1 The Free Enterprise System

2 What is “Free Enterprise”? Free: Having liberty; not controlled by others. Having liberty; not controlled by others.Enterprise: An undertaking or project; readiness for daring action. An undertaking or project; readiness for daring action. Therefore, we can define Free Enterprise as: Being at liberty to undertake a daring action without being controlled by others. If allowed, what action will the individual undertake?

3 RATIONAL MAN THEORY Human behavior is based on the belief that we: –Prefer more to less. –Want it sooner rather than later. –Want it themselves rather than for somebody else to have it.  Individuals, when allowed, will pursue their own self-interest

4 Belief on the superiority of free enterprise is based on the view that: the right of the individual to pursue his own self-interest will bring about the greatest benefit to society as a whole. WHERE IN THE WORLD DID THEY GET THAT IDEA?

5 Adam Smith and The Wealth of Nations “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages." “[the] individual.. is led by an invisible hand to promote an end which was no part of his intention. Adam Smith published 1776

6 According to Adam Smith, with free enterprise: Individuals will be free to buy and sell what they want, where they want, for whatever price they want. Other individuals will be free to decide whether or not they want to buy the products at the prices being offered These countervailing forces work to encourage efficiency and productivity so that an optimum amount of goods and services are available at the best possible prices for both buyer and seller Society, as a whole, has more goods and services available at the best possible prices.

7 WHAT IS A BUSINESS? A business is an organization that provides goods and/or services to earn a profit. So, in Free Enterprise, the individual forms a business in order to pursue his own selfish interests (make a profit) How much profit?

8 I have $100 to invest. I can invest it in a savings account that is risk free, or in my buddy’s new business idea that is very risky. If I can get 3% in the savings account, would I take my Buddy’s offer also at 3%? Risk vs. Reward Risk Return ( Reward ) As risk increases, so should the opportunity for return on the investment.