimes, the government does step into play to provide certain goods and services the market would have trouble producing on its own, such as national defense. This is true in many countries including the U.S., where the role of the government has gone beyond rule maker.

Key Stakeholders

Households own most of the economic resources and determine how to best use them. For example, households own their labor and can choose which businesses they give their labor. In return for labor, they receive the wages and salaries that allow them to act as consumers and purchase the goods and services they want businesses to provide.

Businesses organize resources, such as labor and material, into products. With the incentive of profits, businesses seek ways to efficiently use resources to satisfy customers’ wants and needs.

Businesses and consumers interact in the market, “any place or any way that buyers and sellers can exchange goods, services, and resources or money.” This includes households selling their labor to businesses, businesses selling goods to households, and both households and businesses using financial markets (banks, etc.) to borrow or save money.

 

Current Challenges and Areas for Reform

Market Failures and Externalities

Even the systems that work the best cannot promise perfection. A market failure is “a problem that causes the market economy to deliver an outcome that does not maximize efficiency.” One example is when the quantity of supply does not equal the quantity demanded. Another example is externalities, which occur “when one person’s actions affect another person’s well-being and the relevant costs and benefits are not reflected in market prices.”

Externalities can be positive or negative. A positive externality occurs “when there is a positive gain on both the private level and social level,” such as when research and development increases a companies’ profits while also adding knowledge to society. A negative externality, “when the social costs outweigh the private costs,” can result, for example, when pollution from a factory negatively affects the environment and the health of those living nearby.

Particularly in the case of negative externalities, costs are not often included in market prices, prompting many to “advocate for government intervention to curb negative externalities through taxation and regulation.” Government measures often include subsidies to offset costs of negative externalities; taxation meant to discourage the activities imposing an externality, such as a carbon tax; or regulations, such as environmental or health-related legislation, like the development of the Environmental Protection Agency. This PolicyEd video breaks it down (1 min):

 

Subsidies and Taxes

A subsidy is “a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the government or a targeted tax cut.” The purpose of a subsidy is to offset market failures and assist struggling industry, help achieve economic efficiency, or provide incentives that can encourage new developments. Direct payments include actual payments, whereas indirect payments include price reductions so items can be purchased below the market rate. For example, a healthcare subsidy is funding sent to insurance companies to lower the premium amount required from households. Other businesses that receive subsidies in the U.S. include the agricultural industry, financial institutions, and utilities companies. Good Jobs First tracks the total subsidy amounts given to companies through state and local economic development programs.

It is understandable for cities and states to want to attract businesses to help grow their economies and provide economic opportunity for their workers, but if someone receives a subsidy, someone else needs to pay for it. Since subsidies primarily come from the government, the payment is in the form of taxes. Small businesses, which employ almost half of all U.S. employees and have accounted for three-quarters of all private sector jobs created since 2010, end up paying the higher taxes to fund these subsidies. This capital leaves these small businesses and entrepreneurs with fewer resources for saving, investing, and producing.

The Cost of Regulation

U.S. economic and individual freedom allows people to be entrepreneurs and follow their passions as economic pursuits, and a significant portion of Americans do just that. According to the U.S. Small Business Administration, almost half (47%) of U.S. workers are employed by small enterprises. The U.S. Chamber foundation also estimates there are some 23 million non-employer businesses, from “‘old-fashioned family-run corner stores to home-based bloggers.’” These businesses fuel economic growth and job creation: approximately 45% of U.S. GDP is driven by the small business sector and small businesses created 1.6 million net jobs in 2019. As the heart of America’s economy and communities, these businesses and entrepreneurs also feel the effects of bad policies and regulatory complexity first.

Some regulations are necessary, just as some taxes are necessary. These serve the purpose of protecting public health and enforcing safety measures, or prohibiting conduct that interferes with individual rights. Unnecessary regulations, however, generate costly and time-consuming burdens that weigh on individuals and their businesses. Starting and running a business is hard enough as it is; according to the Small Business Administration, about half of all small business establishments survive five years or longer, and only one-third make it past ten years. Burdensome regulations make it more difficult to start businesses or projects by increasing the cost of production, and reducing the net return and incentives of producers.

What makes regulations even more difficult is the lack of standardization. Randy Fifield of Fifield Companies explains how in real estate, for example, “State by state mandates vary greatly,” which forces projects to be done on a case by case basis. This applies even to those within the same state, as “there are no universal norms to distinguish city by city mandates.” When entrepreneurs need to spend their time and resources discerning and adhering to regulations from rent control to zoning ordinances, it leaves fewer resources available for projects, making them harder to complete or even preventing them from getting off the ground. Such deterrents to investment hurt individuals and the overall economy. For more on how this affects local businesses and neighborhoods, see The Policy Circle’s Stitching the Fabric of Neighborhoods Brief.

Egalitarianism and Central Planning

Even though governments often step into the economic system and assume a greater role, this does not mean those societies have turned to central planning. In a centrally planned economy, a central authority makes all economic decisions regarding product manufacturing and distribution, such as determining how much a product will cost, how much of a product to produce, and how to allocate labor and resources. Advocates of central planning believe that a central authority, rather than the market, can best address issues such as inequality and corruption, but does this actually solve more problems than it generates? This Free to Choose video explains (2 min):

 

 

Central planning limits the individual and economic freedom that are key to free enterprise systems. Critics maintain this is the case because businesses cannot freely choose how much to produce, workers cannot freely choose where to dedicate their labor, and consumers cannot freely choose which products they want to buy. This means many individuals will not have access to the goods and services they may want or need because no one is allowed to produce these things and it is not where the resources have been allocated.

Leonard E. Read (1898–1983) established the website of the Foundation for Economic Education in 1946. One of his best-known pieces, I, Pencil, published in 1958, illustrates the main point that “economies can hardly be ‘planned’ when not one soul possesses all the know-how and skills to produce a simple pencil.” Watch the video version of I, Pencil here (6 min):

 

 

Central planning also skews the price system, “the link that connects consumers, producers and markets.” In a free enterprise system, the price of a good or service is based on its scarcity (the supply) and how much people value it (demand). This information is vital to making economic decisions by telling producers how much to produce and what to charge.

Too much control by a central authority can result in policies on pricing, inflation, interest rate controls, foreign exchange controls, and artificial exchange rates that damage the market, as was the case in Latin America and Africa in the 1980s and 1990s. For example, centralized control in Ghana meant the nation’s cacao exporters only received 6% of the world price of cacao. The tiny country that had dominated the world cacao market since the early 1900s lost its market share by 1982 because its cacao exporters had no incentive to produce.

Russ Roberts, research fellow at Stanford University’s Hoover Institute and host of the podcast EconTalk, explains the dilemmas posed by central planning in terms of something we all know and love: Bread (6 min).

 

Monetary Stability

Maintaining a stable dollar is crucial for increases in production and economic growth. It gives investors and entrepreneurs confidence that their investments and returns will not be depreciated by inflation or destabilized by swings in the business cycle.

In the U.S., the authority to spend money belongs to the government, but the authority to manage money belongs to the Federal Reserve. The Federal Reserve, which is independent of the government, is the U.S. central bank and plays an important role in ensuring a healthy, growing economy. The Federal Reserve is in charge of ensuring the nation has “a safer, more flexible, and more stable monetary and financial system.” This means making sure there is neither too much nor too little money in circulation. This affects inflation, which in turn influences purchasing power or what people can buy and how much of it.

Conclusion

Economic freedom is what fuels the success of America and access to hundreds of thousands of products and services. It is also what allows our citizens to pursue their own interests and even turn these passions into a path to personal and financial wellbeing. The power of the free enterprise system is in actuality the power of individual freedom and creativity. Our examples of a mobile application, loaves of bread, and pencils represent the idea that we all have a natural passion and a desire to succeed, and a free enterprise system allows Americans to do just that.

 

Ways to Get Involved/What You Can Do

Measure: Find out what your state and district are doing about economic freedom

Identify: Who are the influencers in your state, county, or community? Learn about their priorities and consider how to contact them, including elected officials, attorneys general, law enforcement, boards of education, city councils, journalists, media outlets, community organizations, and local businesses.

Reach out: You are a catalyst. Finding a common cause is a great opportunity to develop relationships with people who may be outside of your immediate network. All it takes is a small team of two or three people to set a path for real improvement.

  • Find allies in your community or in nearby towns and elsewhere in the state.
  • Foster collaborative relationships with community organizations, local businesses, or local chambers of commerce.

Plan: Set some milestones based on your state’s legislative calendar.

  • Don’t hesitate to contact The Policy Circle team, communications@thepolicycircle.org, for connections to the broader network, advice, insights on how to build rapport with policy makers and establish yourself as a civic leader.

Execute: Give it your best shot. You can:

Working with others, you may create something great for your community. Here are some tools to learn how to contact your representatives and write an op-ed.

 

Thought Leaders and Resources

ECONSTORIES is a media channel dedicated to exploring the world of economics with visual storytelling and entertainment.

AEI’s Free Enterprise Fact Sheet

Free Market Revolution: How Ayn Rand’s Ideas Can End Big Government, Yaron Brook

Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World,  Deidre McCloskey (2016)

Free to Choose, Milton and Rose Friedman (1980)

The Wealth of Nations, Adam Smith (1776)

The Road to Serfdom, Friedrich Hayek (1944)

Short Reads: Foundational Readings for the Free Market Woman, The Policy Circle (2017)

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