American Free Enterprise CHAPTERS

A tradition of free enterprise  Currently 18 million unincorporated businesses in America, started by single entrepreneurs or small groups  Even after centuries, America is seen as the “land of opportunity,” because it allows people to be successful and contribute to the country’s overall economic prosperity.  Why is America such a success? American Free Enterprise  The social and political commitment to giving people the freedom to try out their business ideas and compete in the market

Constitutional Protections  Guarantees some rights that allow people to engage freely in business  Property rights  Under Fifth Amendment, private property cannot be seized for public use without “just compensation” (applies to federal government)  Under 14 th Amendment, the 5 th gets applied to the states as well.  These rights apply not only to individuals, but to corporations as well.

Constitutional Protections  Contracts  Constitution guarantees people and businesses the right to make binding contracts  Article I, Section 10: prohibits states from passing any “Law Impairing the Obligation of Contracts,” meaning individuals and businesses cannot use the political process to get excused from contracts.  No legislature can pass a law that changes the terms of someone’s business agreement.

Basic Principles of Free Enterprise  Key characteristics:  Profit motive—the force that encourages people and organizations to improve their material well-being  In America, people are able to run their businesses in ways that will help them earn the most profit  Forces management to exercise financial discipline because it makes people economically responsible for their own success/failure (in other words, because the government isn’t controlling businesses, individuals/corporations are)  Rewards innovation by letting companies grow, and improves productivity by allowing more efficient companies to make more money

Basic Principles of Free Enterprise  Key Characteristics (continued…don’t write this bullet down)  Open Opportunity  Concept that everyone can compete in the marketplace.  Allows for mobility up or down  Economic Rights  Legal Equality  We allow everyone to compete in the marketplace; Maximizes a country’s use of its human capital  Private Property Rights  People have the right to control their possessions as they wish.

Basic Principles of Free Enterprise  Economic Rights (don’t write this bullet down again…)  Free Contract  Allows people to enter into whatever agreements they want to.  Voluntary Exchange  Lets people decide what and when they want to buy and sell, rather than forcing sales at specific times or at specific prices  Competition  The rivalry among sellers to attract customers while lowering costs; This provides choice for consumers for a myriad of goods at reasonable prices

Role of the Consumer  Consumers make their desires known through their economic dealings with producers (when they buy, they signal what to produce and how much to make)  Consumers can join interest groups—private organizations that try to persuade public officials to act or vote according to the interest of the members  Taxation, aid for farmers, land use, etc.

Role of the Government  Ensure producers provide consumers with information about products  Public Disclosure Laws  Require companies to give consumers info about their products; allows consumers to evaluate their buying options  Regulate goods and services that can affect well-being of consumers  Environmental protection rules (disposing of hazardous chemicals, zoning laws, etc.)  Public Interest—the concerns of the public as a whole  Cars, food, medicine, and other products that might impact the health and well-being of consumers  Sanitary conditions, safe medication, safe medical equipment, expiration dates  Negative Effects of Regulation  Businesses have pointed out that government programs are costly, cut into profits, slow growth, and force them to charge higher prices  Highly regulated industries (airlines, telephone companies) felt that government rules stifled competition, raised government spending  80s and 90s—Public pressure led to budget cuts in the area of government regulation of industry.

Promoting Stability and Growth SECTION 2

Tracking Business Cycles  Macroeconomics  Study of behavior and decision-making of entire economies  Examines major trends for an economy as a whole.  Economists measure economic growth with a tool called GDP (gross domestic product)  The total value of all final goods and services produced in an economy  Helps to predict the business cycle—a period of macroeconomic expansion and decline, which can last for a year or multiple years, and are major fluctuations. We are always at some point in the business cycle

Tracking Business Cycles  More about business cycles (don’t write this down)  (write this down) Free enterprise systems are subject to b.c’s because economic decisions are made by individuals acting in their own self-interest.  Government attempts to keep wild swings in economic behavior from happening  B.C. impacts our lives everyday  Prices rise, but incomes don’t: ability to buy declines  Not enough jobs: graduates have difficulty finding work

Promoting Economic Strength  Government focuses on three areas to provide stability: employment, growth, stable prices  Employment  Most economists consider unemployment rate between 4 and 6 percent to be healthy and desirable (in US)  Last half of 20 th century, ranged from 3-11 percent.

Promoting Economic Strength  Growth  Desire for each generation to have a higher standard of living than the prior generation  Economy must provide additions goods and services to the next generation  This is measured by GDP

Promoting Economic Strength  Stability  Gives people confidence in the economy and in our financial institutions, which promotes freedom and growth  Indicators include general price levels, health of financial institutions  General price levels  Government wants to prevent sudden shifts in prices because it puts a strain on consumers, as well as producers  Healthy financial institutions  Federal government monitors and regulates American banks; Hundreds of regulations, and the power to enforce them.  Protect bank deposits and pensions for retirees.  Investigate fraud and manage interest rates and flow of money.

Technology and Productivity  American economy has higher GDP (and therefore standard of living) than most other economies in the world.  One way to keep growing (and shifting the PPF outward) is through work ethic—a commitment to the value of work and purposeful activity.  Another way to continue growth is through improved technology.  Allows economy to produce more output from the same of smaller quantities of inputs (resources)  Allows the US economy to operate more efficiently and productively  increasing GDP and giving US businesses a competitive edge

Technology and Productivity  The Government’s Role  Inventions are soul of free enterprise system  Allow us to build more, better, and faster, giving consumers choices  Government provides incentives for innovation  Federal agencies fund research and development projects at universities  Texas A&M and Massachusetts Institute of Technology  Government has its own research institutions  NASA—not only the Space program itself, but residual projects that have ended up with commercial uses  Offering inventors huge profits in the free market  U.S. patent gives inventor sole rights to their product for 20 years  Copyright grants an author exclusive rights to publish and sell their creative work  Framers saw the need to create incentives for innovations. Article 1, Section 8 of the Constitution: Promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.