Free Enterprise: Definition, How It Works,

Origins, and Example

By 
CAROLINE BANTON
 

Updated December 30, 2022

Reviewed by ERIC ESTEVEZ

What Is Free Enterprise?

Free enterprise, or the free market, refers to an economy where the market
determines prices, products, and services rather than the government.
Businesses and services are free of government control. Alternatively, free
enterprise could refer to an ideological or legal system whereby commercial
activities are primarily regulated through private measures.

KEY TAKEAWAYS

 Free enterprise refers to business activities that are not regulated by

the government but are defined by a set of legal rules such as property
rights, contracts, and competitive bidding.
 The argument for free enterprise is based on the belief that government
interference in business and the economy hampers growth.
 A free enterprise legal system tends to result in capitalism.
 A free enterprise aims to increase freedom, market efficiency,
consumer rights, financial security and stability, and economic
opportunities.
 Though free enterprise grants more freedom, there is higher risk of
more several economic crises without government intervention.
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Free Enterprise

Free Enterprise As Law and Economics

In principle and in practice, free markets are defined by private property
rights, voluntary contracts, and competitive bidding for goods and services in
the marketplace. This framework is in contrast to public ownership of
property, coercive activity, and fixed or controlled distribution of goods and
services.

In Western countries, free enterprise is associated with laissez-faire

capitalism and philosophical libertarianism. However, free enterprise is
distinct from capitalism. Capitalism refers to a method by which scarce
resources are produced and distributed. Free enterprise refers to a set of
legal rules regarding commercial interaction.

Another definition of free enterprise is in terms of economics and was offered

by the Nobel-winning economist Friedrich Hayek. Hayek described such
systems as "spontaneous order." Hayek's point was that free enterprise is not
unplanned or unregulated; rather, planning and regulation arise from the
coordination of decentralized knowledge among innumerable specialists, not
bureaucrats.

The Origins of Free Enterprise

The first written intellectual reference to free enterprise systems may have
emerged in China in the fourth or fifth century B.C., when Laozi, or Lao-tzu,
argued that governments hampered growth and happiness by interfering with
individuals.

Legal codes resembling free enterprise systems were not common until much

later. The original home of contemporary free markets was England between
the 16th and 18th centuries. This growth coincided with, and probably
contributed to the first industrial revolution and birth of modern capitalism. At
one time, the English legal code was completely free of international trade
barriers, tariffs, barriers to entry in most industries, and limitations on private
business contracts.

The United States also used a largely free-market legal approach during the
18th and 19th centuries. In modern times, however, both the United States
and the United Kingdom are better classified as mixed economies. Countries
such as Singapore, Hong Kong, and Switzerland are more reflective of free
enterprise.

 
The opposite of a free enterprise economy is a planned, controlled, or
command economy.

Characteristics of Free Enterprise

In the absence of central planning, a free enterprise legal system tends to
produce capitalism although it is possible that voluntary socialism or even
agrarianism could result. In capitalist economic systems, such as that of the
United States, consumers and producers individually determine which goods
and services to produce and which to purchase. Contracts are voluntarily
entered into and may even be enforced privately; for example, by civil courts.
Competitive bidding determines market prices.

The U.S. economic system of free enterprise has five main principles: the
freedom for individuals to choose businesses, the right to private property,
profits as an incentive, competition, and consumer sovereignty.

 Economic Choice: In a free enterprise, consumers have the ability to

choose who to transact with. This is only possible if there are multiple
market suppliers. Consumers also have freedom to choose what they
want to pay, although a seller must agree to this price for a transaction
to occur.
 Right to Private Property: In a free enterprise, consumers have the
right to acquire private property. This may be in the location in which
they want to acquire property and should not be restricted by personal
or financial limitations.
 Profit Motive: In a free enterprise, the goal is to make money in a
freely-flowing society. Individuals have the right to buy and sell goods
to personally profit, though there are less restrictions on doing so
compared to other restrictive forms of economies.
 Competition: In a free enterprise, buyers and sellers compete. Buyers
attempt to acquire goods for lower prices or more favorable terms,
while sellers attempt to sell goods for higher prices. Market equilibrium
is met where these two parties agree to come together.
 Voluntary Exchange: In a free enterprise, consumers have the right to
choose to or not to exchange goods. Individuals can not be forced into
trade or be required to consume any products.

Free enterprise may also be referred to as free trade or free market.

Goals of Free Enterprise

There are a number of goals in which a free enterprise society hopes to
achieve. When a free enterprise society in fully operational, consumers often
have freedom, efficiency, stability, security, growth opportunities, and justice.

 Freedom: The overriding goal of a free enterprise is freedom. This is

the freedom of choice, freedom to express oneself through the creation
of any product you'd like, or freedom to charge or pay what you prefer.
 Efficiency: By allowing markets to regulate themselves, inefficient
companies are theoretically at-risk of being eliminated as market
participants will not choose them and government policy won't fund
them to keep them alive. In addition, there may be less processes or
procedures to transact in a free enterprise.
 Stability: A free enterprise strives to be self-sustaining by having
markets rooted in consumer preference. Instead of monetary or fiscal
policy dictating economic circumstances, the long-term goal for free
enterprise is to have the consumers shape the economy in a more
predictable, stable manner than a government may be able to.
 Security: In a free enterprise, every individual should feel their goods
and rights are protected. This means having the ultimate choice on
what to make, what to sell goods for, and what they're allowed to
consume or acquire.
 Growth Opportunities: At the heart of free enterprise is the notion that
individuals should be able to pursue profit-making opportunities without
government limitation. This means every individual has greater
potential for success when given greater flexibility.
 Justice: Each individual should have the same rights as everyone else
in a free enterprise. There is no favoritism or special circumstances
granted to certain people in a free enterprise; every market participant
faces the same rules without benefit from government policy.

Advantages and Disadvantages of Free Enterprise

Pros of Free Enterprise

In a free enterprise, the market faces no bureaucracy. Processes are

theoretically more efficient and may be administratively less expensive to
operate a business and interact with consumers. This is especially true in
highly regulated markets, though increased competition may shift costs
elsewhere.
Market participants are usually allowed greater expression and flexibility.
Entrepreneurs aren't constrained by public policy or dictated on what goods
need to be produced. A cornerstone theory of free enterprise is that the best
companies will innovate to continue to meet market demand, while
companies that fail will cease to exist as they no longer have a place in the
market.

Instead of government policy deciding how resources are allowed, a free

enterprise's large benefit is that consumers have a greater voice in the
economy. The consumer determines the ultimate prices of a good, which
products are needed in a market, and what goods fail or succeed. It is up to a
firm in a free enterprise to understand these consumer preferences and
adjust their operations accordingly.

Cons of Free Enterprise

Seemingly unlimited freedom does come with its disadvantages. First, goods
that are generally not profitable to manufacture will not be produced in a free
enterprise. This is because there is no economic incentive for a firm to
produce these goods (unless there were government aid or stipend). This
may also include limitations on where goods are delivered. For example,
government funds may partially pay for telecommunication services to be
distributed to rural areas; without this funding, those communities may not
receive service.

A free enterprise may also spur unfavorable activity due to prioritization of

profits. Consider the example of Enron where the company did not follow
public reporting regulation, resulting in financial ruin. When there are little to
no rules to follow, entities within a free enterprise may sacrifice worker safety,
environment standards, or ethical behavior in favor of making more money.

Last, a free enterprise doesn't come with bailouts. This means economic
downturns are theoretically more severe, as public funds can't be used to aid
failing institutions that would cause major ripple effects by dissolving. This is
especially true in today's interconnected society where one
large bankruptcy could negatively financially impact firms around the world.

Pros
 Less bureaucratic
 May be less expensive to operate a business
 Allows for greater entrepreneurial freedom
 Prioritizes consumer demand and preferences
Cons
 May result in unprofitable products being dissolved
 May restrict where goods are distributed to
 May entice illicit behavior due to prioritizing profits
 May result in greater market crashes due to no bailouts

Example of Free Enterprise

Consider the differences between two companies: Apple Inc., a public
company, and SunGard Data Systems, a private company. Because both
companies transact within the United States, neither is truly in a free
enterprise environment.

Still, imagine each company wants to raise capital. As a public company, the
Securities and Exchange Commission has outlined regulations that Apple
must meet to sell additional shares and be listed on public exchanges. This
also includes meeting public reporting and filing requirements. On the other
hand, with fewer restrictions in place as a private company, SunGard Data
Systems may raise capital more freely (yet still restricted) as it does not
experience as many government restrictions.

Another example of free enterprise (or lack thereof) is the 2008 Global
Financial Crisis. In response to the economic calamity, Congress authorized
the use of the Trouble Assets Relief Program (TARP) emergency funds for
distressed financial institutions.1 In a truly free enterprise, governments
would not intervene to aid struggling businesses. Instead, these companies
would be allowed to fail, allowing for the market to resolve itself with new
market participants entering the space to claim the newly vacated market
opportunity.

What Is the Main Goal of Free Enterprise?

The main goal of free enterprise is to allow citizens to dictate market and
decide the value of trade. Instead of relying on government intervention or
public policy, free enterprise's main goal is to allow markets to move
themselves without constraint, self-discovering efficiencies and inaccuracies.

What Is the Main Benefit of Free Enterprise?

Some may argue the main benefit of free enterprise is freedom. In one sense,
individuals may transact with little to no restricting barriers, especially those
set by policy or trade regulation. In another sense, individuals are allowed to
creatively express and transact based on a seemingly endless range of
consumer choices.

What Is the Difference Between Capitalism and Free

Enterprise?
Free enterprise and capitalism are related, though the two terms are different.
Free enterprise refers to how a free market system has minimal barriers
regarding the exchange of wealth or transacting of goods and services. On
the other hand, capitalism is primarily centered on the creation of that wealth
or production of those goods. Both relate to an individual initiating their own
decisions with fewer market mechanisms governing the control of their
resources.

What Is the Difference Between Socialism and Free

Enterprise?
Whereas free enterprise is the notion around letting goods and services freely
generate market results on their own, socialism is focused on governing how
resources are distributed. These government policies may dictate how
resources are used, who receives goods, or what pricing mechanisms certain
market participants may face.

The Bottom Line

Free enterprise refers to an economic concept where markets are not
governed by policy. Instead, market participants set pricing, do not face
export or regulation requirements, and have more freedom in choosing how
they transact. Though free enterprise is rooted in granting individuals more
freedom, market failures may be more devastating without government
intervention.

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2022

10 Free Market Principles That Could

Transform Agriculture
 
Jun 24, 2014 4 min read

COMMENTARY BY
Daren Bakst@darenbakst

Senior Research Fellow, Environmental Policy and Regulation

Bakst analyzes and writes about regulatory policy, trade, environmental policy, and related issues.
  Copied 

Agriculture policy affects all Americans. From policies that drive up food prices to government
control of your dietary decisions, it warrants significant attention.

Unfortunately, central planning has been entrenched in agriculture policy for more than 80 years.
The 2014 farm bill didn’t change that reality. When it comes to agriculture, many legislators
ignore any free-market principles they have, as if there’s something about farming and ranching
that requires them to believe in and enact federal control of our food production.

There needs to be new thinking about agriculture policy. The same free-market solutions that
have allowed this nation to flourish are just as applicable to agriculture as they are to other
sectors of the economy. The following are 10 guiding principles for agriculture policy.

1. Markets, Not Government Incentives and Controls, Should Inform Farming Decisions.

Farmers make decisions based on the restrictions imposed upon them through central-planning
policies and the subsidies that distort their choices through misguided incentives. There’s an
assumption in agriculture that the federal government can use central planning to best allocate
resources. Nobody has the knowledge to plan economies. By responding to markets, farmers
would be free to produce what they deem fit to meet consumer demand.

2. Free Markets Promote Food Affordability.

Consumers often are ignored by existing policies that drive up food prices, such as the sugar
program and the Renewable Fuel Standard. Higher food prices hurt low-income individuals the
most because a greater share of their incomes go to food costs compared to individuals with
higher incomes.

3. Subsidies Are Not Necessary for Farmers to Succeed.

Government should not intervene in the market to help ensure that farmers are profitable, such as
through the “shallow loss” program that protects farmers from even minor losses.  Like any
businesspeople, farmers should succeed or fail on their own merits and assume the risks and reap
the rewards of doing business.

4. Property Rights Are the Cornerstone of American Agriculture.

Farmers and ranchers are the best stewards of their property. Property ownership creates
powerful incentives to maintain property. Too often, farmers and ranchers have to bear an
excessive cost for government regulations that place restrictions on how they use their property.

5. Problematic Regulations Affecting Agriculture Should Be Fixed or Eliminated.

New regulations are often adopted to address problems caused by existing regulations. The
solution should be to fix or eliminate the existing regulation, not to use failed policies as
justification for more government intervention.

6. The Regulatory Burden on the Agriculture Sector Should Be Minimized and Sound
Regulatory Approaches Used.

Regulations can hinder farmers and other businesses throughout the food supply system. Farm-
specific regulations generally should be limited to covering health and safety. When agencies
promulgate regulations, they should have clear statutory authority and use sound regulatory and
scientific analysis, including adopting the least costly alternative to achieve its objective.
Unnecessary, duplicative, or outdated regulations should be repealed.

7. Obstacles to Agriculture Research and Innovation Should Be Removed.

There are groundbreaking innovations in fields such as agricultural biotechnology that will help

the agriculture sector feed Americans and the world. These innovations can yield many benefits
including greater productivity, reduced food costs and improved nutrition.Misinformation
campaigns instead of sound science are creating obstacles that are undermining critical
innovations.

8. Free Trade in Agriculture Benefits Farmers and Consumers.

Free trade in agriculture should be aggressively pursued. This means, for example, eliminating
domestic trade barriers, which would promote competition by giving consumers access to
foreign agricultural products and aggressively seeking the removal of barriers that block
American products from entering foreign markets.

9. Individual Dietary Decisions Should Be Respected.

From mandatory menu labeling requirements to the Food and Drug Administration’s
proposed de facto ban on trans fat in processed food, the federal government presumes the public
is incapable of making informed dietary choices. These are personal choices that should be made
by individuals, not government officials.

10. Agriculture Policy Should Not Promote Special Interests.

Everyone is affected by agriculture policy because everyone eats. When agriculture policy
debates occur, farming interests and other “stakeholder” interests usually are at the table, but
consumer and taxpayer interests are not. Lawmakers should develop agriculture policy with a
view that agriculture exists to meet the needs of consumers and the government is spending
taxpayer money, not its own, on agriculture programs.

Moving Forward

A free-market vision for agriculture starts with having principles that recognize the flaws of
government intervention while embracing freedom and individual rights. These broad-based
principles, if applied, can help change agriculture policy from an area of excessive government
control to an area of individual freedom.

This piece originally appeared in The Daily Signal

4 Factors of Production Explained With

Examples
By 
JASON FERNANDO
 

Updated July 13, 2022

Reviewed by 
THOMAS BROCK
Fact checked by 
YARILET PEREZ
Mira Norian / Investopedia

What Are Factors of Production?

Factors of production are the inputs needed for creating a good or service,
and the factors of production include land, labor, entrepreneurship,
and capital.

Those who control the factors of production often enjoy the greatest wealth in
a society. In capitalism, the factors of production are most often controlled by
business owners and investors. In socialist systems, the government (or
community) often exerts greater control over the factors of production.

KEY TAKEAWAYS

 Factors of production is an economic term that describes the inputs

used in the production of goods or services to make an economic profit.
 These include any resource needed for the creation of a good or
service.
 The factors of production are land, labor, capital, and entrepreneurship.
 The state of technological progress can influence the total factors of
production and account for any efficiencies not related to the four
typical factors.
 Land as a factor of production can mean agriculture and farming to the
use of natural resources.

Factors Of Production

How Factors of Production Work

The modern definition of factors of production is primarily derived from
a neoclassical view of economics. It amalgamates past approaches to
economic theory, such as the concept of labor as a factor of production from
socialism, into a single definition. 

Land, labor, and capital as factors of production were originally identified

by early political economists such as Adam Smith, David Ricardo, and Karl
Marx. Today, capital and labor remain the two primary inputs for processes
and profits. Production, such as manufacturing, can be tracked by certain
indexes, including the ISM manufacturing index.
The 4 Factors of Production
There are four factors of production—land, labor, capital, and
entrepreneurship.
Image by Sabrina Jiang © Investopedia 2020

Land As a Factor
Land has a broad definition as a factor of production and can take on various
forms, from agricultural land to commercial real estate to the resources
available from a particular piece of land. Natural resources, such as oil and
gold, can be extracted and refined for human consumption from the land.

Cultivation of crops on land by farmers increases its value and utility. For a

group of early French economists called “the physiocrats,” who predated
the classical political economists, land was responsible for generating
economic value.

While land is an essential component of most ventures, its importance can

diminish or increase based on industry. For example, a technology company
can easily begin operations with zero investment in land. On the other hand,
land is the most significant investment for a real estate venture.

Labor As a Factor
Labor refers to the effort expended by an individual to bring a product or
service to the market. Again, it can take on various forms. For example, the
construction worker at a hotel site is part of labor, as is the waiter who serves
guests or the receptionist who enrolls them into the hotel.

Within the software industry, labor refers to the work done by project

managers and developers in building the final product. Even an artist involved
in making art, whether it is a painting or a symphony, is considered labor. For
the early political economists, labor was the primary driver of economic value.
Production workers are paid for their time and effort in wages that depend on
their skill and training. Labor by an uneducated and untrained worker is
typically paid at low prices. Skilled and trained workers are called “human
capital” and are paid higher wages because they bring more than their
physical capacity to the task.

For example, an accountant’s job requires the analysis of financial data for a
company. Countries that are rich in human capital experience increased
productivity and efficiency. The difference in skill levels and terminology also
helps companies and entrepreneurs create corresponding disparities in pay
scales. This can result in a transformation of factors of production for entire
industries. An example of this is the change in production processes in the
information technology (IT) industry after jobs were outsourced to countries
with lower salaries.

Capital As a Factor
In economics, capital typically refers to money. However, money is not a
factor of production because it is not directly involved in producing a good or
service. Instead, it facilitates the processes used in production by enabling
entrepreneurs and company owners to purchase capital goods or land or to
pay wages. For modern mainstream (neoclassical) economists, capital is the
primary driver of value.

It is important to distinguish personal and private capital in factors of

production. A personal vehicle used to transport family is not considered a
capital good, but a commercial vehicle used expressly for official purposes is.
During an economic contraction or when they suffer losses, companies cut
back on capital expenditure to ensure profits. However, during periods of
economic expansion, they invest in new machinery and equipment to bring
new products to market.

An illustration of the above is the difference in markets for robots in China

compared to the United States after the 2008 financial crisis. After the crisis,
China experienced a multi-year growth cycle, and its manufacturers invested
in robots to improve productivity at their facilities and meet growing market
demands.12 As a result, the country became the biggest market for
robots.3 Manufacturers within the United States, which had been in the
throes of an economic recession after the financial crisis, cut back on their
investments related to production due to tepid demand.4   

 
As a factor of production, capital refers to the purchase of goods made with
money in production. For example, a tractor purchased for farming is capital.
Along the same lines, desks and chairs used in an office are also capital.

Entrepreneurship As a Factor
Entrepreneurship is the secret sauce that combines all the other factors of
production into a product or service for the consumer market. An example of
entrepreneurship is the evolution of the social media behemoth Meta (META),
formerly Facebook.
Mark Zuckerberg assumed the risk for the success or failure of his social
media network when he began allocating time from his daily schedule toward
that activity. When he coded the minimum viable product himself,
Zuckerberg’s labor was the only factor of production. After Facebook, the
social media site, became popular and spread across campuses, it realized it
needed to recruit additional employees. He hired two people, an engineer
(Dustin Moskovitz) and a spokesperson (Chris Hughes), who both allocated
hours to the project, meaning that their invested time became a factor of
production.5

The continued popularity of the product meant that Zuckerberg also had to
scale technology and operations. He raised venture capital money to rent
office space, hire more employees, and purchase additional server space for
development. At first, there was no need for land. However, as business
continued to grow, Meta built its own office space and data centers.6 Each of
these requires significant real estate and capital investments.

Connecting the Factors

Another example of entrepreneurship is Starbucks Corporation (SBUX). The
retail coffee chain needs land (prime real estate in big cities for its coffee
chain), capital (large machinery to produce and dispense coffee), and labor
(employees at its retail outposts for service). Entrepreneur Howard Schultz,
the company’s founder, provided the fourth factor of production by being the
first person to realize that a market for such a chain existed and figuring out
the connections among the other three factors of production.7

While large companies make for excellent examples, a majority of companies

within the United States are small businesses started by entrepreneurs.
Because entrepreneurs are vital for economic growth, countries are creating
the necessary framework and policies to make it easier for them to start
companies.

Ownership of Factors of Production

The definition of factors of production in economic systems presumes that
ownership lies with households, who lend or lease them to entrepreneurs and
organizations. But that is a theoretical construct and rarely the case in
practice. Except for labor, ownership for factors of production varies based on
industry and economic system.
For example, a firm operating in the real estate industry typically owns
significant parcels of land, while retail corporations and shops lease land for
extended periods of time. Capital also follows a similar model in that it can be
owned or leased from another party. Under no circumstances, however, is
labor owned by firms. Labor’s transaction with firms is based on wages.

Ownership of the factors of production also differs based on the economic

system. For example, private enterprises and individuals own most of the
factors of production in capitalism. However, collective good is the
predominating principle in socialism. As such, factors of production, such as
land and capital, are owned and regulated by the community as a whole
under socialism.

Ownership of the factors of production depends on the type of economic system and
society
  Factors of Production Capitalism Socialism Communism
 Are owned by... Individuals Everyone Everyone (via the government)
 Are valued for... Profitability Usefulness to people Usefulness to society

The Role of Technology

While not directly listed as a factor, technology plays a vital role in influencing
production. In this context, technology has a fairly broad definition and can
refer to software, hardware, or a combination of both used to streamline
organizational or manufacturing processes.

Increasingly, technology is responsible for the difference in efficiency among

firms. To that end, technology—like money—is a facilitator of the factors of
production. The introduction of technology into a labor or capital process
makes it more efficient. For example, the use of robots in manufacturing has
the potential to improve productivity and output. Similarly, the use of kiosks in
self-serve restaurants can help firms cut back on their labor costs.

The Solow residual, also known as "total factor productivity (TFP)," measures

the residual output that remains unaccounted for from the four factors of
production and typically increases when technological processes or
equipment are applied to production. Economists consider TFP to be the
main factor driving economic growth for a country. The greater a firm's or
country's TFP, the greater its growth.

What Are the Factors of Production?

The factors of production are an important economic concept outlining the
elements needed to produce a good or service for sale. They are commonly
broken down into four elements: land, labor, capital, and entrepreneurship.
However, commentators sometimes refer to labor and capital as the two
primary factors of production. Depending on the specific circumstances, one
or more factors of production might be more important than the others.

What Are Examples of the Factors of Production?

Land refers to physical land, such as the acres used for a farm or the city
block on which a building is constructed. Labor refers to all wage-earning
activities, such as the work of professionals, retail workers, and so on.
Entrepreneurship refers to the initiatives taken by entrepreneurs, who
typically begin as the first workers in their firms and then gradually employ
other factors of production to grow their businesses. Finally, capital refers to
the cash, equipment, and other assets needed to start or grow a business.

Are All Factors of Production Equally Important?

Depending on the context, some factors of production might be more
important than others. For example, a software company that relies primarily
on the labor of skilled software engineers might see labor as its most valuable
factor of production. Meanwhile, a company that makes its money from
building and renting out office space might see land and capital as its most
valuable factors. As the demands of a business change over time, the relative
importance of the factors of production will also change accordingly.

Factors of Production : Land,

v

Labour, Capital and

Entrepreneur | National Income
Article Shared by 

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Some of the important factors of production are: (i) Land

(ii) Labour (iii) Capital (iv) Entrepreneur.
Whatever is used in producing a commodity is called its inputs. For
example, for producing wheat, a farmer uses inputs like soil, tractor,
tools, seeds, manure, water and his own services.

All the inputs are classified into two groups—primary inputs and
secondary inputs. Primary inputs render services only whereas
secondary inputs get merged in the commodity for which they are
used.

ADVERTISEMENTS:

In the above example, soil, tractor, tools and farmer’s services are
primary inputs because they render services only whereas seeds,
manure, water and insecticides are secondary inputs because they get
merged in the commodity for which they are used. It is primary inputs
which are called factors of production.

Primary inputs are also called factor inputs and secondary inputs are
known as non-factor inputs. Alternatively, production is undertaken
with the help of resources which can be categorised into natural
resources (land), human resources (labour and entrepreneur) and
manufactured resources (capital).

All factors of production are traditionally classified in the

following four groups:

(i) Land:
It refers to all natural resources which are free gifts of nature. Land,
therefore, includes all gifts of nature available to mankind—both on
the surface and under the surface, e.g., soil, rivers, waters, forests,
mountains, mines, deserts, seas, climate, rains, air, sun, etc.
(ii) Labour:
Human efforts done mentally or physically with the aim of earning
income is known as labour. Thus, labour is a physical or mental effort
of human being in the process of production. The compensation given
to labourers in return for their productive work is called wages (or
compensation of employees).

Land is a passive factor whereas labour is an active factor of

production. Actually, it is labour which in cooperation with land
makes production possible. Land and labour are also known as
primary factors of production as their supplies are determined more
or less outside the economic system itself.

(iii) Capital:
All man-made goods which are used for further production of wealth
are included in capital. Thus, it is man-made material source of
production. Alternatively, all man-made aids to production, which are
not consumed/or their own sake, are termed as capital.

ADVERTISEMENTS:

It is the produced means of production. Examples are—machines,

tools, buildings, roads, bridges, raw material, trucks, factories, etc. An
increase in the capital of an economy means an increase in the
productive capacity of the economy. Logically and chronologically,
capital is derived from land and labour and has therefore, been named
as Stored-Up labour.

(iv) Entrepreneur:
An entrepreneur is a person who organises the other factors and
undertakes the risks and uncertainties involved in the production. He
hires the other three factors, brings them together, organises and
coordinates them so as to earn maximum profit. For example, Mr. X
who takes the risk of manufacturing television sets will be called an
entrepreneur.
An entrepreneur acts as a boss and decides how the business shall run.
He decides in what proportion factors should be combined. What and
where he will produce and by what method. He is loosely identified
with the owner, speculator, innovator or inventor and organiser of the
business. Thus, entrepreneur ship is a trait or quality owned by the
entrepreneur.

Some economists are of the opinion that basically there are only two
factors of production—land and labour. Land they say is appropriated
from gifts of nature by human labour and entrepreneur is only a
special variety of labour. Land and labour are, therefore, primary
factors whereas capital and entrepreneur are secondary factors.

What is Free Enterprise?

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more.
DEFINITION:

Free enterprise is a system of commerce where private individuals can form

companies and buy and sell competitively in the market without government
interference.

🤔 Understanding Free Enterprise

Free enterprise, or the free market, is an economic system where private
individuals can form companies and buy and sell competitively in the market
with a minimum of government interference. A free enterprise system follows
the laissez-faire concept of economics, the idea that people don’t need the
government to regulate or correct the market. People are free to conduct
business as they see fit based on the needs they see around them. A government
does not tell anyone what kind of business they can start, what they must sell, or
 how to run the company in a free enterprise system. While many economic
systems, like in the United States, are based on free enterprise, government
regulations usually provide some checks and balances instead of allowing a pure
laissez-faire style of capitalism.
EXAMPLE

The United States, generally speaking, is a good example of a free-market

economy. Individuals are allowed to start businesses, buy and sell goods at prices
set by the market, and sell their own labor with relatively few regulations or
barriers to economic activity. This is in contrast to heavily regulated or state-
controlled economies, such as Cuba’s or North Korea’s Communist governments,
where essentially all economic activity is controlled by the state and markets do
not operate freely. Most economies fall somewhere between a totally free market
and total state control.

Takeaway
Free enterprise is like children playing at recess…
They can play their own games by their own rules. The teacher (the government)
will only step in if someone’s in danger of serious harm.

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Tell me more…
 What are the characteristics of a free enterprise system?
 How does free enterprise work?
 Does free enterprise help the rich or the poor?
 Is free enterprise the same as free markets?
 How is free enterprise different from a command economy?
 Does the United States have a free enterprise system?
 What countries have a free enterprise system?

What are the characteristics of a free

enterprise system?
Personal freedom is the cornerstone of a free enterprise system. Being able to
participate in economic activity according to personal freedom is vital. Private
property, economic freedom, economic incentives, competitive markets, and the
limited role of government are the characteristics of a free enterprise system.
1. Private property: Private property means that individuals can own and make
decisions about the use or sale of land, personal property, and other assets.
Individuals control their property rather than using or renting property belonging
to the government.
2. Economic freedom: Economic freedom is the freedom to pursue financial gains.
This freedom includes the right to create a business, seek employment at a
specific company, quit a job, invest as desired, and any other economic activity.
3. Economic incentives: Economic incentives refer to being able to make
individual financial decisions. People can accept employment, quit a job, move to
work in another state, choose to learn a higher-paying skill, decide what to buy,
and more.
4. Competitive markets: Every person has different personal preferences and
goals. Some want a simple lifestyle, while others prefer luxury choices. Some like
chocolate ice cream and others like strawberry. A competitive market provides
alternatives to consumers rather than many copies of the same product.
Businesses compete against each other to offer products and services consumers
want in a free enterprise system, rather than the government dictating what can
and cannot be sold.
5. Limited role of government: While a free enterprise system should be free of
unnecessary government interference, it doesn’t mean it is free of government.
The government still has a role in enforcing people’s individual rights to be
secure in their person and property. The government also enforces rules of fair
play in the economy, enforcing contracts and making sure that consumers are
not defrauded. In short, the government acts like a referee.

How does free enterprise work?

A free enterprise economy works by people participating in economic activities
for personal gain. Someone sees a need, creates a business to fill that need,
others accept jobs to work with the company, and others buy the product.
Each stage relies on someone being motivated to act and reap the benefits of
their efforts. Competition to sell the most product, get paid the highest wage
and improve a personal standard of living drives the activities of each person
participating in free enterprise.
Individual freedom is only checked in case of disagreements — where the
government’s role should be that of an arbiter, settling contract and property
disputes to prevent “cheating” by one party to unfairly gain an advantage over
another.

Does free enterprise help the rich or the

poor?
A free enterprise system, in theory, allows individuals of all economic classes to
make their best economic choices without interference. A free enterprise system
should not penalize the poor or help the rich.
Whether or not a free market system is ideal is an important dispute in politics
and economics. Generally speaking, free-market economies see much higher
rates of economic growth — with greater prosperity improving the standard of
living for rich and poor alike.
However, many feel that free markets lead to the exploitation of the poor by the
rich. If a free enterprise system is not accompanied by strong consumer
protections and a generous social safety net in terms of anti-poverty programs, it
is often perceived as unfair.

Is free enterprise the same as free markets?

Free enterprise and free markets are often used interchangeably in everyday
discussion.
However, there are differences.
Put simply: Free enterprise is the act of conducting business in a free market,
while free markets are the arena in which free enterprise takes place.

How is free enterprise different from a

command economy?
Free enterprise is more or less the opposite of a command economy. A
command economy is wholly controlled and owned by the government, like in
Communist and totalitarian countries such as Cuba and North Korea, while free
enterprise relies on the private sector (privately owned businesses).
In theory, government control in a command economy is aimed at providing the
necessities of living to citizens. The reason should not be profit gained for the
government or government officials. However, in practice, the citizens usually get
the short end of the stick, and government officials become the economical elite.

Does the United States have a free enterprise

system?
The United States has a mostly free enterprise system. The ideal of the U.S.
system is for the government to mostly act as a referee, with rules (laws)
designed to prevent abuses. In reality, the government does reach further due to
politics, social pressures, and lobbying groups. The American system technically
could be considered a mixed enterprise economy. However, the U.S. is
considered to be the primary example of a free enterprise system.

What countries have a free enterprise

system?
Much like a free-market economy, a free enterprise system in its purest
theoretical form is hard to find. However, many countries have some version of a
free enterprise system. The U.S. is considered the best example of a free
enterprise system, but other countries with some version of a free enterprise
system include the UK, Singapore, Switzerland, Australia, and Canada. It bears
noting that a democratic country does not automatically have a free enterprise
system. Many democratic countries have considerable government regulation of
free enterprise.