Free Enterprise: Our Heritage, Our Wealth Booklet

FREE ENTERPRISE: OUR HERITAGE, OUR WEALTH

Chapter 8:

ten myths about
free enterprise

the theoretical appeal of free enterprise seems so great that it is hard to
believe anyone would reject it. When you compare it to non-enterprise,
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enterprise systems. Here are ten of the most common.

Myth 1: Free Enterprise is Based on Greed

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not be greedy. Second, self-interest is an inherent character trait of human
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service of others.

Pope John Paul II , in his encyclical on free enterprise systems, accepted
self-interest as a basic fact of human nature, and argued that an economic
system must respond to it:

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account and does not place in opposition personal interest and the society
as a whole, but rather seeks ways to bring them into fruitful harmony. 12

Myth 2: Adam Smith is Irrelevant to Today’s World

People often accept Smith’s logic of a competitive economy in which prices
channel self-interest to the service of everyone’s interests. But then they add
something like, “Of course, that was just true of the 18th century. Today, the
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logic relies does not now exist.”

12Ninth Encyclical. Centesimus Annus, May 1991.

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COLORADO COUNCIL FOR ECONOMIC EDUCATION

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Smith’s competitive ideal than it was when Smith was writing. Extraordinary
advances in transportation and communication have transformed the world
into a global economy, one in which new competitors can pop up literally from
any corner of the globe. It is a mistake to look back to the 18th century world
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was a monopolist; high transportation costs to the next village blocked his
competition.

Today industrial giants like U.S. Steel have replaced the village blacksmith.
It faces far more competition than the village blacksmith ever dreamed of –
from companies large and small in the United States and from companies in
Germany, China, Japan, Russia, India, South Korea and Brazil, Japan, South
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it ever was.

Figure 13:

Source: U.S. Census Bureau. Economic Census of the United States, 2011.
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FREE ENTERPRISE: OUR HERITAGE, OUR WEALTH

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Expense of Wages

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and therefore increases wages. To think otherwise is to be guilty of zero-
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Successful enterprise creates new opportunity and new wealth. It creates more
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Karl Marx was perhaps the most famous person to commit this error. He
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would receive a larger and larger share of income. It would come at the expense
of wages, so workers would receive a smaller and smaller share. History has
proven Marx wrong. A century ago, workers received two-thirds of total income
while owners received one-third. As Figure 14 shows, the ratio of labor income
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is, as the economy grew over time the total compensation of workers and the
total income of capital owners grew at almost exactly the same rate.

Figure 14:

Source: U.S. Census Bureau. Economic Census of the United States, 2011.

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COLORADO COUNCIL FOR ECONOMIC EDUCATION

Myth 4: Free Enterprise Creates Poverty

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Poverty has been the norm throughout the history of mankind. It was the
emergence of free enterprise that succeeded in largely eliminating poverty in
the countries that chose free enterprise.

Of course, poverty continues to exist even in free enterprise economies.
Ability, enterprise, luck, and health are not distributed equally among people,
nor are incomes. Some people, therefore, have not done as well and will continue
to do less well than others. However, research by David Dollar and Aart Kraay
demonstrates that a primary force in alleviating the most severe global poverty
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generates growth is the free enterprise system.

Most people agree that those who do well should help those who do less
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vastly smaller problem in free enterprise economies.

Figure 15:

Share of the Population Living in
Severe Poverty (Less than $1 per day)

80
70
60
50
40
30
20
10
0

234567
Economic Freedom Index (1 least free, 10 most free)

Source: Economic Freedom of the World, 2000, and Human Development Report, 2000.

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FREE ENTERPRISE: OUR HERITAGE, OUR WEALTH

Myth 5: Consumers in Free Enterprise are
Manipulated by Wasteful Advertising

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Second, that consumers are manipulated by it. If advertising is wasteful, it
does not waste very much of U.S. income. While advertising expenditures
in the various media were just over 2 percent of our nation’s total output
in recent decades, it is interesting to note that the fraction of output
devoted to advertising is lower now than in earlier periods. Sellers
spent well in excess of 3 percent of total output in the early 1900s.13

Is that small share spent on advertising a waste? Imagine an economy
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started our car wash? How, except through advertising could we have informed
potential customers of our existence? Clearly without advertising there would
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of the last decades: personal computers, XPVMECFGFXFSOFXmSNT
microwave ovens, or digital video disc players. and fewer new products.
Would any of these products have been
introduced without advertising being available to let us know of their existence?

Advertising may seem excessive to us at times, but it is what makes markets
more competitive than they otherwise would be. Comparisons of markets with
and without advertising have consistently shown that it results in lower prices
to consumers because it promotes competition.14

As for the proposition that consumers are manipulated by advertising, we
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into buying things, does it mean that they are somehow forced to spend more
of their income on consumption than they otherwise would? If that is what
manipulation means, then it clearly does not exist. Consumers spend about 90
percent of their after-tax income on consumer goods and services, just as they did
a century ago, long before television and radio changed the face of advertising.

13Walters, S. Enterprise. Government and the Public. NY: McGraw-Hill, 1993, pp 304-5.
14For example, Lee Benham reports that he found eyeglass prices were 25–30 percent higher in
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wJournal of Law and Economics, October 1972).

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COLORADO COUNCIL FOR ECONOMIC EDUCATION

If the manipulation argument means we are forced by advertising to buy
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total consumption of beer. It is clear that advertising can get us to try a particular
brand of beer. Suppose it convinces us to try it and we don’t like it. Could
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Do you continue to buy products you regard as inferior just because they are
advertised? If that were the case, we would still see Studebakers being sold.

Myth 6 - Free Enterprise Destroys the Environment

We see lots of environmental damage in free enterprise systems, but if you
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air in some cities in Eastern Europe was dirtier under non-enterprise economic
systems than the air in any other cities on Earth.

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assign property rights to them. Who owns the air? Who owns the ocean?

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prove difficult for private markets to solve

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environmental resources is described in Box 2, the government’s creation

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property rights to them. QSPNJTJOHSFTVMUTJOEFBMJOHXJUIUIJTEJċDVMU

problem.

Myth 7: Free Enterprise Economies Exploit the Less
Developed Nations

If an economy is less developed, it is probably not a free enterprise economy.
Its poverty is not the result of the choice of others to be free enterprise
economies, but because of its own choice not to be a free enterprise economy.
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these rapidly growing economies – Taiwan, South Korea, China, India – is
that they opened themselves to international trade; primarily this trade was
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FREE ENTERPRISE: OUR HERITAGE, OUR WEALTH

Box 2:

Tradable Pollution Permits

Several alternative government policies for dealing with pollution exist,
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keep the environment clean is the use of tradable pollution permits. We
can apply our simple demand and supply diagram from Chapter 5 to see
how this method might work. In the Figure below, the Environmental
Protection Agency (EPA ) sets a quantity of pollution by issuing a chosen
number of pollution permits – each permit authorizing a given amount
of pollution per time period. In this case, the supply curve for pollution
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demand (and position of the demand curve) now determines the price of a
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permits in order to produce their product must pay price P for each unit
of pollution required. Since businesses are interested in increasing their
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product. If a new technology becomes available that allows production
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permits (assuming the new pollution reduction technology is a cheaper
alternative than buying the required number of permits). As the demand
declines over time, the demand curve shifts left and the price of pollution
permits falls. In the next year, the EPA can then reduce the supply of
permits issued, moving the supply curve leftward and again raising the
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Price of Supply of Pollution
Pollution Permits

P

Demand for Pollution
rights
Q Quantity of Pollution

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COLORADO COUNCIL FOR ECONOMIC EDUCATION

a result of these connections. Non-enterprise economies that avoided these
interconnections remained mired in poverty. One need only think back to the
example of North Korea to prove this point.

Myth 8: Free Enterprise Economies Promote
Materialism

Free enterprise systems certainly enhance material wealth. Does that lead
to an obsession with material goods? Sabina Muller, an art teacher and mother
of two children in the former East Germany, made an interesting comment
about this claim.

You know, we were raised in the G.D.R. (East Germany) to think that
Westerners are evil capitalist materialists. But the truth is, people in
the East are the real materialists. When your shops are always empty,
when you have to stand in line for an orange, when you wait ten years
for a lousy car, you spend your life obsessed with things.15

Materialism is always a danger, whether in free or non-enterprise economies.
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enterprise.

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Don’t Produce Anything

We became imaginary capitalists when we went into the car wash business.
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the idea of starting a car wash, organizing the workers, securing the location,
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contribute nothing to its well-being is silly. Suppose all the capitalists got up and
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be more productive? Would wages rise?

15ɩ F.BSHJO, November/December 1990, pp. 58-9.

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FREE ENTERPRISE: OUR HERITAGE, OUR WEALTH

Myth 10: A Better Middle Way Exists

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Having done that, they reject free enterprise. But what would such a middle
way be? Should we seek a “less-enterprise system?” One in which people are
enterprising, but not so enterprising as in free enterprise?

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4XFEFO

Germany, Canada, and the United States all have their own special features. But
they share in common a system of free enterprise, a system in which individuals
are free to make choices with their privately owned resources.

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and it is only proper that we should strive to make those things better. But,
before we dismiss our system, we should do two things. First, we should identify
what alternative we prefer. Is there a non-enterprise system somewhere that
appeals? Where is it? What are its strengths and weaknesses? Simply saying
that one does not like our current free enterprise system accomplishes nothing.
We must specify what would be better and why. Finally, we must be able to
show that it would work. To the present, this has not been done.

Second, we should reflect on what free enterprise has meant to us,
personally. How has it made us richer? Not just richer in material wealth, but
in the satisfaction we receive from our lives and our families. In doing this, we
must not make the mistake of thinking that we are not rich because we do not
have as much money as William Gates III , the founder of Microsoft®. We must
take a global perspective. In that perspective, nearly everyone in the United
States is rich, and we have free enterprise to thank for this wealth.

How lucky we are that those early Pilgrims How lucky we are that our
recognized the error of a non-enterprise economic freedoms, as well as
system. How lucky we are that generations out political freedoms, have
of Americans have resisted the appeals of been preserved.
economic fascism. How lucky we are that our
economic freedoms, as well as our political 49
freedoms, have been preserved.

COLORADO COUNCIL FOR ECONOMIC EDUCATION

Our free enterprise system is not some idle abstraction. It is an essential
part of our heritage as Americans – in much the same way as our civil rights
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ɩ FGSFFEPNJUHJWFTVOMPDLTPVSDSFBUJWFFĊPSUTJOUIFTFSWJDFPGPUIFST"T
the rest of the world catches on to this simple truth, it is just as important that
we understand it as well. It is one of our most precious assets – a heritage that
is ours to enjoy and ours to protect.

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FREE ENTERPRISE: OUR HERITAGE, OUR WEALTH

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COLORADO COUNCIL FOR ECONOMIC EDUCATION

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FREE ENTERPRISE: OUR HERITAGE, OUR WEALTH

CCEE’s Economics and Personal Finance Education
Services for Teachers and Students

• Teachers attending the Colorado Council for Economic Education classes
learn from the highest caliber Ph.D. economics professors who specialize in
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TUVEFOUTJOHSBEFTɩ JTDPNQSFIFOTJWFBOEFOHBHJOHPOMJOFJOWFTUNFOU
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make real-time trades and choices.

• CCEE maintains an extensive Teacher Resource Library of more than 300
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which are available to active teachers without charge from our lending library
POMJOFIUUQXXXDDFFOFUSFTPVSDF@MJCSBSZIUNɩ FTFSFTPVSDFTJODMVEF
lesson plans, curriculum guides, activities, simulations, student handouts and
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COLORADO COUNCIL FOR ECONOMIC EDUCATION

“A splendid booklet which states in very clear and
eloquent terms the case for free enterprise.”
—Milton Friedman, Nobel Laureate Economics

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Phone 303-752-2323 | Fax 303-337-2212

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