Shortcomings, imperfections of the Free Enterprise System

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We live in an imperfect world. In this imperfect world that we live in, for anything we want to do, every option we consider always has its advantages and disadvantages, pluses and minuses. If we are looking for a house we may be considering many things: 1. The kind of neighborhood. 2. Nearness to a high quality school system. 3. Nearness to the place of our employment 4. Style and size of the house. 5. Cost no more than a certain price. Etc., Etc. Our final decision is always some compromise. We never get everything we want. The same is true with economic systems. There is no perfect economic system. Any economic and political system is some compromise of good characteristics and bad, pluses and minuses. Some systems may be really bad and others less bad. That is just the real world we live in. So which system is the best system?

The following is excerpted from the 1971 World Book article on economics:

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Different economic systems have developed because nations have never agreed on how to solve their basic economic problems. Four important economic systems today are: (1) free enterprise, (2) socialism, (3) communism, and (4) fascism. The economies of many countries include elements from more than one economic system.

Free Enterprise is the economic system of the United States, Canada, and many other countries throughout the world. It is also called private enterprise and capitalism. The section on The American Economy earlier in this article describes how the free enterprise system works.

The Scottish economist Adam Smith (1723-1790) first stated the principles of the free enterprise system. Smith believed that governments should not interfere in economic affairs. He said the desire of businessmen to earn a profit, when regulated by competition, would work almost like an "invisible hand" to produce what consumers want. Smith's philosophy is known as laissez faire (noninterference).

Adam Smith's emphasis on individual economic freedom still forms the basis of the free enterprise system. But the government has taken on many more economic duties than Smith gave it. In fact, many economists call the American system modified free enterprise because the government plays such an important part in it.

Socialism involves more government control and planning than does private enterprise. Under socialism, the government owns and operates such important industries as steel, coal, and the railroads. Some industries are privately owned, and the forces of supply and demand may influence production and prices. Many socialist nations have a democratic form of government. The people may protest against economic policies they do not like. They also may vote to increase or reduce the amount of control the government has over the economy. Partially socialist countries include Great Britain, Sweden, and India.

Communism is based on government ownership of nearly all productive resources. In a communist country, the government directs all important economic activity. It decides what shall be produced and in what quantity. It sets wages and prices. It also plans the rate of economic growth. Consumers can spend their money largely as they wish. But their choice of goods is limited to what the government decides to make available. Under communism, the people have little control over the government's policies. A dictator and a few powerful members of the communist party make major decisions. Russia and China are the largest communist countries.

Fascism combines a dictatorship with private ownership of property. The dictator works closely with large business companies to organize economic activity and to get desired goods and services produced. Fascism developed in Germany and Italy before World War II.

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Communism has been tried in Russia, China, Vietnam, Cambodia, Cuba, North Korea, etc. It is a bad system. It combines a dictatorial system with an economic model that just doesn’t work very well. That is why Russia, China, Vietnam, etc. abandoned it for the free enterprise model.

However, just because the free enterprise system has produced the biggest increases in the standard of living in countries where it has been tried doesn’t mean that the free enterprise system is perfect or even near perfect. It is by no means some panacea. So what are the defects of the free enterprise system?

Well, the basic underlying idea behind the free enterprise system is competition. Competition between businesses, companies or corporations offering the same product. Competition tends to produce low prices and good products. Just as you may have a highly competitive dog-eat-dog situation existing between individuals one can find dog-eat-dog conditions in the corporate world. One company lives and another dies. When survival is involved competition between companies can become intense. In this kind of environment companies will do anything to survive including laying off employees. Adverse economic conditions may cause companies to downsize, lay off workers. Stronger companies may buy competitor companies out, laying off large numbers of workers. In a competitive environment the strong live and the weak die.

According to the U.S. Bureau of Labor Statistics (BLS), approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more. These statistics haven't changed much over time, and have been fairly consistent since the 1990s.

Source: Investopedia.com

What are the implications of all of this for you as an employee? It has big implications in regard to job security. How secure is your job with any company? If the company goes bankrupt, where is your job? Large lawsuits can cause big corporations to go bankrupt (think the silicon implant lawsuits against Dow Corning). The worst time to lose your job is when you get up over 40 years old. If you lose your job when you are over 40, it may be a traumatic event. You may not find another comparable job. You may go from company executive to washing cars to support your wife and five children. That is life. Life can be hard.

Looking for a job when jobs are scarce can be a very demoralizing experience.

So what can one do? Well, he can be prudent. He can be frugal and save money instead of squandering it. Or he can consider getting a government job (federal, state, or local) which is likely to be much more secure.

I have always been a very security conscious person. I always see the darker possibilities. Negative thoughts like this are what caused me to become interested in self-sufficient country living when I was younger. See Self-sufficient Country Living.

8 Sept 2024