Free Enterprise, the Economy and Monetary Policy

Transcription

1 Free Enterprie, the Economy and Monetary Policy

2 free (fre) adj. not cont Free enterprie i the freedom of individual and buinee to power of another; at regulation. It enable individual and buinee to create, produce, contrained; able to are able and willing, enterpriing people produce good and ervice for enterprie (en ter-priz) produce and ell good and ervice. In thi ytem, no one force people an undertaking, epe they believe to be bet for them. By producing the good and ervice difficult one; readine greatet efficiency, or lowet cot, of any economic ytem. It i the buine organization.

3 rolled by or under the operate and compete with a minimum of government interference or liberty; not bound or tranform, develop, innovate and compete in the marketplace. A they move in any direction. profit, offer their labor for wage and own the reource needed to n. energy and initiative; to be creative, productive or enterpriing. Intead, they purue what cially a big, bold or that ociety value mot highly, a free enterprie ytem reult in the for adventure or rik; a ytem mot compatible with individual freedom and political democracy.

4 W h a t I F r e e E n t e r p r i e? Free enterprie mean men and women have the opportunity to own economic reource, uch a land, mineral, manufacturing plant and computer, and to ue thoe tool to create good and ervice for ale. What prompt people to take the financial and emotional rik of tarting a buine? The main motivator i the potential to earn a profit. People alo go into buine for peronal reaon, uch a the deire for independence and the drive to be creative. Other have no intention of tarting a buine. If they chooe, they can offer their labor, another economic reource, for wage and alarie. The key to free enterprie i that all thee people, whether they tart a buine of their own or work for omeone ele, do o voluntarily. By allowing people to purue their own interet, a free enterprie ytem can produce phenomenal reult. Running hoe, walking hoe, mint toothpate, gel toothpate, kim milk, chocolate milk, cellular phone and BlackBerry are jut a few of the million of product created a a reult of economic freedom.

5 Mot free enterprie ytem conit of four component: houehold, buinee, market and government. In a free enterprie ytem, houehold not the government own mot of the country economic reource and decide how to ue them. Buinee organize economic reource to create a good or ervice. Buying and elling take place in what economit call market any place or any way that buyer and eller can exchange good, ervice, reource or money. The backbone of the ytem include a government that enforce property right and provide neceary good and ervice that the private market would have difficulty producing.

6 T h e B u i l d i n g B l o c k o f a F r e e E n t e r p r i e S y t e m Mot free enterprie ytem conit of four component: houehold, buinee, market and government. Houehold the Owner. In a free enterprie ytem, houehold not the government own mot of the country economic reource and decide how to ue them. One of the reource that houehold poe i their labor, which they ell to exiting firm or ue to form new buinee. In addition to elling their reource where they can get the highet price or larget profit, houehold alo act a conumer. The wage and alarie of houehold purchae about two-third of all the production in the United State. Conumer vote with their dollar, thereby directing production toward the good and ervice they want buinee to provide. Thi i called conumer overeignty. Buinee the Organizer. Buinee organize economic reource to produce a good or ervice. The people who tart buinee are called entrepreneur. They are the organizer and innovator, contantly dicovering new and better way to bring reource together in the hope of making a profit. Profit fuel the engine of buine. Entrepreneur, lured by the potential for profit, create new buinee to atify conumer need and deire. The inability to make profit ignal buinee to cloe or to reorganize their reource more efficiently. Efficiency mean that reource are being ued to produce the good and ervice that ociety mot deire at the lowet economic cot. In a competitive indutry, the preence or abence of profit end an important ignal about the indutry economic efficiency. Market the Broker. How and where do buying and elling activitie take place? The anwer i, in market. Although market are not necearily people, they act a agent omething like a tockbroker or a real etate agent to bring buyer and eller together. Over time, market have become increaingly complex. Now, buying and elling can occur 24 hour a day from anywhere in the

7 The U.S. economy i a free enterprie ytem. That mean that individual and not the government own mot of our country reource. world via the Internet. A market i any place or any way that buyer and eller can exchange good, ervice, reource or money. There are three categorie of market in a free enterprie ociety: reource market, product market and financial market. Houehold go through reource market to ell their labor to buinee. Buinee go through product market to ell good and ervice to houehold. And both houehold and buinee ue financial market to borrow and ave money. Typically, buinee borrow money that houehold ave, uing financial intitution a the intermediary. Government the Protector. The cornertone of a truly free enterprie economy i the abence of government interference in economic matter. However, the government till play an important role in any free enterprie ytem. Thi i becaue unlimited freedom i impoible: one peron freedom may ometime conflict with another. A Supreme Court Jutice William O. Dougla once put it, My freedom to move my fit mut be limited by the proximity of your chin. The main role of government in a free ociety, then, i to define and enforce the rule of ociety. Government ha the coercive power to maintain law and order, protect people right to own property and enforce voluntary contract people enter into. In eence, government provide the umbrella under which the free enterprie ytem operate. Government alo provide good, uch a national defene, that the private market alone would have a hard time producing. Free enterprie alo mean that upply and demand determine how our reource are ued. T h e P r i c e S y t e m The price ytem i the link that connect conumer, producer and market. Price tell u about the demand for a good, and they alo tell u how carce or abundant the good i. For example, water ha great underlying value to ociety. If price meaured only value, then water would be extremely expenive. But we all 7

8 In a free ociety, people own mot of the country reource and private market determine the bet ue for thee reource. Free enterprie work becaue it allow people to do what they do bet and trade for the ret. Competition i a driving force of free enterprie, reulting in greater efficiency and lower price for the conumer. Countrie embracing free market principle benefit from a higher tandard of living.

9

10 know that water generally i not very expenive. Thi i becaue the price of water alo reflect it abundance. The ame concept applie to a Picao painting. A ingle painting doe not necearily have a tremendou value to ociety; we could eaily live without it. But an original Picao i extremely expenive, while a poter print of a Picao painting i relatively cheap. Why? Becaue the original i one of a kind, while the poter are numerou. Price provide information that i vital to making economic deciion. Without market price, it would be very difficult for people to meaure the value to ociety of each good and the carcity or abundance of our reource. If we tried to make deciion without price, a ocialit countrie do, then we would probably produce too many of ome good and too few of other. Probably our mot important competitive advantage in the world market today i our high level of technology and our ability to T h e F r e e o f F r e e E n t e r p r i e Free market are an extenion of peronal freedom. The premie of a market ytem i that people benefit from their own purpoeful action. Football fan tand in line for Dalla Cowboy ticket becaue they believe they will be better off if they can purchae ticket and go to the game. The team owner alo benefit becaue the team mut make a profit to remain in buine. Both the owner and the fan are better off when ticket are old. That what free enterprie i all about cooperation and mutual benefit. No one i forced to buy football ticket, no one i forced to ell football ticket, and no one i forced to play football. A free enterprie ytem promote the freedom of individual, whether they are part of the majority or a minority. For example, when people buy pencil, they don t ak about the race of the lumberjack who chopped the wood, the religiou preference of the miner who dug up the graphite or the political 10

11 innovate. knowledge bae through education. To tay competitive and keep thi advantage, it important that we improve our affiliation of the worker who molded the aluminum caing for the eraer. Intead, they ak, I thi a good price for the product? In a free market ytem, a buine that expree prejudice and dicriminate in it deciion will face higher cot than firm that do not dicriminate. Thi i becaue the dicriminating firm will have a maller pool of worker and other reource to chooe from. Such unprofitable attitude will put them at a competitive diadvantage, and the market will tend to drive them out. Although it i true that prejudicial attitude till perit in a free enterprie ociety, it i alo true that a free enterprie ytem doe a better job than any other to make uch attitude unprofitable. T h e E n t e r p r i e o f F r e e E n t e r p r i e In a free enterprie ytem, entrepreneur, or rik-taker, have a trong incentive to pay attention to the vote conumer regiter with their dollar. Thi i becaue entrepreneur profit by meeting conumer want and need. Entrepreneur continually trive to improve etablihed product and dicover new one. In the end, both the producer and the conumer benefit. Producer can earn a profit, and conumer can obtain the good and ervice they want. Free market do not cater olely to the majority. They alo provide product and ervice that appeal to individual tate. Societie in which one group of leader make all the economic deciion probably do not produce the thing that group with pecial interet would like to have. For example, it i doubtful that one central authority would think to produce both rap muic and claical muic, Super Mario Brother and Trivial Puruit, pizza and uhi, and Bran Flake and Cap n Crunch. But free market provide all thee thing and much, much more. Free market provide a vehicle for erving the individual need of an entire 11

12 Money i the fuel of the economy. It make buying and elling eaier by providing a common unit to ue for trade. The Fed role i to manage how much money we have in the economy. By adjuting the growth of the money upply to repond to long-term economic condition, the Fed can keep the economy on a table coure. The goal i to allow total pending to grow only a fat a production i able to grow. When pending rie fater than the production of good and ervice, price rie a ign of inflation. Like a thief in the night, inflation rob people of their purchaing power and hinder the economy ability to grow. By attempting to curb inflation, the Fed play a vital role in building and maintaining a trong free enterprie ytem.

13

14 credit in our pectrum of interet, whether they repreent the majority or only a mall percentage of people. Adam Smith, in The Wealth of Nation, howed u more than 200 year ago that people puruing their own elf-interet in a free enterprie economy, a if led by ome inviible hand, end up promoting the public interet. But with all thee people looking out for themelve, how doe free enterprie reult in uch beneficial outcome for ociety? That where competition enter the picture. For example, when computer firt came on the market, they had great value but were extremely cotly to produce. Relatively few buinee could afford them. But the lure of profit prompted other companie to tart producing computer. Thi added competition had two reult. It prompted computer companie to cut cot in order to compete, and it led them to look harder and fater for innovation that could give their computer an edge over the other. Now, computer are much le expenive, more powerful and much more uerfriendly than they ued to be. Competition and the lure of profit, combined with ingenuity, continue to drive the market forward. the Federal Reerve Sytem, and delegated to it the power to influence the upply of money and money when it need it. That not true. In 1913, Congre created our central bank, Many people think that the federal government jut print The benefit of competition and free enterprie are not limited to one country. If free enterprie between people in Texa and California make thoe individual better off, then free enterprie between people in Texa and Mexico mut make thoe individual better off a well. The larger the marketplace, the greater the choice available and the greater the competition. Competition reult in greater efficiency and lower price, whether it be between two companie in the ame country or two companie on oppoite ide of the globe. 14

15 economy. It role i to manage the growth of our money upply to enure a healthy economy. W h e r e D o e t h e F e d e r a l R e e r v e F i t I n? Without a common unit of exchange, buying and elling in a free enterprie ytem would conit of bartering good for good, ervice for ervice or good for ervice. Money provide a medium of exchange. It i common to all buyer and eller. Money alo i ued a a unit of account. People can meaure the value of a occer ball in unit of money, jut a they can meaure it weight in number of gram. Moreover, money can be ued a a tore of wealth over time. It i thi function of money that the Federal Reerve i mot intereted in preerving. Organized in 1913 a an independent entity, the Federal Reerve i the nation central bank. The Fed independence from government control eparate the authority to pend money a role belonging to the government from the authority to manage the money upply a role belonging to the Fed. The Fed i reponible for enuring a upply of money and credit in the ytem ufficient to maintain a healthy, growing economy. At the ame time, the Fed mut not inject o much money into the economy that the money loe it value. If the Federal Reerve let the money upply grow too rapidly, then the amount of money in the economy would be greater than the quantitie of good and ervice for ale. Thi overupply of money would lead to widepread ecalation of price what we know a inflation. Inflation i like a thief in the night. It rob people of their power to purchae good and ervice and hinder the economy ability to grow. Rapid inflation can caue political intability and make it difficult for people to plan future invetment, whether they are organizing fund to buy a franchie, aving for college tuition or trying to increae the ize of their workforce. By attempting to limit inflation advere effect, the Federal Reerve play a vital role in building and maintaining a trong free enterprie ytem. Free market do not cater olely to the majority. They alo provide product and ervice that appeal to individual tate. 15

16 Federal Reerve Bank of Dalla El Pao Houton San Antonio For additional copie of thi publication, contact: Public Affair Department, Federal Reerve Bank of Dalla, 2200 N. Pearl St., Dalla, TX ; call (214) or (800) , ext. 5254; or viit our web ite at Revied 9/05