American Free Enterprise

The Benefits of Free Enterprise

A Tradition of Free Enterprise “ Land of opportunity” “ Land of opportunity” Equality of opportunity Equality of opportunity Keys to America’s economic success: Keys to America’s economic success: Land, resources, human capital (immigrants) Land, resources, human capital (immigrants) Free enterprise – social and political freedom to pursue economic self-interests Free enterprise – social and political freedom to pursue economic self-interests

Constitutional Protections The Bill of Rights Property rights Property rights 5 th and 14 th Amendments 5 th and 14 th Amendments 5 th - Due process clause 5 th - Due process clause Applies to actions of federal government Applies to actions of federal government 14 th – Applied Due process clause to state governments. 14 th – Applied Due process clause to state governments.

Constitutional Protections Taxation Article I – gives Congress power to levy taxes Article I – gives Congress power to levy taxes Sections 2 and 9 - must be apportioned according to population equally Sections 2 and 9 - must be apportioned according to population equally 16 th Amendment (1913) – Congress given clear right to set taxes based upon income 16 th Amendment (1913) – Congress given clear right to set taxes based upon income Section 10 (Article I) – Obligation of Contracts Section 10 (Article I) – Obligation of Contracts No laws can be passed changing the terms of someone’s business agreement No laws can be passed changing the terms of someone’s business agreement

Basic Principles Profit Motive – the force that encourages people and organizations to improve their material well- being Profit Motive – the force that encourages people and organizations to improve their material well- being Business make their own choices Business make their own choices Forces management to exercise financial discipline Forces management to exercise financial discipline Rewards innovation Rewards innovation

Basic Principles Open Opportunity – everyone can compete in the marketplace. Open Opportunity – everyone can compete in the marketplace. Economic mobility – up or down Economic mobility – up or down Based on how well you do Based on how well you do

Basic Principles Economic Rights Economic Rights Legal equality Legal equality Private property rights Private property rights Free contract Free contract Voluntary exchange Voluntary exchange Competition Competition

Role of the Consumer Consumers are free to make their own economic choices Consumers are free to make their own economic choices Make their desires known through their purchases Make their desires known through their purchases Can work with interest groups which seek to influence public officials to act or vote favorably to their group – taxation, land use, farmers, etc. Can work with interest groups which seek to influence public officials to act or vote favorably to their group – taxation, land use, farmers, etc.

Role of Government Protect rights spelled out in Constitution Protect rights spelled out in Constitution Protect us from problems that affect us all (pollution, unsafe foods, etc) Protect us from problems that affect us all (pollution, unsafe foods, etc) Ensure that producers provide consumers with information – examples? Ensure that producers provide consumers with information – examples? Public disclosure laws Public disclosure laws

Role of Government Protect health, safety, and well-being of citizens Protect health, safety, and well-being of citizens Restrictions / regulations -- Examples? Restrictions / regulations -- Examples? Matters of public interest -- Examples? Matters of public interest -- Examples? Consumer protection Consumer protection

Role of Government Negative affects of Regulation Negative affects of Regulation Bigger government – increased government spending Bigger government – increased government spending Costly for businesses to implement – cuts into profits Costly for businesses to implement – cuts into profits Stifles competition resulting in higher prices Stifles competition resulting in higher prices

American Free Enterprise Promoting Growth and Stability

Tracking Business Cycles American Economy is HUGE!!!!! American Economy is HUGE!!!!! 108 million households 108 million households 288 million people 288 million people 137 million jobs 137 million jobs Earning $8 trillion a year Earning $8 trillion a year $28 billion saved in 71,000 banks $28 billion saved in 71,000 banks 6.5 million homes / 17 million cars annually 6.5 million homes / 17 million cars annually

Tracking Business Cycles Looking at Macroeconomic trends. Looking at Macroeconomic trends. Macroeconomics – the study of the behavior and decision making of entire economies Macroeconomics – the study of the behavior and decision making of entire economies Microeconomics – the study of the economic behavior and decision making of small units such as individuals, families, and businesses Microeconomics – the study of the economic behavior and decision making of small units such as individuals, families, and businesses

Tracking Business Cycles Measuring economic well-being: Measuring economic well-being: Gross Domestic Product (GDP) – the total value of all final goods and services produced in an economy Gross Domestic Product (GDP) – the total value of all final goods and services produced in an economy GDP is used to help predict business cycles GDP is used to help predict business cycles Business Cycle – A period of macroeconomic expansion followed by a period of contraction or decline Business Cycle – A period of macroeconomic expansion followed by a period of contraction or decline

Tracking Business Cycles Free Enterprise systems are susceptible to cycles Free Enterprise systems are susceptible to cycles Economic decisions are made by individuals Economic decisions are made by individuals Businesses act in their own self-interests Businesses act in their own self-interests Government attempts to prevent wild swings Government attempts to prevent wild swings Business cycles affect our lives Business cycles affect our lives

Promoting Economic Strength Government seeks to keep economy stable through policies that promote Government seeks to keep economy stable through policies that promote High employment High employment Steady growth Steady growth Stable prices Stable prices

Technology and Productivity Maintaining our high standard of living Maintaining our high standard of living Increase productivity – How? Increase productivity – How? American work ethic – a commitment to the value of work and purposeful activity American work ethic – a commitment to the value of work and purposeful activity Improved technology – the process used to produce a good or service Improved technology – the process used to produce a good or service Inventions and patents Inventions and patents

American Free Enterprise Providing Public Goods

Public Goods Public Goods: a shared good or service for which it would be inefficient or impractical: Public Goods: a shared good or service for which it would be inefficient or impractical: 1) to make consumers pay individually and 1) to make consumers pay individually and 2) to exclude nonpayors 2) to exclude nonpayors A number of consumers can use them without reducing the benefits to any single consumer

Costs and Benefits When a good or service is public: When a good or service is public: 1) the benefit to each individual is less than the cost that each would have to pay if it were provided privately, and 1) the benefit to each individual is less than the cost that each would have to pay if it were provided privately, and 2)the total benefits to society are greater than the total cost

Costs and Benefits Public goods are financed by the public sector Public goods are financed by the public sector The private sector has little incentive to produce public goods The private sector has little incentive to produce public goods Free riders consume what they do not pay for Free riders consume what they do not pay for

Market Failures Market failures are situations in which the market, on its own, does not distribute resources efficiently Market failures are situations in which the market, on its own, does not distribute resources efficiently Free riders are examples of market failure Free riders are examples of market failure

Externalities An externality is an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume An externality is an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume Positive externalities – beneficial side effects Positive externalities – beneficial side effects Negative externalities – unintended costs Negative externalities – unintended costs Government aims to encourage positive externalities and limit negative externalities Government aims to encourage positive externalities and limit negative externalities

American Free Enterprise Providing a Safety Net

The Poverty Problem Free markets generate wealth but it’s spread unevenly through society Free markets generate wealth but it’s spread unevenly through society Some live below the poverty threshold Some live below the poverty threshold See Overhead The Welfare System The Welfare System

Redistribution Programs Cash transfers – direct payments of money to poor, disabled, and retired Cash transfers – direct payments of money to poor, disabled, and retired TANF – Temporary Assistance for Needy Families TANF – Temporary Assistance for Needy Families Social Security Social Security Unemployment insurance Unemployment insurance Worker’s compensation Worker’s compensation

Redistribution Programs In-kind benefits – food stamps, subsidized housing, legal aid In-kind benefits – food stamps, subsidized housing, legal aid Medical benefits – Medicare and Medicaid Medical benefits – Medicare and Medicaid Education Education Faith-based initiatives – religious organizations compete for federal funds to deliver social services Faith-based initiatives – religious organizations compete for federal funds to deliver social services