Why Do We Need “Free Enterprise”?

free-enterprise_logoLast week we looked at the problems of government.  This week, I want to look at the issues both pro and con with “Free Enterprise”.  First of all, let’s start with the obvious:  “Free Enterprise” does not exist.  It is like the Holy Grail, a wonderful concept but a myth.  There are no free lunches and there are no free businesses.  The purpose of a business is as follows:

To provide goods or services that people want or need at a price they can afford and that allows the business enterprise to make a profit. 

Businesses provide value.  If they do not provide value, they become extinct but much faster than dinosaurs.  Businesses exist in an extraordinarily dynamic environment where rapid change and obsolescence creates a life span for most companies that is less than fifty years.  It is a rare organization that makes it to one hundred years or more.

Why we need enterprise is an easy question to answer.  It is clear that people have myriad wants and needs that must be provided for.  However, why not let the Government do it?  Why should enterprise be free?  Why not have planned economies as in socialism?

Both theory and experience can show us the reason why enterprise should be free.   But first, what do we really mean by free.  We certainly do not mean that products, services, land, capital and human resources are free.  Each of these elements is required for a successful business but they must be bought and paid for.  So what do we mean by free?  What are most people talking about when they equate “Free Enterprise” with mom, God, baseball and apple pie?  

Most people talking about “Free Enterprise” have no clue where the term originated or what it really means.  However, these same people take great umbrage at anyone who questions the role of “Free Enterprise” in the USA.  It is interesting how people will defend things they know very little about.  President U. S. Grant questioned how the average Confederate soldier could support the Southern plantation system when the majority of soldiers were about as poor as most slaves and saw little or no benefit from the system they were giving their lives for.  The same is true for many Americans.  Most people in this country are not entrepreneurs nor are they owners.  In fact, most people own little or no stock in any company.   Yet the average American thumps their chest and cries out with great pride that “I support “Free Enterprise”.

“New data from Pew Research suggests that more than half (53 percent) of Americans have absolutely no money in the stock market, including retirement accounts.  The Pew data show that just 15 percent of people with a family income of less than $30,000 per year are invested in the stock market; as families earn more, their participation in the stock market increases.  Fifty-five percent of those who earn between $30,000 and $75,000 per year are invested in the market, while 80 percent of those who earn $75,000 or more are.”

Investopedia explains “Free Enterprise” “The “Free Enterprise” movement started in the 1700s, when many individuals were restricted from starting and owning their own business without the permission of the government.  The movement looked to reduce ownership and other related restrictions, such as how one should operate their business and who they were allowed to trade with.”  In other words, “Free Enterprise” is about being able to run your own business without the government telling you what to do.  A government that probably could not manage a paper bag factory efficiently.

A number of years ago there was a brilliant economic thinker by the name of Adam Smith (1723-1790).  Smith theorized that the most efficient markets would be laissez faire.  Basically, without knowing the terminology of self-organizing systems which we now speak of today, Smith recognized that the laws of pricing and its attendant mechanisms would best provide for a rationale distribution of goods and services that people wanted.  Today, we talk about Complex Adaptive Systems with elements of sensitive dependency and strange attractors and we understand that the Free Market is best described by such terms.  Pricing may be a strange attractor and value one of many conditions that are described as sensitive dependency to initial conditions.   No human being or government can possibly have the capacity or information to efficiently regulate a complex adaptive system.

Nevertheless, today we realize that rules, policies and regulations are essential to a “Free” market.  Think of a sporting event without rules, referees, penalties or umpires.  What you would have these control mechanisms would be chaos and not a game.  You cannot have an Efficient Market (A more appropriate term than Free Market) without rules.  You would have anything but efficiency and no one would benefit.  So some structure and planning is needed.  The problem becomes one when too much structure and too much planning intrude on the operation of the market. This is what you had in the Soviet system and it ultimately led to the collapse of the Soviet Union.

Centralized government planning can be invaluable in helping a nation’s economy.  Countries like Japan and Taiwan which have had a close collaboration between government and private enterprise have done quite well in terms of productivity and economic success.  Even in the USA, there is a great deal of unseen and seen collaboration between government and private enterprise.  However, it is the extremes which create the dangers.  Seldom has government planning been taken to the extremes that it was in the Soviet Union or China before the uprisings in 1989.  Consider the comments of David Elton Trueblood from the Ludwig von Mises Institute:

“It is easy to see, then, that the Soviet system represents a far more radical innovation than it would if it were concerned merely with ownership. The nationalization of the means of production involves a radical shift in the power structure, especially in the eminence accorded to the central planning bodies. The system enables the party machine to have a monopoly of power, for they have all but the legal attributes of ownership. Above all, it allows a few who are the new elite to seek to control the total lives of the masses.” 

EcoPillars for free enterpriseWhat most people despise about communism and centralized government planning is not just the inability to allocate resources effectively and efficiently, but more importantly, the attempt to control the economic choices of citizens and the destruction of entrepreneurial spirit.  Soviet communism went well beyond simple economic planning when it decided that all enterprise would be run by the government.  The profit incentive would be eliminated and the proletariat would control the means of production.  Everyone would be free from being a “wage slave.”  However, this so called freedom actually meant that no one would have any freedom over their economic decisions.  Whether or not the odds favor any of us becoming a billionaire, we all enjoy the hope and dream that we someday might be another Bill Gates or Warren Buffett.  Communism kills that hope and dream.  However, it was the Communist policies towards individual initiative which destroyed the dream and not any single model of centralized government planning.  There are many advantages to some centralized government planning and to throw out all such planning is to throw the baby out with the bathwater.

Free Markets left to their own accord can be monstrously inefficient and ineffective.  Here are some typical examples of market failure:  (Source:  Economics Online)

Productive and allocative inefficiency

Markets may fail to produce and allocate scarce resources in the most efficient way.

Monopoly power

Markets may fail to control the abuses of monopoly power.

Missing markets

Markets may fail to form, resulting in a failure to meet a need or want, such as the need for public goods, such as defense, street lighting, and highways.

Incomplete markets

Markets may fail to produce enough merit goods, such as education and healthcare.

De-merit goods

Markets may also fail to control the manufacture and sale of goods like cigarettes and alcohol, which have less merit than consumers perceive.

Negative externalities

Consumers and producers may fail to take into account the effects of their actions on third-parties, such as car drivers, who may fail to take into account the traffic congestion they create for others. Third-parties are individuals, organizations, or communities indirectly benefiting or suffering as a result of the actions of consumers and producers attempting to pursue their own self-interest.

Property rights

Markets work most effectively when consumers and producers are granted the right to own property, but in many cases property rights cannot easily be allocated to certain resources. Failure to assign property rights may limit the ability of markets to form.

Information failure

Markets may not provide enough information because, during a market transaction, it may not be in the interests of one party to provide full information to the other party.

Unstable markets

Sometimes markets become highly unstable, and a stable equilibrium may not be established, such as with certain agricultural markets, foreign exchange, and credit markets. Such volatility may require intervention.

Inequality

Markets may also fail to limit the size of the gap between income earners, the so-called income gap.  Market transactions reward consumers and producers with incomes and profits, but these rewards may be concentrated in the hands of a few.

I hope you are impressed by the large number and substance of possible market failures.  No doubt there are other examples of “Free Market” failure.   What can be done about these failures?  The answer is simple.  It is the government’s job is to try to rectify these failures but with as light a hand as possible.  Too heavy a hand and it actually ends up stifling and distorting the “Free Market.”  It is apparent from the current animosity towards the government that it is either failing in these tasks or exerting too heavy a hand in the administration of these tasks.  For instance, government critics might point out:

It is hard to imagine any small business or large business having to sort through this many regulations.  Either the business is inundated with red tape and cannot prosper or any prospective business person is discouraged from even trying to start a business.  Both are not conducive to a productive and prosperous economy.

Conclusion: 

We need ““Free Enterprise” or a “Free Market” because it nurtures the human soul.  It is also generally more efficient and effective than any centralized government planning.  We need “Free Enterprise” as the cornerstone of a dynamic democratic government wherein citizens have the liberty to choose their economic endeavors.  No economic system has yet proven to be as resilient and productive as a “Free Market.”  However, there are no perfect systems.  The “Free Market” must have oversight mechanisms.  Like it or not, without government regulations (just like the rules needed in any game), the economic system would devolve into chaos, confusion and a distorted disequilibrium that would quickly have citizens clamoring for a dictator like Hitler and Mussolini who would promise to restore order.  Unfortunately, people would be buying order at the expense of their freedom.  Hitler and Mussolini both made the markets efficient again but at the price of liberty, justice and equality.  If we do not want to pay that price, we must rely on our government to provide the rules, policies and regulations that will keep our economic system viable and FREE.  See my blog “Why do we need government” for an explanation of what citizens must do to insure that government does its job. 

Time for Questions:

What does “Free Enterprise” mean to you?  Have you ever started or run your own business?  Have you ever thought about running your own business?  What is stopping you?  Can you think of any other country where it would be better or easier to start a business than the USA?  Where?  Why?  Do you think that any business has a responsibility to society? Why or why not?

Life is just beginning. 

2 Comments (+add yours?)

  1. bgalbreath
    Mar 10, 2014 @ 12:32:42

    There are quite a few jurisdictions where the barriers to starting a new business are much lower than in the US. Hong Kong is one example. As I understand it, you can start a business without seeking anyone’s permission, and there is a simple flat tax on business earnings. You have to comply with safety and pollution laws, and laws against fraud, but those things only kick in after violations are detected; you don’t have to prove anything in advance.
    I accept that we need rules of the game and umpires to enforce them. What is the feedback mechanism that prevents the umpires from becoming overbearing or shedding their neutrality and entering the game on the side of one contestant over another? We have the political process, I suppose, and the courts; but they do not seem to be effectively preventing the emergence of crony capitalism, a “system” in which some few corporations either capture the regulators or are captured by them (no real difference) and get special advantages over their would-be competitors.

    Reply

    • johnpersico
      Mar 11, 2014 @ 00:03:30

      I was reading Bloomberg Daily today and it talks about the 18 million Comcast has been spending on lobbying Obama for its merger with Time. THe Senior VP has been to several WHite House Dinners and Obama has been to his house several times. It is really disgusting. YOu are right on about the “crony” capitalism. It is over the top. We need to fix that before anything will change. Thanks for your comments Bruce.

      Reply

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