Systems Matter Part 9: Essentials of Free Enterprise

So, what’s the big deal about the free enterprise idea? Civilizations over the centuries seem to have bumbled along just fine utilizing economic systems directed by dictators, despots, and greedy socialists . . . haven’t they? 

Please recall that the whole reason behind this discussion is the valid and penetrating question, why are some nations rich and other nations poor? We have concluded that the reason is not because of the difference in the people. I have observed in my lifetime of travels that the people of the United States are precious and wonderful, but they are not necessarily more clever or skilled than those in other venues of the world. 

A supply of natural resources doesn’t necessarily guarantee that a nation will be wealthy either. Japan has almost no natural resources, yet it is relatively wealthy. Brazil is larger than the continental U.S. and is rumored to be blessed with more natural resources, but it is still considered a developing country and poorer by far than the U.S. India and North Korea have resources in abundance, but they are not wealthy. 

We have certainly validated in our previous discussions that just because a country cranks up the presses and prints more money, it does not make that country wealthier. In fact, printing more money relative to the amount of goods in a country’s economic system simply sets that country on a course of bankruptcy through inflation. 

Production of goods and services is the established reason for nations being wealthy. Income is created through production. Discourage or destroy production and you take away income. Take away income and you have a nation of poverty. Let industrious people be allowed to keep for themselves the fruit of their individual and corporate labors and they will realize prosperity. Allow a dictator or a corrupt government to steal the fruits of conscientious labor through excessive taxation or greedy manipulation and coercion, and you will experience not just resentment and rebellion but unemployment, want, and increased crime. 

Cultural and economic decisions set into motion individual and national consequences. Cultural and economic systems are the means of transportation that carry out those predictable consequences. Cultural and economic systems make all the difference in the world. 

If the individuals of a nation are allowed to experience a system of freedom of economic and cultural choices within a framework of legal fairness and rule of law, they will spontaneously use their God-given talents and abilities to jointly utilize the available resources to produce needed and desirable products. That production will then materialize into individual and corporate income. The end result will be a wealthy nation. 

I have noticed an interesting economic irony in my international travels. In Great Britain, some parts of Europe, and especially in the United States, the country may have started out with an economic system built on freedom of economic and cultural choice. Production flourished, industrial revolutions took place, income was generated, and the country became wealthy. 

But then the governments began tinkering with the formula of free enterprise. Myriads of special-interests groups decided to vie for pieces of the profits. Labor unions decided to build their empires of closed shops, quotas, regulations, dues, and manipulation. Politicians began to see that the exercise of increased taxes could deliver monies not only directly into their own endeavors, but also make it possible to garner votes necessary to seize additionally desired control. 

This tinkering did not take into consideration that there is a direct and positive correlation between stifling the freedoms of economic and cultural choice and the net wealth of a nation. They somewhere forgot that the secret of a wealthy nation was an economic system that allowed individuals to create wealth. The more onerous the restrictions, the less would be the production. The more extortionate the taxation, the less would be the income and money for reinvestment. 

In 1776, there seemed to be a straight line running from the 1215 signing of the Magna Carta at Runnymede, England, directly to Thomas Jefferson and his friends in Philadelphia. Individuals would be allowed not only personal freedom, but economic freedom as well. By the 1930s and the Great Depression, that straight line seemed to be running directly from London and John Maynard Keynes to Franklin D. Roosevelt at the White House in Washington DC. From that time until the present the economic system has changed from one of growth and production to one of outrageous politics, unbalanced budgets, burdensome regulations, programs with gargantuan deficits, and a prevailing economic philosophy that truly believes it is possible to spend one’s way out of seventeen trillion dollars of federal sovereign debt and tax one’s way into prosperity. 

All that having been said . . . let’s look at the bright side and discuss the five essential factors necessary for realizing a successful free enterprise system:

  • The right to own property is the fundamental basis for free enterprise. Ownership includes the individual’s exclusive possession and also the right to transfer that ownership to someone else. Individuals must be free to agree with other individuals to voluntarily enter into contracts. There must be the possibility to personally succeed in the endeavors and also the possibility to fail. The property is not just limited to real estate or land, but also to any personal property or capital. Perhaps the most important resource that you own is your labor. You have the right to exchange your labor for income or other benefits. 
  • Free enterprise is based on the freedom of cultural and economic choice. But, it is not anarchy or lawlessness. In order for free enterprise to work, there must be an established and recognized government. The fact that two individuals are entering into voluntary agreements presupposes that there is going to be some kind of establishment with the authority to enforce those agreements. There must be a fair and enforceable rule of law.

Next session we will discuss the absolute magic of the Free Enterprise System when we look at the last three essentials: Prices, Profits, and Losses.

  • Prices 
  • Profits
  • Losses

Next Week: The Magic of the Free Enterprise System

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)

© Dr. James W. Jackson   

Permissions granted by Winston-Crown Publishing House