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The Free Market System
&
The United States of America
An economic system refers to the laws and
institutions in a nation that determine who owns
economic resources, how people buy and sell
those resources, and how the production process
makes use of resources in providing goods and
services.
The Free market system came out of the
Industrial revolution and the advent of the Factory
System.
Free-Market Economy, The market system is an
economic system in which individuals, rather than
government, make the majority of decisions
regarding economic activities and transactions.
This system is based in a belief in:
Capitalism, economic system in which private
individuals and business firms carry on the
production and exchange of goods and services
through a complex network of prices and
markets.
The principles underlying free-market economies
are based on laissez-faire (non-intervention by
government) economics and can be traced to the
18th-century Scottish economist Adam Smith.
In a free-market economy the government's
function is limited to providing what are known as
“public goods” and performing a regulatory role in
certain situations.
Public goods, which include defense, law and
order, and education, have two characteristics:
consumption by one individual does not reduce
the amount of the good left for others; and the
benefits that an individual receives do not depend
on that person's contribution.
An example is a lighthouse. One individual's use of
light provided by a lighthouse does not reduce the
ability of others to use it. In addition, the lighthouse
owner cannot restrict individuals from using the light.
Government's role in a free-market economy also
includes protecting private property, enforcing
contracts, and regulating certain economic
activities. Governments generally regulate
“natural monopolies” such as utilities or rail
service
These industries require such a large investment
that it would not be profitable to have more than
one provider. Regulation is used in place of
competition to prevent these monopolies from
making excessive profits.
Proponents of free-market economies believe
they provide a number of advantages.
• encouraging individual responsibility for
decisions.
•economic freedom is essential to political
freedom.
•free markets are more efficient in economic
terms.
•Free markets provide incentives both to
individuals to allocate resources, such as labor
and capital, and to firms to produce goods and
services that the public wants.
Free-market economies are criticized;
• Opponents believe that a free-market economy
cannot ensure basic social values, such as
alleviating poverty, or that the income distribution
that results from a free-market economy may not
be equitable.
•A free-market economy may also permit the
accumulation of vast wealth and powerful vested
interests that could threaten the survival of
political freedom.
Free Market
In
The USA
Life, Liberty and the pursuit of Happiness.
This is the basis of the American constitution, that
everyone has the right to the above. It is from
this that the American economic system stems.
The U.S. economy is made up of individual
people, business and labor organizations, and
social institutions.
People have many different economic roles—they
function as consumers, workers, savers, and
investors.
Some of the most important organizations in the
U.S. economy are businesses that produce and
distribute goods and services to consumers.
These businesses can take many different forms.
A Corporation, is an organization created by a
government charter that allows people to
associate together for a common purpose under
a common name. The charter gives the
corporation certain privileges, including the right
to buy and sell property, enter into contracts, sue
and be sued, and borrow and lend money. In the
United States, state governments charter most
corporations.
Although corporations account for only about 20
percent of all businesses in the United States,
they generate about 90 percent of all business
income.
Franchise, in government and economics, a
special right or privilege granted to an individual
or a group to carry on a particular activity. The
term is used in several ways. A municipality, for
example, awards franchises to corporations to
operate public utilities, such as electric and
telephone services, in a given area. Rates to be
charged and services to be provided to the public,
as well as tenure and labor regulations, are
stipulated in a contract between the parties.
In business, the term franchise refers to the
exclusive right given to someone to market a
company's goods or services in a designated
territory. In return for a specified fee and usually a
share of the profits, the franchisor provides the
product, the name, and sometimes the physical
plant and the advertising. One well-known
example of a franchised business is McDonald's,
the fast-food restaurant chain.
Private enterprise is undertaken by private
individuals who hope to realize a profit from their
activities and who bear any risk associated with
those activities. Proponents of private enterprise
believe that it promotes individual ingenuity and
efficiency, particularly when such enterprises are
free of government regulation.
Partnership A term applied to an association of
two or more persons who have agreed to
combine their labor, property, and skill, or some
or all of them, for the purpose of engaging in
lawful business and sharing profits and losses
between them; in this definition the term business
includes every trade, occupation, and profession.
Positives
•Consumer choices – consumers are free to
choose what they want to buy and where.
•Wealth of product choices – Consumers have a
large selection of products and companies to
choose from.
Negatives
•Caveat Emptor (Latin, “let the buyer beware”)
•Decentralized Market – hard to control harmful
goods (cigarettes, alcohol)
•Profit motives – these can conflict with the
governments agenda.
•Dog eat dog – larger companies can easily devour
smaller businesses.
•Wealth distribution – all the money in the hands
of a very rich few
Monetary Policy, economic principles and
programs adopted by a government that manage
the growth of its money supply, the availability of
credit, and interest rates. In the United States, the
Federal Reserve Board determines monetary
policy.
Fiscal Policy, government policy related to
taxation and public spending. Fiscal policy and
monetary policy, which is concerned with money
supply, are the two most important components of
a government's overall economic policy, and
governments use them in an attempt to maintain
economic growth, high employment, and low
inflation.