Free Enterprise

A free-enterprise system is based on private ownership as the means of production.

Learning Objective

Explain how free enterprise leads to the economic system of capitalism

Key Points

Free-market systems operate in capitalist economies.
There are multiple variants of capitalism depending on interpretation and practice.
Economists emphasize the degree to which markets are free of government control (laissez faire) in capitalism.
Political economists focus on the presence of private property, as well as power, wage, and class relations.
Mixed economies and state capitalism are systems that incorporate different amounts of planned and market-driven elements in the state's economic system.

Terms

laissez-faire
A policy of governmental non-interference in economic affairs.
State capitalism
The term state capitalism has various meanings, but is usually described as commercial (profit-seeking) economic activity undertaken by the state with management of the productive forces in a capitalist manner, even if the state is nominally socialist. State capitalism is usually characterized by the dominance or existence of a significant number of state-owned business enterprises.
mixed economy
Mixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety of government-sponsored aspects.

Example

China is seen as the primary example of a successful state capitalist system. Political scientist Ian Bremmer describes China as the primary driver for the rise of state capitalism as a challenge to the free market economies of the developed world, particularly in the aftermath of the 2008 financial crisis. Bremmer states, "In this system, governments use various kinds of state-owned companies to manage the exploitation of resources that they consider the state's crown jewels and to create and maintain large numbers of jobs. They use select privately owned companies to dominate certain economic sectors. They use so-called sovereign wealth funds to invest their extra cash in ways that maximize the state's profits. In all three cases, the state is using markets to create wealth that can be directed as political officials see fit. And in all three cases, the ultimate motive is not economic (maximizing growth) but political (maximizing the state's power and the leadership's chances of survival). This is a form of capitalism but one in which the state acts as the dominant economic player and uses markets primarily for political gain. "

Full Text

Free-Enterprise Defined

The definition of free enterprise is a business governed by the laws of supply and demand, where the government has no involvement in its decisions or actions. This economic system is based solely on private ownership as the means of production.

It is a private system in which all means of production are privately owned and operated.

Link to Capitalism

This is an example of capitalism in which government policies generally target the regulation and not the money.

Capitalism is generally considered to be an economic system that is based on private ownership of the means of production and the creation of goods or services for profit by privately-owned business enterprises.

Some have also used the term as a synonym for competitive markets, wage labor, capital accumulation, voluntary exchange, and personal finance. The designation is applied to a variety of historical cases, varying in time, geography, politics, and culture.

Variations of Capitalism

There are multiple variants of capitalism, including laissez faire, mixed economy, and state capitalism. There is, however, a general agreement that capitalism became dominant in the Western world following the demise of feudalism.

Economists, political economists, and historians have taken different perspectives on the analysis of capitalism. Economists usually emphasize the degree to which government does not have control over markets (laissez faire), as well as the importance of property rights.

Most political economists emphasize private property as well, in addition to power relations, wage labor, class, and the uniqueness of capitalism as a historical formation.

The extent to which different markets are free, as well as the rules defining private property, is a matter of politics and policy. Many states have what are termed mixed economies, referring to the varying degree of planned and market-driven elements in a state's economic system.

A number of political ideologies have emerged in support of various types of capitalism, the most prominent being economic liberalism.

Capitalism gradually spread throughout the Western world in the 19^th and 20^th centuries.

Peoples' Republic of China's Nominal Gross Domestic Product (GDP) Between 1952 to 2005

Scatter graph of the People's Republic of China's GDP between years 1952 to 2005, based on publicly available nominal GDP data published by the People's Republic of China and compiled by Hitotsubashi University (Japan) and confirmed by economic indicator statistics from the World Bank.

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