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Chapter 3:American Free Enterprise
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1 - Benefits of Free Enterprise
2 - Promoting Growth and Stability
3 - Providing Public Goods
4 – Providing a Safety Net
•Signs, Signs, everywhere a sign,
blocking up the scenery,
breaking my mind, do this don’t
do that, cant you read the Signs
. . . Five Man Electrical Band,
1970
Signs
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And the sign said long haired freaky people need not apply
So I tucked my hair up under my hat and I went in to ask him why
He said you look like a fine upstanding young man, I think you'll do
So I took off my hat I said imagine that, huh, me working for you woah!
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Sign Sign everywhere a sign
Blocking out the scenery breaking my mind
Do this, don't do that, can't you read the sign
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And the sign said anybody caught trespassing would be shot on sight
So I jumped on the fence and yelled at the house, Hey! what gives you the right
To put up a fence to keep me out or to keep mother nature in
If God was here, he'd tell you to your face, man you're some kinda sinner
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Bridge:
Now, hey you Mister! can't you read, you got to have a shirt and tie to get a
seat
You can't even watch, no you can't eat, you ain't suppose to be here
Sign said you got to have a membership card to get inside Uh!
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And the sign said everybody welcome, come in, kneel down and pray
But when they passed around the plate at the end of it all,
I didn't have a penny to pay, so I got me a pen and a paper and I made up my own
little sign
I said thank you Lord for thinking about me, I'm alive and doing fine
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FIVE MAN ELECTRICAL BAND, 1970
1. Basic Principles of Free
Enterprise
• Profit Motive – incentive that drives
individuals and business owners to improve
their material well-being
• Open Opportunity – anyone can compete in the
market place
• Legal Equality – everyone has the same legal
rights
• Private Property – individual has the right to
control their possessions
• Freedom to Buy and Sell – people decide what,
when, and how they want to buy and sell
The Role of the Consumer
• Consumers send signals to businesses
telling them what to produce and what
not to produce
• Through interest groups -private
organizations that try to persuade
public officials to act in a way that
benefits the members
Economic Freedom and the
Constitution
• Patriotism -love of one’s country
• Property rights - eminent domain -the government’s right to
take private property for public use (Amendment 5 without just
compensation)
• Taxation -Constitution spells out how government can tax
individuals
• Contracts -legal binding agreements between people and
business
• Economic freedom plays a dual role in the promotion of a free
society. On the one hand, freedom in economic arrangements is
. . . An end in itself. In the second place, economic freedom is
also an indispensable means toward the achievement of political
freedom.” - Milton Friedman, Capitalism and Freedom
Does the government have the right to Eminent Domain?
The Role of Government in the
market place
• Public interest -the concerns of society
as a whole
• Public disclosure laws -companies must
provide information about their
products or services
• Protecting public health, safety, and
well-being-laws aimed at protecting the
consumer
• There is a negative impact of Regulation
Major Federal Regulatory
Agencies
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1906 - Food and Drug Administration – provides standards for food and Drug
1913 – Federal Reserve System – regulates banking and manages money supply
1914 – Federal Trade Commission – enforces antitrust laws to protect consumers
1933 – Federal Deposit Insurance Corporation – insures bank deposits
1970 – Environmental Protection Agency – protect human health and environment
1995 – Surface Transportation Board – resolve railroad, trucking, and shipping
rates
2. Promoting Growth and
Stability
• TRACKING BUSINESS CYCLES
• Macroeconomics -the study of economic
behavior and decision-making in a
nation’s whole economy
• Microeconomics -study of economic
behavior and decision-making in small
units, such as households and firms
GDP and the Business Cycle
• Gross Domestic Product (GDP)-the total value of all final goods
and services produced in a country in a given year
• Business cycle - macroeconomic growth followed by
macroeconomic decline
• Changes occur in business cycles because people make
predictions
Promoting Economic Strength
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Employment-ensure jobs for everyone who can work
Economic Growth -higher standard of living
Stability and Security -government seeks to keep economy stable
Economic citizenship -voters play a vital role in shaping
government economic actions
• Referendums -proposed law submitted directly to the public
Technology and Productivity
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Technological progress -improved technology is
essential –innovation
The Government’s Role -government promotes
innovation and invention through funding research
-must show results or no funding! (NASA)
Government grants patents-licenses that gives
the inventor exclusive right and copyrightslicenses that give authors exclusive rights
– The American Work Ethic
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“I’ve never really viewed myself as particularly
talented. I’ve viewed myself as slightly above
average in talent. And where I excel is ridiculous ,
sickening work ethic. You know, while the other
guy’s sleeping? I’m working. While the other guy’s
eating? I’m working.” – Will Smith, 60 Minutes
Interview
3. Providing Public Goods
• A shared good or service for which it would be inefficient to
make consumers pay individually and to exclude those who did
not pay
Public v Private sector
• Public Sector -the part of the economy that
involves the transactions of the government
• Private sector -the part of the economy that
involves the transaction of the individual or
business
Costs and Benefits
• Infrastructure -the basic facilities that are
necessary for a society to function and grow
• 1. The benefit to each individual is less than the cost
that each would have to pay if it were provided
privately
• 2. The total benefits to society are greater than the
total cost
Free Rider Problem
• Someone who would not be willing to pay
for certain good or service but who
would get the benefits of it anyway if it
were provided as a public good
Market Failures
• A situation in which the free market,
operating on its own, does not distribute
resources efficiently
• (DOES NOT SUGGEST THAT FREE
MARKET DOES NOT WORK!!!)
Externalities
• Economic side effect of a good or a
service that generates benefits or
costs to someone other than the person
deciding how much to produce or
consume
• Positive -generates benefits to many
people
• Negative -generates unintended costs
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Positive Externalities
State gains Revenue – tolls
Can be used by everyone
Increased traffic – increases
business – gas stations,
restaurants
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Negative Externalities
Construction and traffic (noise)
Grease and oil from bridge
(pollution)
Interrupt spawning of local fish
Government’s Role
• Government must take action to create
positive externalities and at the same
time limit negative externalities
4. Providing a Safety Net
• The Poverty Problem -an income level below that
which is needed to support families and households
• The Welfare System -the governments efforts to
ease poverty by collecting taxes from individuals and
redistributing some of those funds in the form of
money (FDR-Great Depression)
• As of today, 1 out of every 7 people are in poverty
• Single man – 11,000 dollars
• Family of Four – 22, 000 dollars (Channel 69 News, 917-10)
Redistribute Programs
• Cash Transfers -direct payment of money by the
government to poor, disabled, or retired people (exTANF, Social Security, Unemployment insurance)
• In-kind benefits -goods and services provided for
free or at reduced prices (subsidized housing)
• Medical benefits -government provided healthcare to
elderly, the disabled, the poor (Medicare – Elderly
and Medicare – poor)
• Education -opportunities to those who need
instruction (learning disabilities and financial aid)
Private Action
• Charitable Donations – individuals and corporations provide help
to charities (2006 – 295 billion dollars in deductable charitable
contributions)
• Grant -A financial award given by the government agency to a
private individual or group in order to carry out a specific task
“It is always better to give than receive. The glory of charitable
donations is that you give and receive at the same time.”
Jeff Schnepper, “Give and Grow Rich with Charitable
Deductions.”