Text 3: The Pillars Of Free Enterprise

The free enterprise system rests on certain traditions, beliefs and practices that set it apart from other economic systems. These "pillars" of our economic system are private property,the price systemand competition.

Private Property.Unlike people in many other parts of the world, Americans are able to own property for business purposes and use it to produce income. Nearly 90 percent of the goods and services produced in this country each year come from privately owned firms.

The right to private property gives the owners of natural resources and capital the incentive to use their assets as effi­ciently as they can. Why? Because property owners know they will make a profit if they can produce goods and services that buyers want, at a price they are willing to pay. The advan­tages of private property and its incentives were summarized by "the father of modern economics," Adam Smith, in his famous work, The Wealth of Nations.

The Price System.One of the remarkable things about the American economic system is that it seems to ran by itself. No central economic agency dictates responses to the What, How and Who questions. Yet the questions are answered.

Prices determine what we are willing and able to buy. They influence us to continue in school or to accept a job. Prices help to determine when and where factories will be built, which businesses will succeed, which will fail, and even the color and style of the clothing that will be manufactured.

Prices, the money value of goods and services, carry so much information and so affect the behavior of buyers and sellers that economists often describe our economy as a price-directed system.

The price system provides the answers to the fundamental ques­tions of What goods and services will be produced, How they will be produced, and Who will receive them.

Competitionrefers to the rivalry among buyers and among sellers. Sellers compete by trying to produce the goods and services buyers want at the lowest possible price. Those unable or unwilling to sell at a price low enough to attract buyers will be unable to dispose of their goods or services. This rivalry benefits us all.

▲ It benefits us by giving us the goods and services we want, when and where we want them. Producers know that if they don't satisfy consumer demand, their compe­titors will.

▲ It benefits us because producers must con­stantly strive to oper­ate more efficiently. The quest for greater efficiency conserves scarce resources, increases output and raises living standards by reducing costs.

Text 4: Adam Smith And The Wealth Of Nations

Seventeen seventy-six, the year that we associate with the signing of the Declaration of Independence, also marked the publication in England of one of the most influential books of our time, The Wealth of Nations. Written by Adam Smith, it earned the author the title "The father of economics."

In Smith's view, a nation's wealth was dependent upon production, not agriculture alone. How much it produced, he believed, depended upon how well it combined labor and the other factors of production. The more efficient the combination, the greater the output, and the greater the nation's wealth.

The heart of Smith's economic philosophy was his belief that the economy would work best if left to function on its own without government regulation. In those circumstances, self-interest would lead business firms to produce only those products that consumers wanted, and to produce them at the lowest possible cost. They would do this, not as a means of benefitting society, but in an effort to outperform their competitors and gain the greatest profit. But all this self-interest would benefit society as a whole by providing it with more and better goods and services, at the lowest prices.

To explain why all society benefits when the economy is free of regulation, Smith used the metaphor of the "invisible hand":"Every individual is continually exerting himself to find the most advantageous employment for whatever capital he can command. It is his own advantage, and not that of society, which he has in mind, . .but he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his inten­tion, for the pursuit of his own advantage necessarily leads him to prefer that employment which is most advantageous to society."

The "invisible hand" was Smith's name for the economic forces that we today would call supply and demand, or the marketplace. He sharply disagreed with the mercantilists who, in their quest for a "favorable balance of trade," called for regulation of the economy.

Instead, Smith agreed with the physiocrats and their policy of "laissez faire," letting individuals and businesses func­tion without interference from government regulation or private monopolies. In that way, the "invisible hand" would be free to guide the economy and maximize production.

You can see, therefore, that Thomas Jefferson's Declaration of Independence and Adam Smith's The Wealth of Nations have more in common than a birthday. More importantly, both contain some of the best descriptions of the principles upon which our political and economic systems are based.