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Free enterprise is a concept that promotes a free market economy without government regulation. Adam Smith’s book, The Wealth of Nations, discusses the “invisible hand of the market” and how it regulates the market for maximum efficiency. However, some argue that government regulation is necessary to prevent abuse of market freedom and side effects such as pollution.
Free enterprise, which is a concept that forms the basis of free market economies, dictates the absence of regulation and other government interference in a society’s economic machinations. Free enterprise considers the interactions of the laws of supply and the laws of demand and how they will lead to a “competitive market” with efficient pricing terms and a maximization of productivity if market participants are left to their own devices. This is a famous concept by Adam Smith in his 1776 book entitled The Wealth of Nations. There are competing ideologies to free enterprise which claim that government regulation is necessary to prevent the abuse of freedom in the marketplace.
The basis of free enterprise is market participants – sellers and buyers. The laws of supply and demand dictate that, if left undisturbed, participants in a free market will act in their individual interests, buying and selling goods and services, until they finally reach economic equilibrium. Economic equilibrium is defined as the point at which the price of a good or service is fixed at a point where the supply of the good or service will meet market demand. Without inequalities of supply or demand, the market will reach its equilibrium and operate at its highest level of efficiency.
In 1776, Adam Smith wrote a book called The Wealth of Nations, for which free enterprise was one of the central themes – although the artistic term had not yet been invented. Smith writes at length about the “invisible hand of the market,” which is a mechanism that automatically regulates the free market to facilitate maximum efficiency through market participants seeking to satisfy their own interests. Simply through the human predisposition to seek the best and most efficient way, the invisible hand will lead to mutually beneficial cooperation in the market.
The other side of this argument is that market regulation is necessary to avoid abuse of market freedom as well as many side effects. For example, the government enacts labor laws to prevent the abuse of low-level workers by entrepreneurs who wield too much market power. In addition, there are side effects that are generally not accounted for in the free market, such as pollution, which need to be regulated and may result in the most efficient way of conducting business being banned. Any outside intervention, whether laws, regulations or subsidies, runs counter to free enterprise principles. The need for such intervention is where most economic debates are.
Asset Smart.
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