The Free Enterprise System
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What is “Free Enterprise”?
Free:
Having liberty; not controlled by others.
Enterprise:
An undertaking or project; readiness for daring
action.
Therefore, we can define Free Enterprise as:
Being at liberty to undertake a daring action without
being controlled by others.
If allowed, what action will the individual undertake?
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RATIONAL MAN THEORY
Human behavior is based on the belief that we:
– Prefer more to less.
– Want it sooner rather than later.
– Want it themselves rather than for somebody
else to have it.
 Individuals, when allowed, will pursue
their own self-interest
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Belief on the superiority of free enterprise is
based on the view that:
the right of the individual to pursue his own
self-interest will bring about the greatest
benefit to society as a whole.
WHERE IN THE WORLD DID THEY GET THAT IDEA?
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Adam Smith and The Wealth of Nations
“It is not from the benevolence of the butcher, the
brewer, or the baker, that we expect our dinner, but
from their regard to their own interest. We address
ourselves, not to their humanity but to their self-love,
and never talk to them of our necessities but of their
advantages."
“[the] individual.. is led by an invisible hand to
promote an end which was no part of his intention.
Adam Smith
published 1776
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According to Adam Smith, with free enterprise:
Individuals will be free to buy and sell what they
want, where they want, for whatever price they want.
Other individuals will be free to decide whether or
not they want to buy the products at the prices being
offered
These countervailing forces work to encourage
efficiency and productivity so that an optimum
amount of goods and services are available at the
best possible prices for both buyer and seller
Society, as a whole, has more goods and services
available at the best possible prices.
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WHAT IS A BUSINESS?
A business is an organization that provides goods
and/or services to earn a profit.
So, in Free Enterprise,
the individual forms a business in order to
pursue his own selfish interests (make a
profit)
How much profit?
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Risk vs. Reward
I have $100 to invest.
I can invest it in a savings account that is risk free,
or in my buddy’s new business idea that is very
risky.
If I can get 3% in the savings account, would I take
my Buddy’s offer also at 3%?
Return
(Reward)
Risk
As risk increases, so should the opportunity for
return on the investment.
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