Free Enterprise System Definition and Characteristics

Free Enterprise System Definition:

an economic system that grants individuals the freedom to use their abilities to produce wealth

Synonyms for this system include capitalism, market economy, and private enterprise. Each of these words are used to describe the most successful economic system in history. As a result of the benefits of this system, most countries today are free enterprise countries, of which some of the best examples are Singapore, Hong Kong, and the United States.

Free Enterprise System Characteristics

There are four major characteristics of this economic system, which are the four freedoms that the system is based on. Those four freedoms can be easily remembered with the acronym “POET.” The letters stand for:

P: Freedom of Production

In a capitalist economy, individuals are free to produce. Their production is only limited by what can be physically produced at the moment. Producers are free to expand their total production potential any time they are able to.

A person might own an automobile factory. The owner of the factory may produce as many automobiles as his or her factory is able to assemble. If the owner wants to produce more, all he or she has to do is invest in a larger factory, purchase more automobile parts, and hire more workers.

O: Freedom of Ownership

In a free enterprise economy, individuals have the right to own property. Individuals receive payment based on the value they deliver to the economy. Individuals are free to manage their private property in any way they choose.

If the automobile factory owner earns a profit, he or she has ownership of that profit. The profit belongs to the owner, who may choose to spend money on personal expenses, such as a new house or a vacation to a tropical island.  The owner can also reinvest the profit into his or her factory to be able to earn a larger profit.

There are infinite ways that the money earned by producers can be invested or spent. The use of the money is determined by however the owner sees fit.

inside of an automobile factory
The freedoms to produce, own, exchange, and think are what makes free enterprise what it is.

E: Freedom of Exchange

The exchange of goods and services is vital to a market economy. Individuals are able to sell and buy goods and services freely and voluntarily. No agreements are forced upon anyone. Prices and quantities are determined through such voluntary agreements. The freedom to be able to exchange allows the products from production to be sold.

Starting a new example, a corn farmer needs to be able to sell crop. The corn farmer can choose who the corn is sold to, selling the corn to the highest bidder. The buyers of the corn can be however much they want as long as the farmer is willing and able to sell it.

The freedom of exchange allows people to trade cash for product and vice versa. Without the freedom of exchange, the freedom of production would be mostly worthless as people would not be able to sell what they produce.

T: Freedom of Thought

Innovation and ingenuity are what create expanding, healthy economies. When individuals are able to create new ideas, improve existing ideas, and share ideas, the result is a world of abundance. A person might develop a new invention that doubles the productivity of agricultural workers or improve power generation systems to drastically reduce the cost of energy. Allowing individuals to do so creates wealth for everybody. The freedom to communicate ideas through speech, writing, the press, and more allows those ideas to take form in the physical world. The special ability of mankind is the ability to produce with the mind. The ability and freedom of thought have produce miraculous advances in manufacturing, transportation, healthcare, and more, including inventions such as the train, X-ray, steam motor, airplane, and wind turbine.

 

Watch the video below for a helpful explanation of the nature of free enterprise:

 

 


When the four freedoms of production, ownership, exchange, and thought are established, a free enterprise system is born. This economic system has worked wonders for the world, with an enormous improvement in human life happening in the last few hundred years. The system does have some flaws, such as a lack of a safety net, but simple, unrestrictive government intervention can remedy those flaws easily. But even government intervention is not always necessary to correct the failures of capitalism. Industry self-regulation is an effective solution to some of those problems. As a result of its effectiveness and near-flawlessness, free enterprise is the most successful economic system in history.