Understanding Capitalism: The Free Market System and Its Principles, Exercises of Market economy

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Capitalism is often

called the “free-

enterprise system”.

TradiTional

Economy

• Economic decisions are

based on custom and

historical precedent.

• People often perform the

same type of work as

their parents and

grandparents, regardless

of ability or potential.

Adam Smith

• Considered one of the founders of the free market system.
• Published the book The Wealth of Nations in 1776.
• According to Smith, when all individuals are free to pursue their own interests, an “invisible hand” works to promote the general welfare!
• Smith believed the free-enterprise system would work to perpetually increase economic activity.

Private Ownership

• Private individuals and companies own and operate the means of production.
• Individual initiative determines what will be produced.
• Individuals also own the right to their labor.
• Protection of private property is the role of the government.

Profit and Loss

• Profit is the motive that drives the system.
• Loss is the risk of the entrepreneurs.
• If an individual or company fails, a vacuum will be created which might be filled by another product or service.

The role of

competition:

• Freedom to start a business fuels competition.
• Through this competition for the market, the best products should be created and sold for the least amount of money.
• Customers are likely to purchase the best product for the least money.
• This system promotes efficiency and technical advancement.

Dangers of Free-enterprise

• Without government involvement, there are no laws to protect the workers, or their right to unionize.
• There will be no government regulations for the safety of products and consumers could be harmed.
• Without laws preventing monopolies, competition could be crushed by large businesses.