Chapter 3:American Free Enterprise

• 1 - Benefits of Free Enterprise• 2 - Promoting Growth and Stability• 3 - Providing Public Goods• 4 – Providing a Safety Net

•Signs, Signs, everywhere a sign, blocking up the scenery, breaking my mind, do this don’t do that, cant you read the Signs . . . Five Man Electrical Band, 1970

Signs• And the sign said long haired freaky people need not apply

So I tucked my hair up under my hat and I went in to ask him whyHe said you look like a fine upstanding young man, I think you'll doSo I took off my hat I said imagine that, huh, me working for you woah!

• Sign Sign everywhere a signBlocking out the scenery breaking my mindDo this, don't do that, can't you read the sign

• And the sign said anybody caught trespassing would be shot on sightSo I jumped on the fence and yelled at the house, Hey! what gives you the rightTo put up a fence to keep me out or to keep mother nature inIf God was here, he'd tell you to your face, man you're some kinda sinner

• Bridge:• Now, hey you Mister! can't you read, you got to have a shirt and tie to get a

seatYou can't even watch, no you can't eat, you ain't suppose to be hereSign said you got to have a membership card to get inside Uh!

• And the sign said everybody welcome, come in, kneel down and prayBut when they passed around the plate at the end of it all,I didn't have a penny to pay, so I got me a pen and a paper and I made up my own little signI said thank you Lord for thinking about me, I'm alive and doing fine

• FIVE MAN ELECTRICAL BAND, 1970

1. Basic Principles of Free Enterprise

• Profit Motive – incentive that drives individuals and business owners to improve their material well-being

• Open Opportunity – anyone can compete in the market place

• Legal Equality – everyone has the same legal rights

• Private Property – individual has the right to control their possessions

• Freedom to Buy and Sell – people decide what, when, and how they want to buy and sell

The Role of the Consumer • Consumers send signals to businesses

telling them what to produce and what not to produce

• Through interest groups -private organizations that try to persuade public officials to act in a way that benefits the members

Economic Freedom and the Constitution

• Patriotism -love of one’s country• Property rights - eminent domain -the government’s right to

take private property for public use (Amendment 5 without just compensation)

• Taxation -Constitution spells out how government can tax individuals

• Contracts -legal binding agreements between people and business

• Economic freedom plays a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is . . . An end in itself. In the second place, economic freedom isalso an indispensable means toward the achievement of political freedom.” - Milton Friedman, Capitalism and Freedom

Does the government have the right to Eminent Domain?

The Role of Government in the market place

• Public interest -the concerns of society as a whole

• Public disclosure laws -companies must provide information about their products or services

• Protecting public health, safety, and well-being-laws aimed at protecting the consumer

• There is a negative impact of Regulation

Major Federal Regulatory Agencies

• 1906 - Food and Drug Administration – provides standards for food and Drug• 1913 – Federal Reserve System – regulates banking and manages money supply• 1914 – Federal Trade Commission – enforces antitrust laws to protect consumers• 1933 – Federal Deposit Insurance Corporation – insures bank deposits• 1970 – Environmental Protection Agency – protect human health and environment• 1995 – Surface Transportation Board – resolve railroad, trucking, and shipping

rates

2. Promoting Growth and Stability

• TRACKING BUSINESS CYCLES• Macroeconomics -the study of economic

behavior and decision-making in a nation’s whole economy

• Microeconomics -study of economic behavior and decision-making in small units, such as households and firms

GDP and the Business Cycle• Gross Domestic Product (GDP)-the total value of all final goods

and services produced in a country in a given year• Business cycle - macroeconomic growth followed by

macroeconomic decline• Changes occur in business cycles because people make

predictions

Promoting Economic Strength• Employment-ensure jobs for everyone who can work• Economic Growth -higher standard of living• Stability and Security -government seeks to keep economy stable• Economic citizenship -voters play a vital role in shaping

government economic actions• Referendums -proposed law submitted directly to the public

Technology and Productivity• Technological progress -improved technology is

essential –innovation• The Government’s Role -government promotes

innovation and invention through funding research -must show results or no funding! (NASA)

• Government grants patents-licenses that gives the inventor exclusive right and copyrights-licenses that give authors exclusive rights– The American Work Ethic

• “I’ve never really viewed myself as particularly talented. I’ve viewed myself as slightly above average in talent. And where I excel is ridiculous , sickening work ethic. You know, while the other guy’s sleeping? I’m working. While the other guy’s eating? I’m working.” – Will Smith, 60 Minutes Interview

3. Providing Public Goods• A shared good or service for which it would be inefficient to

make consumers pay individually and to exclude those who did not pay

Public v Private sector• Public Sector -the part of the economy that

involves the transactions of the government• Private sector -the part of the economy that

involves the transaction of the individual or business

Costs and Benefits• Infrastructure -the basic facilities that are

necessary for a society to function and grow• 1. The benefit to each individual is less than the cost

that each would have to pay if it were provided privately

• 2. The total benefits to society are greater than the total cost

Free Rider Problem

• Someone who would not be willing to pay for certain good or service but who would get the benefits of it anyway if it were provided as a public good

Market Failures

• A situation in which the free market, operating on its own, does not distribute resources efficiently

• (DOES NOT SUGGEST THAT FREE MARKET DOES NOT WORK!!!)

Externalities

• Economic side effect of a good or a service that generates benefits or costs to someone other than the person deciding how much to produce or consume

• Positive -generates benefits to many people

• Negative -generates unintended costs

• Positive Externalities• State gains Revenue – tolls• Can be used by everyone• Increased traffic – increases

business – gas stations, restaurants

• Negative Externalities• Construction and traffic (noise)• Grease and oil from bridge

(pollution)• Interrupt spawning of local fish

Government’s Role• Government must take action to create

positive externalities and at the same time limit negative externalities

4. Providing a Safety Net• The Poverty Problem -an income level below that

which is needed to support families and households• The Welfare System -the governments efforts to

ease poverty by collecting taxes from individuals and redistributing some of those funds in the form of money (FDR-Great Depression)

• As of today, 1 out of every 7 people are in poverty• Single man – 11,000 dollars• Family of Four – 22, 000 dollars (Channel 69 News, 9-

17-10)

Redistribute Programs• Cash Transfers -direct payment of money by the

government to poor, disabled, or retired people (ex-TANF, Social Security, Unemployment insurance)

• In-kind benefits -goods and services provided for free or at reduced prices (subsidized housing)

• Medical benefits -government provided healthcare to elderly, the disabled, the poor (Medicare – Elderly and Medicare – poor)

• Education -opportunities to those who need instruction (learning disabilities and financial aid)

Private Action• Charitable Donations – individuals and corporations provide help

to charities (2006 – 295 billion dollars in deductable charitable contributions)

• Grant -A financial award given by the government agency to a private individual or group in order to carry out a specific task

“It is always better to give than receive. The glory of charitable donations is that you give and receive at the same time.”

Jeff Schnepper, “Give and Grow Rich with Charitable Deductions.”