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What is 'Free Enterprise'?

Free enterprise, or the free market, refers to all voluntary business activities in a given economic area. Alternatively, free enterprise could refer to an ideological or legal system whereby commercial activities are primarily regulated through private measures rather than through political means.

BREAKING DOWN 'Free Enterprise'

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.

Free Enterprise as Law

The first written intellectual reference to free enterprise systems may have been in China in the 4th or 5th 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 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 businesses 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 United Kingdom are better classified as mixed economies. Countries such as Singapore, Hong Kong and Switzerland are more reflective of free enterprise.

Free Enterprise as Economics

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, 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. Market prices are determined by competitive bidding.

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

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