Introduction
Free enterprise is an economic system that provides individuals the opportunity to make their own economic decisions, free of government constraints, and as private profit potential businesses. It equates to a capitalist system of economy which is completely different from a socialist or communist system.
It is, however, important to note that a free enterprise system is not simply the absence of government. It is therefore wrong for any one to simply assume that a free enterprise system automatically comes into existence when government interference is removed. There is a heavy dependency on the law to determine what should be traded (JTF, 2008).
The system allows for the privilege of individual ownership of property and the means of production. The key ingredient of the free enterprise system is the right of individuals to make their own choices in the purchase of goods, the selling of their products and their labor, and their participation in business structure (Lewis, 2001).
The system is based on a number of principles that include the right to private ownership of property, the rule of law, free prices, and competition among others.
A free enterprise system operates in a democratic environment and allows private citizens to freely go into business, produce whatever they choose to produce, and distribute whatever they produce.
Some government restrictions may, however, exist to make sure that the marketplace is orderly and causes no harm to the public. It is through government controls that smaller companies are protected from any form of exploitation by the giant companies.
This paper looks at how a free enterprise system affects the moral and economic development of individuals in a society. The above principles of a free enterprise system and their effects will be examined.
Features of a Free Enterprise System and Effect on Individuals and Development
By and large, free enterprise systems are considered responsible for the moral decay in certain areas. Although this is the case, there are other instances where the morality of individuals in the society is enhanced. However, it all depends on an individual’s judgment regarding what constitutes a good life.
As observed by JTF (2008), a free enterprise system leads to more than simply creating and spread wealth. It also results in better moral character among its participants.
Critics are, however, of the opinion that a free enterprise system is a stumbling block to social and ethical agendas, such as the desire to reduce child labor and poverty in poor countries and the promotion of gender equality and environmental protection globally (JTF, 2008).
Private Property
Private property consists of items of value that individuals have the right to own, use, and sell. It is different from public property which is provided by the government for the common use by all. The right to own property gives individuals the freedom to control productive resources such as land, labor, and capital. These productive resources can be used to produces commodities to be sold.
Apart from being allowed to control the productive resources, the producer also owns the goods produced. Locke (2008), however, argued that only God owns property and it is improper for any single individual to claim ownership to any form of property.
The more property rights a person has in a good, the closer his or her private cost is to the social costs of using that good, and the more incentives that person has for seeking the highest-valued use for the asset.
That is, different property rights in goods create their own incentives through the impact they have on the relationship between the private and social costs of using those goods, which, in turn, affect human behavior in specific and predictable ways.
Private ownership also encourages vigorous competition and economic efficiency. Private ownership ensures that entrepreneurs have a right to the profits generated by their own efforts. This gives entrepreneurs an incentive to search for better ways of serving consumer needs.
That may be through introducing new products, by developing more efficient production processes, by pursuing better marketing and after-sale service, or simply through managing their businesses more efficiently than their competitors.
In turn, the constant improvement in product and process that results from such an incentive has been argued to have a major positive impact on economic growth and development. The market alone puts the whole social system in order and provides it with sense and meaning.
Although proponents tend to think that a free enterprise system lets individuals think about others, it is impossible to imagine how people who thinks so much about their own success and how they can outdo opponents, will work for the benefit of others.
There is a general belief among proponents that a free enterprise system creates room for individuals to advance personal interests while thinking about the good of others. Proponents also consider greed and envy that are prevalent in a free enterprise system as necessary vices that can aid the development process.
Rule of Law
Law is regarded as the collective organization of an individual’s right to lawful defense and is the greatest threat to liberty (Bastiat, 2004). The law allows every individual to protect what rightfully belongs to him or her. This includes freedom as well as property.
According to Rawls (1999), justice is the first virtue of any social institution and it is guaranteed through the rule of law. Every single individual possesses and inviolability founded on justice that even the welfare of a society as a whole cannot override.
As observed by John Templeton Foundation, free enterprise systems always involve moral constraints which are controlled by governments through the rule of law. The property rights on which free enterprise systems rely are also enforced by the government (JTF, 2008).
Even though freedom is guaranteed to a certain degree, the government regulates certain aspects of the market to ensure that business is undertaken fairly. The state will make use of every means available to coerce people into submission so as to prevent unhealthy practices that may end up inflicting harm to others.
The life and property of each individual is protected by the government through the rule of law. In summary, the government does quite a bit to ensure that effective operation within a free enterprise system.
Price Determination
Generally, changes in price send various signals to entrepreneurs. Entrepreneurs understand quite well that if prices are too high, customers refuse to buy their products. On the other hand, if prices are too low, the products will sell out very quickly. In most cases, the price of commodities is determined by the laws of supply and demand.
Demand refers to the number of products that will be bought at a given time for a given price. It is not the same as want. When a person wants a luxury car without the ability to pay for it, no demand is generated. The demand for an item is represented by people who want an item, have the money needed to purchase the item, and are willing to spend the money on the item.
As the price of commodities goes up, the quantity demanded by consumers subsequently goes down. A tight relationship exists between price and demand. Prices usually rise with increased demand, and as demand decreases, prices will usually come down. Supply refers to the number of products that will be offered for sale at a particular time and at a particular price.
In case there a shortage in the supply of a commodity, prices will generally rise. As the price for a given product goes up, producers are more willing to make the product available in the market. There is also the market clearing price which is that price at which the quantity of the product the consumer is willing to buy equals the number of products the producer is willing to supply.
Competition
In any business, the goal of sellers is to make a profit while consumers want to be supplied with quality goods at a reasonable price. Usually, this conflict is settled through competition. Competition is the rivalry among product sellers for the consumers’ money. Benefits of competition to society include improved quality of products as sellers strive to attract customers, development of new products, efficient operation to keep prices down and conserve scarce productive resources.
Healthy competition ensures that customers get new and quality products at very fair prices. A number of ways exist through which companies compete. One such approach is price competition where a company takes a competitor’s business by lowering its own prices.
The other approach is non price competition where a company aims to produce better quality products or adding a feature that the competition doesn’t have or can not provide. Businesses may use unique shapes and colors among others to compete.
To critics, however, a free enterprise system creates room for moral decay. In the presence of fierce competition, and when survival is at stake, people tend to think less about issues morality. The system forces individuals to do whatever it takes, without thinking about the repercussions, to exist.
Conclusion
Despite the seemingly cruel nature of a free enterprise system, it can improve the well being of the society in two major ways. To begin with, an individual who considers morality as being valuable will tend to advocate for it. Companies may find it necessary to give part of their profits towards charity work with an intention of enhancing the level of competitiveness.
A good reputation in the face of the public that results from giving back to the society can be of great benefit to a company. Secondly, when the economy grows to such an extent that there is a surplus of resources, it is possible that individuals will want to protect their moral standing.
There is increased concern for the welfare of others. As individuals continue to benefit from others, they will be inclined to act morally. In the same way, companies that succeed because of reliable employees or customer loyalty will be forced to carry out their operations with honesty and a high level of integrity.
References
Bastiat, F. (2004).The Law. Irvington-on-Hudson, NY: Foundation for Economic Education.
John Templeton Foundation (JTF). (2008). Does the Free Market Corrode Moral Character? West Conshohocken, PA: John Templeton Foundation.
Lewis, C. S. (2001). The Abolition of Man, Or, Reflections on Education with Special Reference to the Teaching of English in the Upper Forms of Schools. New York, NY: HarperSanFrancisco.
Locke, J. (2008).Two Treatises of Government. United Kingdom: Jonathan Bennett.
Rawls, J. (1999). A Theory of Justice, Revised Edition. USA: Harvard University Press.