What is the free enterprise system definition?

The economies of developed countries are often characterized as a system of free enterprise. Free enterprise is the freedom of individuals and business structures, the freedom of work and competition, with a minimum of government intervention or regulation. However, the freedom of business in these countries is not total.


Entrepreneurs still have to act in accordance with state laws and government decisions regarding health and labor protection, minimum wages, and financial statements. In doing business, an entrepreneur, despite having to adhere to many rules, can decide what and how to produce and at what prices to sell. Free enterprise allows individuals and enterprises to create products, develop, innovate, and compete in the market. Freedom of enterprise means freedom of choice: from whom to buy, to whom, and on what terms to sell, open a business, or get a job.

The economy of free enterprise involves private ownership, economic freedom, economic incentives, competitive markets, and the restrictive role of the state. These characteristics reflect the main content of the free enterprise system. The central place in this system belongs to a person who can decide for themselves what is in their interests.

In a free enterprise system, the property is private; it belongs to individual citizens or firms. Neither society as a whole nor the government owns anything. This statement is true for several reasons. Firstly, ownership of property means possession of power and some authority. Secondly, private ownership, in some cases, may contribute to the conservation of resources. Thirdly, the property is an asset and a significant investment, which, with time, will bring more profit to the owner.

The owner has the right:

  • To decide how to use their property;
  • Transfer their property to someone;
  • Use the income and other benefits provided by the property.

The entrepreneur has the right:

  • Start or end their business;
  • Acquire any resources for which they can pay;
  • Apply any technology;
  • To produce any product and offer it for sale at its price;
  • Use their money at their discretion.

Freedom of personal choice is just as important as freedom of enterprise. Everyone has the right to:

  • Buy any available product or service which they can afford;
  • Offer their services to carry out any work;
  • Refuse any work;
  • Use their resources with their own free will.

Consequently, economic freedom is an essential component of the enterprise system, which encourages a person to be more productive and financially independent. Incentives are a form of motivation that may incite a person to perform specific actions. These include owners wanting to set the highest possible prices for their resources, workers looking for the highest wages, and buyers tending to buy the right products cheaper. In the enterprise system, economic incentives provide an opportunity to determine which area of ​​activity will be most profitable. The entrepreneur’s income indicates that he correctly resolves the issues of “What to produce?” and “How to produce?” This means that the entrepreneur directs limited resources to the products that the consumer needs and at the price that they can pay.

The incentive system also provides a form of punishment, which in the business system takes the form of losses (bankruptcy) for business people or low wages for individual employees.
In the free enterprise system, an important place belongs to competitive markets. A competitive market should be understood, as markets where there are quite a lot of buyers and sellers is powerful enough to influence market prices by free will. Thus, entrepreneurs can compete among themselves for consumers. Also, employees can compete with each other for work and customers – for the purchase of goods and services. Competitive markets provide an opportunity to realize economic freedom. So, in entrepreneurship, competition does not allow one buyer or seller (or their groups) to control the entire market. Competition helps keep prices low and high quality at the same time.

Therefore, the free enterprise system meets the desires and needs of individuals. It helps each entrepreneur develop a strategy that meets his interests and implement the solution in free markets. Both buyers and sellers should see the benefits in every transaction. Entrepreneurs should be able to answer the questions, such as “What to produce?” “How to produce?” “For whom to produce?”

What motivates people to accept the financial and emotional risks of starting a business? The primary motivator is the potential profit and income. People can also enter the industry for personal reasons, such as the desire for independence and the desire to be creative. Others do not intend to start a business willingly, other than to gain an individual status in society. The main thing in free enterprise is that all these people who start their own business or work for employers do it voluntarily. This allows people to pursue their interests; accordingly, a free enterprise system can produce phenomenal results. Sneakers, walking shoes, peppermint toothpaste, skim milk, milk chocolate, cell phones, and BlackBerrys are just a few of the millions of products created as a result of economic freedom.

Without a standard unit of exchange, purchase and sale in a free enterprise system will consist of barters: goods for goods, services for services or goods for services. But in most cases, money is the most significant medium of exchange and is familiar to all buyers and sellers. Money is also used as a unit of account because people can measure the value of a soccer ball in monetary terms, just as they can measure their weight in grams.

Besides, money can be used as a storehouse for wealth and fortune over time. It is in this function of money that the Federal Reserve is the most concerned. Organized in 1913 as an independent agency, the Federal Reserve System is the country’s central bank. The independence of the FRS from state control separates permits for spending money owned by the government and the authority to manage the money supply. The FRS is responsible for securing the money supply and credit in the system enough to maintain a healthy, growing economy. At the same time, the FRS should not input so much money into the economy, for money to not lose its value. If the Federal Reserve System increases the money supply too quickly, then the amount of money in the economy will be more than the number of goods and services for sale. This excess of money supply can lead to a widespread escalation of prices that is widely known as “inflation.” Inflation deprives people of their capability for the purchase of goods and services and hinders the ability of the economy to grow. Rapid inflation can lead to political instability and make it difficult for people to plan future investments, whether organizing funds for the purchase of a franchise, saving for college, or trying to increase the number of their employees. Trying to limit the adverse effects of inflation, the Federal Reserve plays a vital role in creating and maintaining a robust free enterprise system.

In this system, no one forces people to be creative, productive, and entrepreneurial. Instead, the participants of this system pursue what they consider best for them. For the production of goods and services that society values ​​most the free enterprise system leads to the highest efficiency, or lowest cost, from any economic system. This system is most compatible with individual freedom and political democracy. Consequently, free enterprise means that men and women, having their financial resources such as land, minerals, factories, and computers, can use them to create goods or services.

Currently, the foundations of a free enterprise system are threatened by monopolies and bureaucracy. Protecting freedom of enterprise and the market from deformation is the task of the whole society and a democratic state.

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