The Nuts and Bolts of Capitalism

Many times when asked about the nature of their economy, people in the United States respond that a free enterprise system prevails in the country. Few of them seem to realize that the term– free enterprise –is not exactly an accurate description of the U.S. economic system.

Looking more closely, they’ll likely note that it’s an amalgam of two other important terms often used to describe key elements of a capitalist system– free competition and private enterprise .

In contrast to what socialist societies promote (i.e. collective ownership of the means of production), a capitalist system stresses the importance of private ownership of resources. Put another way, individuals and/or legal entities (i.e. partnerships, corporations, etc.), not the state, are to enjoy a place of prominence in economic activity. Private parties, in recognition of the incentive to earn a profit as a result of their activities, willingly enter the marketplace, where they offer a product or service to prospective customers.

Generally speaking, there are three main categories of entity under which such private parties operate legally. They are (1) sole proprietorship, (2) partnership, and (3) corporation.

In a sole proprietorship, usually a single individual is operating under his own name or under a DBA (doing business as) alias. A partnership can be either a general partnership or limited partnership, where two or more parties agree to operate together and split the profits of their activity. In contrast, a corporation is a legal entity, separate and distinct from its owners and/or its managers.

In a well-developed economy, such as the one in the United States, all three types of private enterprises are widespread.

Ideally, in any given marketplace, consumers benefit the most when free competition prevails. Usually when producers are able to enter and leave markets freely, consumers tend to find lower prices on available goods and services, as well as find a greater variety in the products and services available. Producers are not able to collude with each other to (1) prevent other possible producers from entering the marketplace, (2) rig prices, or (3) create oligopolies or monopolies. U.S. antitrust law has been one of the major reasons why such collusion does not take place. Within this context, the government’s role remains that of assuring that marketplaces function as efficiently as possible, without, however, directly intervening in marketplace activity itself.

Technological innovations, such as the internet, are contributing to the realization of free competition in the marketplace. How they will influence the workings of a capitalist society will be growing interest to producers and consumers alike.