How is risk a welcomed ingredient in a free-enterprise system?

Answer 1

Risk acts as the motivation to found an enterprise.

Sure it is a risk that you will fail, and most small businesses fail in their first year. But, if you can get beyond that point then the rewards are worth it. This is how every single private company got its start.

At one point Doctor Pepper was made at one soda fountain by one person. Now it is a multimillion dollar company.

Exxon started with one oil well and after changing its name from Esso to Enco it became and absorbing Mobile Oil it became the multimillion dollar Goliath it is today.

The problem with communism is there is no incentive to take the risk to open a new business or to innovate or to save money. If you don't have anything to gain or lose then why bother to do it?

Risk also weeds out the unprofitable and the weak. There have been a lot of companies that failed because they either couldn't keep up, or they couldn't compete. Kmart was a mega department store chain known for its inexpensive goods and the once famous "blue light special;" when a blue light and siren would sound announcing a special deal to anyone in the store. Wal Mart just about killed them off, by going to the producer and DEMANDING that they get their goods cheaper. They cut corners elsewhere and just blew Kmart away.

Now we have better price available at Wal Mart, the cheapest you can get. The problem is that along the way all the small "mom and pop" operations got axed as well. Small stores can't compete with Wal Mart so they either have to find another market, improve their system, or find some other way to make a profit.

There is always a risk of failure and of someone doing it better than you. This risk keeps the company looking for new ways to compete, and how to do it better. When the American car market shifted to Japanese Imports the car company AMC went away. GM and Ford used to be huge giants and they both almost died out. They are coming back, but they are facing some tough competition. The consumer gets the benefit in cheaper and better cars. But, there is a cost in lost jobs. Detroit just about dried up when GM and Ford went robotic and started cutting out a huge number of jobs.

The American Steel industry was undercut by the Japanese and just about driven out of the market. They couldn't compete with the cheaper labor and costs. They have made a comeback by entering the recycling industry. It is cheaper to buy recycled steel here in the US than to import it from abroad. US Steel had to adapt to survive and it did. The risk of competition drove the market and drove them to change it.

Of course it turns out Japan didn’t play fair, their companies were subsidized by the Japanese Government so they competed unfairly in the market place. The US government let it happen, rather than get into a tariff war so the steel and auto industry suffered.