Fireworks for the Free Enterprise System and Democracy

AS July 4 approaches, it may be appropriate to remind ourselves of the role of a private-enterprise system in a democratic society. Surely, the briefest reconnaissance of national experiences in modern times reveals that capitalistic economies generally perform much better than societies with a much larger governmental presence in the economy. History shows that it is not a question of natural resources or inherited wealth or culture or geography. In Europe, the capitalist countries of the West outperform the communist economies of the East. In Asia, Taiwan and South Korea outperform the communist economies of North Korea and China.

What characteristics do the successful economies have in common and what do the economic failures lack?

Basic factors include a strong business sector, competition, private decisionmaking in the marketplace, and decentralization of power.

I am also struck by the close correspondence between the countries with a large and strong private sector and those that provide their citizens with a substantial degree of individual liberty. That is not coincidental. The decentralization of power so essential for capitalism to prosper is also the basic way of avoiding a totalitarian society.

The high degree of economic freedom in the United States did not just happen. The constitutional underpinnings of United States private economic activity are extensive.

Because the American society rests on the foundations of capitalism as well as democracy, we inevitably encounter tensions and uneasy compromises. We rely on some unifying principles that promote consensus. Government needs a strong private-enterprise system for two different reasons - as a support and also as a counterweight.

The business sector literally supports government. Through taxes it finances the public efforts to educate our youth, aid the poor, and provide for the national defense. As a counterweight, the decentralization of power inherent in a private-enterprise economy limits the scope and power of government.

However, the success of the private-enterprise system depends critically on government. The most basic attributes of a market economy - enforcement of contracts, protection of private property rights, and provision of legal tender - stem from the power of politicians and bureaucrats to penalize violators of the rules of the market game.

Maintaining a competitive economy does not come easily. Visions of monopoly conjure up big businesses swallowing small businesses. Yet a competitive marketplace generates new businesses at faster rate than old businesses can take them over. Often those new businesses elbow established larger firms from their dominant positions in major markets.

Most cases of monopoly arise from the actions of government. The postal monopoly did not arise from the overpowering success of a single large enterprise, but rather from government unwillingness to let new firms enter this market. Governmental enterprises are not subject to the discipline of the marketplace.

In a recent study of governmental corporations in 13 countries, economists at the World Bank concluded that public enterprises generally do less well than their private counterparts. The researchers noted that the directors of publicly owned corporations have no financial stake in the business and that the easy recourse to government finance encourages complacency.

The proper role of government does not mean being single-mindedly pro-business. That approach normally translates into a cozy partnership between government and business - subsidies and protection for failing industries, ``incomes'' policies, detailed government planning, and other interventionist techniques invariably justified on an ``exceptions'' basis.

Business executives need to accept setbacks, as well as gains, without running to the government for help or for some advantage over the competition. Likewise, public sector officials need to appreciate more fully the contributions that decentralized economic decisionmaking makes to a free society and restrain the ever-present temptation constantly to second-guess the private sector.