Free enterprise provides the greatest opportunity for people to pull themselves out of poverty and to transition from the middle class to financial independence. Part of the reason is that it creates the most wealth because it creates an incentive to create wealth. Want food to eat? Spend you day making things rather than spending the day in bed or out fishing. Want a house in which to live? Get a job in which you are providing services to others and keep that job long enough to pay for the home.
A free enterprise system also provides opportunity to all who are willing to create things and provide needed services to build wealth. Unlike Socialist systems in which those with the connections to the individuals controlling the distribution of wealth, or those either accepting bribes or making bribe are the only ones who become wealthy, an individual in a free enterprise system has the opportunity through hard work and smart decisions to go from abject poverty to great wealth. Those stories may be rare, but there are a lot of stories of people who do so in two or three generations.
It is also the most fair and benevolent of economic systems. A system that is truly free rewards those who meet the needs of others and compensates individuals in proportion to what they do for others. A short-order cook in a diner may think they are just there to get a paycheck, but in actuality they spend their day feeding hungry people. An individual who opens a restaurant and employs enough cooks to feed even more hungry people earns more money because he is providing for the needs of more people. An individual who builds a restaurant chain and feeds thousands of hungry people each day becomes very wealthy. Your income is in proportion to the number of people whose needs you meet and how critical those needs are.
While it is not part of the DNA as it is in Socialist systems, free enterprise can become corrupted if people let it. While this corruption can come in the form of collusion among business owners to stifle competition for both goods and employment, this type of corruption will be dealt with by the market itself provided that barriers to entry are minimized such that others can open competing businesses to those colluding. The most dangerous form of corruption comes from government officials who collude with business owners to stifle competition. This is often done through regulations passed in the name of safety or market “fairness” designed to raise costs to the point that few can enter the markets. It also comes in the direct outlaw of competing products, tariffs and taxes to keep out competitors, and wage and benefit laws that drive small businesses out of the market. In some cases, governments fund businesses directly and create unfair competition.
Free enterprise will work and work well if it is truly free. Barriers to entry into markets must be kept to a minimum so that new competitors can enter the market and challenge existing companies who are not providing fair deals to their customers. Employees must be free to move from company to company in order to ensure wages are fair for the value of the work Employers must be free to offer the wages they wish and the benefits they wish. The use of regulations or taxpayer money to benefit specific corporations cannot be allowed to stand.
Often those who are the most productive choose to focus on running their company or working their job and lose sight of the effect of government actions on the free enterprise system. Unfortunately, constant vigilance is needed to prevent crony capitalism and discriminatory regulations from creeping in.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.