Freedom of Enterprise

1. Freedom of enterprise depends on the ability for entrepreneurs to enter markets, to make pricing decisions, and otherwise make competitive decisions that increase productivity and market shares. One criticism of unlimited freedom of enterprise is that some decisions have socially harmful outcomes that can, for example, drive down wages or cause environmental damage.
2. Democracy and freedom of enterprise can reinforce the other by opening meritocratic competition to a greater majority and, therefore, eroding fixed class structures that might hinder wide democratic participation. Some, however, argue that there are limits to meritocracy and that unrestrained freedom of enterprise can limit the power of individuals for self-determination and reduce popular political influence.

Freedom of enterprise refers to the lack of government restriction on the free actions of firms to compete, produce, and price their goods or services. Alternatives to complete freedom of enterprise generally restrict the choice of firms to promote some perceived public good. Such restrictions can take multiple forms. For example, governments set price controls that constrain a firm’s ability to determine prices for what they sell or for what they pay for materials, labor, or capital. These restrictions to market pricing, for example, include maximum legal prices for goods in times of crisis to prevent price gouging. Restrictions also include minimum legal prices for labor, or the minimum wage, which sets a theoretically more moral or just price on work than might occur if competition in labor markets was allowed to drive down wages.

Other than constraints on free pricing, freedom of enterprise may also be limited to protect the rights of other firms protected either by legal monopoly status or other legal infringement on traditional rights or property. In American history, the nineteenth century saw a period of active promotion in courts in support of freedom of enterprise that eroded traditional rights and other forms of competition that might threaten the position of existing firms in favor of new entrepreneurs entering the market. In the two notable Supreme Court cases of Gibbons v. Ogden (1824) and the Charles River Bridge Case (1837), the court held for the right of new market entrants to compete against businesses already licensed in the then emerging industries for transportation and infrastructure. In the first case, the court decided that when a new steamboat operator, Thomas Gibbons threatened the market share of Robert R. Livingston who had received a grant for operating steamboats in 1798, that the grant did not disqualify competition. The Supreme Court interpreted the commerce clause of the American Constitution to allow for free entry into markets for navigation, thus freeing the sector from monopoly control. The Charles River Bridge Case likewise allowed for the construction of a rival bridge, the Warren bridge, that could compete against an existing chartered bridge, the Charles River Bridge. The legal scholar and historian James Willard Hurst described this nineteenth legal system supporting freedom of enterprise over protection, thus promoting a “release of energy” within the economy and, consequently, economic growth.¹

One criticism against unrestrained freedom of enterprise, such as that which emerged in the nineteenth century, is the social costs of operating a business which the companies do not experience themselves but instead pass onto a wider community. Economists often term this secondary effect of the freedom of firms to act on private interests as negative externalities.² Often, unrestrained choices and competition of firms, many have argued, place such costs on society to the benefit of the entrepreneurs. One example of this arose in the third quarter of the twentieth century in the environmentalist movement in which natural scientists noted the destructive effects of unregulated private industry on the environment. For example, Rachael Carson, in her 1962 book Silent Spring wrote on the industrial use of damaging chemicals like DDT in the American agricultural industry which motivated a popular movement against the perceived disregard of corporations for the public good. Under the Nixon administration, these popular concerns led to the regulation of such industries under the Environmental Protection Agency which to this day limits the freedom of industries to use and dispose of harmful substances and places taxes on polluting emissions.³

Since the twentieth century, limitations on private businesses to correct for market failures and to support the public good play a role in politics and industrial regulation. Counterarguments for these restrictions remain. Some economists and policymakers argue that freedom of enterprise can resolve these public conflicts better than interventionism in most circumstances. British economist Ronald Coase argued, for example, that private parties resolve externalities in unencumbered markets when transaction costs between the parties are low.⁴ In such cases, some argue, limitations to freedom of enterprise reduce the likelihood of resolving social problems. Others make similar claims that price controls and other regulations can cause surpluses and shortages in markets and generally incentivize inefficiencies in society for the benefit of specific groups. Generally, the economic debates over freedom of enterprise weigh the efficiency of competition against the net effects of firms’ decisions on society.

Many commentators have noted that freedom of enterprise and democracy tend to reinforce the other. During the period of support for unrestrained freedom of enterprise and competition in nineteenth-century America, French political theorist and historian Alexis De Tocqueville wrote on the individualist, entrepreneurial, and democratic character of Americans who, especially in contrast with Europe, participated widely in politics and generally lacked the deference seen in traditional aristocratic societies.⁵ The explanation for such observations lies in the opportunity for people, regardless of fixed class, to gain a degree of economic influence, property, and, consequently, influence in government. The ability for free entry into markets, and freedom of entrepreneurs to price below established competitors, allows for common people to establish influence they may not be able to achieve under more restrictive legal systems. However, in contrast to De Tocqueville, many more recent observers have argued that freedom of enterprise is always limited for some based on the uneven distribution of resources and opportunity. One can think of the division over the inherent political legitimacy of freedom of enterprise as based in emphasis on what the political philosopher Isaiah Berlin called the “two concepts of liberty.” The first concept, negative liberty or “freedom from,” is that which prevents intervention into the free action and choice of individuals. This concept of liberty is that which, under some democratic societies, promotes freedom of enterprise as socially optimal given that it is that which least restricts individuals. Critics, to varying degrees, note the limitations of resource scarcity and the exclusionary effects of competition which prevent individuals from achieving what would most benefit them in unrestrained competitive economic cultures. Such critics often support types of restriction on freedom of enterprise in certain circumstances to promote positive liberties or “freedom too,” whereby limitation subsidies and protections might promote the ability for individuals to create socially optimal societies through popular political participation.⁶ The question of whether lack of economic restraint inherently produces positive outcomes remains a question of debate and political conflict in democratic political arenas.

In the twenty-first century, the United States and many other developed nations have limited restriction on freedom of enterprise with firms and individuals generally capable of selling, pricing, and operating generally without restraint by legal coercion. The correlation between development and competition, many argue, evidences the importance of freedom of enterprise. Others argue for a limit to the promotion of freedom of enterprise, with an emphasis instead on a necessary balance between competition and other social welfare. Democratic government in coming years will need to address this issue.