You may often hear the term free enterprise in connection with the American economy. A free enterprise system has two important qualities. First, private individuals, rather than the government, own the businesses and farms that produce goods and services. Second, the economy is allowed to operate with a minimum of government regulation. This type of economy is also called a free market system.

The free enterprise system is a democratic way to organize an economy. In a democracy, people vote for what they want. In a democratic economy, buyers “vote” by deciding to spend their money on some goods rather than others. Goods that get lots of votes (money spent on them) continue to be made. Goods that no one wants to buy stop being made. In addition, prices go up or down depending on the supply of goods and how many people want them.

America’s free enterprise system goes back to colonial days. As colonists made their way to America, many hoped to become wealthy. In fact, the chance to make profits motivated many of the organizations that sponsored colonial settlement. To be sure, the British government imposed some restrictive trade policies, as did some of the colonies. But for the most part the economy of the colonies developed free of government regulation.

In 1776, the year the Declaration of Independence was written, English philosopher Adam Smith published a book called The Wealth of Nations. Smith explained and praised the benefits of the free market system. His words inspired many Americans. People believed that, in the United States, a person could climb rapidly up the economic ladder through hard work and initiative. In addition, a free market went well with democratic ideas.

The free enterprise system greatly benefited Americans in the new nation and continues to do so today. There are three main reasons why.

• Profit is an extremely strong motivator. Entrepreneurs (people who start businesses) are willing to take enormous risks in order to become wealthy.

• Quality products thrive in the marketplace because consumers prefer them to inferior ones. Thus, the free enterprise system commonly produces high-quality goods.

• Creative individuals are drawn toward new ideas. The next invention may lead to a pot of gold. As a result, the United States may well be the most innovative nation on Earth.

Enrichment Activity

1. Define the free enterprise system.
2. When did the free enterprise system begin in the United States?
3. Explain why free enterprise developed in the new nation.
4. Describe the characteristics and benefits of a free enterprise system.