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Posted on August 30th, 2012, by

Functioning of national economies and the world economy is based on economic resources or the factors of production – natural, labor, capital (in the form of real capital, i.e., in the form of means of production, and financial, i.e., cash), scientific (scientific, technical, informational knowledge) and business ones. Taken together, these economic resources form the potential of the national, regional or world economy. In this aspect, free-enterprise resources are becoming one of the most important economic reserves.

The issue of free-enterprise is significant and urgent nowadays. All civilized nations owe their prosperity not to administrative command, but market economy, the powerful engine of economic and social development of which is free-enterprise.

Entrepreneurial resource of the free-enterprise system (entrepreneurial capacity, skills, business) is the ability to effectively organize the interaction of other economic resources – labor, land, capital, and knowledge – for carrying out economic activities. It includes market institutions, entrepreneurial ethics and culture.

Free-enterprise system is seen as an essential attribute of market economy, the main feature of which is free competition. In addition, it is not only an economic, but also a social notion, including a specific model of economic thinking.


Free-enterprise System: Notion, Understanding, Essence


Free enterprise system is an economic system, in which everyone has the right to own property and participate in economic activities of his choice and for his own benefit. Free enterprise is an economic system characterized by the presence of citizens’ right to ownership of capital and property, as well as the right to engage in business with minimal government interference. The system of free enterprise stimulates the activity of entrepreneurs and the desire of private owners and companies to profits.

Free-enterprise has a long history; however, only during the period when capitalism emerged, the modern understanding of this activity appeared.

Richard Cantillon was the first to introduce an economic analysis of the concept of entrepreneur and free-enterprise in the 18th century, According to the definition of R. Cantillon, an entrepreneur is a person with the undefined non-fixed income, who buys someone’s goods at a known price, and sells his own one at the unknown price. The main distinguishing feature of free-enterprise is risk, and its function is adjustment of supply and demand for various commodity markets. By Cantillon, a farmer and a robber could be entrepreneurs.

The same features were later outlined by famous economists Adam Smith and J- B. Say, identifying entrepreneur as an owner (Beaud, 2006, pp.41-49).

The most important phase in the development of the ideas and phenomenon of free-enterprise was the French Revolution, which freed up the production and trade from feudal fetters. Free-enterprise (laisser faire) was proclaimed as the principle at that time. This principle was based on the statement of the prominent economist Gournay, which could be translated as let do anything, let go anywhere. France became the first country, which not only officially recognized this principle, but actually tried to integrate it into the industry and commerce (Beaud, 2006, pp.56-62).

For a long time, scientific and everyday understanding of free-enterprise and entrepreneurs was connected with the concepts of capitalism and capitalist. It was quite difficult to distinguish an entrepreneur from a capitalist, but life has clearly and convincingly confirmed that the entrepreneur and the owner of money (capital) are not always one and the same person. Thus, special theoretical studies were required for characterizing the essence of free-enterprise.

An attempt to give a detailed description of free-enterprise was first realized by the theorist Joseph Schumpeter (1883-1950), who published his famous work The Theory of Economic Development in 1912. J. Schumpeter wrote that entrepreneurs were not only the independent economic actors of the market economy, but also those who actually perform the fundamental function, even if they are not independent, as they were employees of the company or any other private firm. According to J. Schumpeter, the fundamental function of free-enterprise is innovation, i.e. the activity involving the new combination of production factors and social factors in order to get real economic benefit, including benefit in the form of increased profit of the company (Beaud, 2006, pp.145-150).

Thus, free entrepreneur is a person engaged in the organization of economic processes at the micro level. The entrepreneur takes the initiative to connect the main factors of production (natural resources, labor and capital) in a single process of goods and services for profit.

Implementation of the most effective combination of these factors of production in order to obtain maximum income is the subject of free-enterprise system.

In addition, the object of free-enterprise is now not only productive, but also innovative, commercial, mediatory, investing, securities trading activities. Nonprofit free-enterprise is expanding, particularly in spheres of ecology, culture, health, welfare and education (McGraw-Hill, 2000, pp. 30-33).

Defining free-enterprise as a method of managing economy, it is important to take into account its main condition, which the autonomy and independence of the subject of free-enterprise system, as well as responsibility for its decisions accompanied by risk, desire to achieve commercial success and increase profits (Petersen, and Lewis, 1987, pp. 306-7).

In theory and in practice, free-enterprise system is presented as the system full of people with full freedom in making any decisions, including economic ones. In fact, entrepreneurs often without any alien interference choose the scope of application of resources and manpower (skills), determine the methods of problems solving, as well as concrete ways and means to achieve their objectives, fully responding primarily with their property for the consequences of decisions made and actions carried out.

Surely, the activity which not related to the responsibility for decisions and their consequences cannot be referred to free-enterprise system. However, it should be emphasized that in social relations no one has absolute freedom, i.e. opportunity to make decisions only at his own discretion, because it is impossible to live in the society and be free from it.

As the practice confirms, true freedom may be only the ability to make decisions knowingly, i.e. being aware of the specific objective and subjective circumstances, actions and deeds and their consequences. In this way, entrepreneurs, possessing corresponding capital, acquire a certain economic and, ultimately, political power or the opportunity to influence the activities of other people, i.e. define the aims and character of their behavior and actions (Younkins, 2002, pp. 251-255).

At the same time, activity connected with free-enterprise system is carried out under conditions of uncertainty, instability and risk. Uncertainty does not occur as a result of lack of knowledge concerning current economic processes or poor orientation in the economic environment, but because of constant change in this environment and in the behavior of market actors, which forces to the rapid reorientation of production and marketing.

Instability stems from the fact that there are no trends lasting for too long. Nothing is permanent in the market, while everything is cyclical: the raise of economic activity is followed by the period slowing down or decline of business activity, and then the recovery starts.

Uncertainty, instability, and constant changes generate risks as an integral feature of free-enterprise system (Younkins, 2002, pp. 311-317).

On the other hand, free-enterprise is characterized by the innovative way of thinking. In this framework, innovation is a special tool for free-enterprise, and it is understood here rather as an economic or social concept, than as a technical one. Free-enterprise, as an activity aimed at embreathing new properties into existing resources on order to create wealth. Moreover, in the course of innovations resources are created. In fact, resources as such do not exist until a human finds something useful in nature and endows it with some economic value.

The task of free-enterprise is focused on purposeful search for sources of innovation, as well as changes and indications of the possibility of success (Sheshinski, 2007, pp. 119-127).

Thus, free-enterprise is not only a special kind of economic activity associated with the formation and use of capital; it is also a certain type and style of behavior, characteristic social psychology, a way of thinking, interests and culture in the broadest sense of the word.

However, traditional capitalism, or capitalism of free competition (laissez faire capitalism) is the economic system, in which material resources are private property, and markets and prices are used to guide and coordinate economic activity, while under contemporary conditions, capitalism in its ideal meaning cannot be found anywhere in the world. The economic systems now functioning in many Western countries are a mixture of free competition and government control (Coates, 2000, pp. 243-245). Thus, modern capitalism can be considered a combination of free-enterprise and state control.

The main feature of the contemporary market economy consists not in the usage of commodity-money relations (they were present in former systems too), not in refusal from planning (marketing changes only the character of its subjects, objects and methods), and not in withdrawal from social production (its most effective form is informatization, but not socialization of property); but in changing forms of connecting production and consumption, of transition from vertical and controlled by the centre to horizontal direct linkages between producers and consumers with intermediaries representing their interests (associations of owners, employers, employees, consumers, defenders of nature, national culture, etc.).

Contemporary market economy is economy based on principles of free-enterprise, diversity of ownership forms for the means of production, market pricing, contractual relationship between business entities, and limited government interference in economic activity. In general, market economy is nowadays a form of economic organization, in which coordination is based on the interaction of free private producers and free individual consumers at free markets.

Free-enterprise and American economic model


The American model of economy is characterized by such basic features as the globalization of business and informational revolution. The globalization of business means the integration of the country and its economic actors in the global economy. Currently, more than half of the income of large American corporations is generated abroad: development of foreign trade and foreign investment has acquired great importance (Houseman, 2009, pp. 25-27).

In its turn, the U.S. also receive great foreign capital goods and technologies, there are numerous branches and subsidiaries of European and Japanese firms. While in the end of 1970s about 17% of the U.S. economy was based on foreign trade, by the end of 1990s, a quarter of the U.S. economy depended on exports. Strong U.S. foreign policy positions, leadership of the American model of economic development determine the U.S. leadership in the process of globalization. No other country in the world is currently able to offer a more successful model of growth. The U.S. benefits even from the fact that the old economic theories have always been considered unacceptable (Libecap, 2001, pp. 45-53).

Strengthening of the dollar as a result of global monetary and financial crisis and hostilities in Yugoslavia led to reduction of American exports and significant increase in imports. U.S. trade balance deficit has reached unprecedented proportions; it is evaluated in over 240 billion dollars. Any other country would long ago face serious difficulties with decline of domestic production and displacement of domestic products in domestic market.

However, nothing like this happens in the United States economy. Import growth has led to supply increase, price reduction, a wider options for consumers; it has created more than 2 million jobs in the service sector, forced domestic producers to be more competitive. Local companies have got the opportunity to renew their production facilities at the expense of cheaper Japanese and European equipment, which will be an additional factor of growth (Rockoff and Walton, 2004, pp.415-421).

The informational revolution is the second powerful source of growth in the U.S. economy. The country is experiencing a real information boom: digital technologies are being improved, new companies are constantly emerging, and new industries are appearing. In the Silicon Valley alone, the center of American Technology (California), more than a dozen of new companies appear every week. It has really changed the American economy.

While until recently the economy was driven forward by automobile and housing industries, now the engine of development is information technologies which on a rough estimate provide one-third of economic growth. The United States have no equals in the field of informatics and information technology. Thus, in the TOP 100 of companies of information technology published by Business Week magazine, 75 represent the United States, and of the top twenty 17 companies are American. This is an example of the model with minimal state involvement in regulating economy. The sphere of the market dominates in it if compared with the public sector. It is called American (or liberal) model of market economy or free-enterprise system. In the U.S., about 4/5 of gross national product is provided by the market system, while the rest is under state control (Bartlett, 2009, pp. 90-112).

As international experience shows, without freedom of the market economy, without the independent producer, without free-enterprise activity, prosperity is impossible.

In general, it is possible to conclude that a country abounds with free-enterprise resources, if there are many skilled and educated entrepreneurs; market infrastructure is developed, if business ethics and culture have deep roots and the society’s spirit is not just sympathetic to free-enterprise, but most of the population is permeated with the desire and aspiration to it.

Similar features are characteristic primarily for the developed countries, most of which have been developing free-enterprise resources for centuries (Europe) or are the successors of the old enterprise culture (North America and other resettlement countries), as well as some of the newly developed and newly industrialized countries with extensive trading tradition (these are particularly the states of East and Southeast Asia) (Dunford, 2005, pp. 149 – 176).

International experience also shows that the entrepreneurial talents are most effectively implemented in these countries, if a strong degree of liberalization of economic activity is combined with high efficiency of public institutions, as well as strong government support of small and medium enterprises and the policy of promoting competition in the domestic market (Walton, 2009, pp. 527-531).

Nowadays, in countries with developed market economies, free-enterprise is experiencing a kind of renaissance. More and more people are getting involved in the business, starting with own small business. While in the 1950s approximately 130 thousand firms on average appeared annually in the United States, in the 1960s this figure reached 220 thousand, in the 1970s – 350 thousand, in the 1980s up to 600 thousand firms occurred on average annually (Rockoff and Walton, 2004, pp. 354-363).

The reason for this phenomenon is seen in a result of at least three factors. First, this was the result of technological progress and scientific and technological revolution, due to which extremely productive machines were invented. The role of informatization of society increased, as well as the importance of information services that could be provided by small groups or free entrepreneurs working individually with a personal computer, in some cases even at home.

The second factor contributing to the flourishing of free-enterprise is complication of the individual and social needs of people. The basis of this is again technological progress: the present era differs from the others not only by the method and means of goods production, but also by the kind of the consumer goods produced. Needs of modern society are so diverse that only free-enterprise with its flexibility and rapid response can more or less successfully satisfy them. Demands of society directed to meet the needs serve as a push to expand the scope of the free-enterprise activity. Responding to these demands, businessmen provided the growth of efficiency and introduced many new products to the world.

Those were small firms created by talented entrepreneurial people presenting the first automobiles, airplanes, air conditioners, instant photography cameras, aerosol cans, foam extinguishers, zippers, safety razors, and many other products, which are now widely used. And today a lot of progressive ideas are born and turned it into innovations in small firms, where entrepreneurial spirit is particularly strong.

Innovations are becoming the engine of growth, increasing the importance of free-enterprise in society. Due to the fact that economy is increasingly characterized by creating and distributing the variety of innovations, the role of immaterial conditions increases significantly among the driving forces of economic growth (Block, 2009, pp. 459-483).

The third factor of free-enterprise flourishing in recent years is political factor. The development of free-enterprise in the United States and other countries with developed forms of democracy and market economy suggests that the old corporate capitalism is gradually transforming into a society with a much greater degree of economic freedom than ever before. Freedom to make decisions and implement them is a necessary condition for the free-enterprise system. It is surely connected with the full economic responsibility for the results of enterprise’s activities (Nardulli, 2008, pp. 267-70).

If the free-enterprise system has proved more effective in comparison with the command-administrative one, if it can give society far more than the opposing one, if it achieves a higher rate of socio-economic growth, if it presents one of the pillars of individual liberty in the productive sector and beyond it, society’s return to the path of so-called capitalist development is quite natural (Ichimura, 2009, pp. 81-84).

Although, the free-enterprise generates a lot of pressing economic and social problems for the society (unemployment, bankruptcy, instability of economic ties, etc.), but they appear to be a lesser evil compared to the total socialization.

Looking at the world today, we see that many of the most prosperous countries have the most dynamic and democratic systems. Countries such as Chile, Ireland and the United States are full-blooded democracies, mostly with free market economy. Countries such as Burma and North Korea are known for their dictatorial regimes and rigid command economy (Dunford, 2005, pp. 149 – 176).

The U.S. was forming as a country of migrants from the Old World, so the features of migrants are characteristic for entrepreneurs: pragmatism, opportunism, individualism, hard work (Dunford, 2005, pp. 149-176). So the market mechanism should involve imprints of freedom, free-enterprise, minimal government interference into economic events.

The American model of economy is the liberal-market economy. It is based on a system of stimulating free-enterprise, achievement of personal success, enrichment of the most active part of the population. The decisive role is played by exchange (goods, raw materials, stock, labor exchange), rather than by banks. The role of the federal government is lower than in other countries, as well as taxes and government spending. State ownership in industry is insignificant.

The problems of social equilibrium are not considered to be at a dangerous level: the layer of the poor is supplied due to the redistribution of national income, tax regulators, social insurance, adjusting the allocation of resources in order to change the structure of national product in the direction of optimizing the production of public goods. In general, the national economy is characterized by the high levels of economic well-being. However, the burden of expenditures for healthcare services, education, and pensions falls on the shoulders of individual citizens and their families. American business philosophy aims to obtain maximum possible profit by satisfying consumer needs.

Now the American model of mixed economy is a model of the society, based on the principles of liberalism, involving the priority of private property, free-enterprise, market competition and minimal direct impact of the state. This mixed economy is focused on encouragement of entrepreneurial activity and success of the society.




As the experience of developed countries shows, free-enterprise is surely an indispensable force of economic dynamics, competitiveness and social prosperity. Contemporary free-enterprise system is successful in its understanding of the nature of economic processes, orienting in a changing environment, in predicting and calculating the probability of loss, i.e. it takes risks knowingly. Combining the factors of production, modern entrepreneurs choose the best option at minimum cost to get the highest possible profit. All these features are the essence of the free-enterprise systems’ functioning, ultimately aimed at multiplying public domain, and at prospering market economy.

In general, the American economic model is based on the high level of productivity and orientation of the citizens to achieve personal success. The state encourages entrepreneurial activity, and the enrichment of the most active part of the population. In the absence of the dictate of social equality as a state objective, it actually creates a reasonable standard of living for disadvantaged groups through the partial benefits.

Thus, the typical features of the American economic model include: absolute predominance of private property; legislative support for maximum freedom of market actors; limiting the scope of state regulation in the major macroeconomic policy; a relatively small share of the state budget in GDP and of state investment and social security payments in the structure of public expenditure.

The American model is actually based on a system of free-enterprise as the kind of economic philosophy. In general, the American model is characterized by minimal state influence, aimed at maintaining stable environment and economic equilibrium.

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