Free Enterprise

A noted economist has claimed, “American prosperity and American free enterprise are both highly unusual in the world, and we should not overlook the possibility that the two are connected.”

Indeed, the evidence seems overwhelming that free enterprise and widespread economic prosperity are more than just connected; the first leads directly to the second, not just in the United States but around the world. Organizations as diverse as the Wall Street Journal, the Heritage Foundation and the World Bank produce annual research documenting the fact that the more enterprising people are free to be, the more businesses they will start, the more people they will employ and the more technologies and innovations they will discover. Free countries feed, clothe and house people at higher levels than unfree countries, by far.

The Founders understood the significance of this aspect of liberty. In his 1774 work, "A Summary View of the Rights of British America," Thomas Jefferson asserted the exercise of free trade as a natural right of the American colonists. Among the complaints registered against Britain’s king in the Declaration of Independence are the following:
“He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance…He has given his assent to acts of pretended legislation…For cutting off our Trade with all parts of the world” (Thomas Jefferson, ”A Summary View of the Rights of British America,” 1774).
The Constitution’s Framers recognized the value of property rights:
“The Congress shall have power…To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries” (The Unites States Constitution, Article I, Section 8, 1787).
Arguing for ratification of the Constitution in Federalist No. 10 in 1787, James Madison posited that protection of
“the diverse faculties of men, from which the rights of property originate… is the first object of government” (James Madison, Federalist No. 10, 1787).
Again, in his 1792 essay “On Property,” Madison explained,
“In a word, as a man is said to have a right to his property, he may be equally said to have a property in his rights. Where an excess of power prevails, property of no sort is duly respected. No man is safe in his opinions, his person, his faculties, or his possessions” (James Madison, “On Property,” 1792).
The wisdom of protecting this aspect of liberty is also clear today. It’s no coincidence that the least free countries in the world are the poorest. North Korea ranks among both the least free and most poor. Across the border in South Korea, people of the same ethnic background live in a largely free enterprise economy and their average income is more than 16 times that of their relatives to the north. In pre-Civil War America, free states were richer than slave states. It’s a familiar pattern the world over.
What is this arrangement we call “free enterprise” that produces so much wealth? What characteristics must an economy exhibit to qualify as a “free enterprise” one?
A good way to answer these questions is to make plain what free enterprise is not. We should understand up front that it’s possible to have enterprise that isn’t free. Visit a busy North Korean tractor factory and you’ll see investment, resources, employment and even busy people managing other busy people – lots of “activity.” But no one would call such enterprise “free.” That’s because only the government in North Korea can own a tractor factory. Whether or not tractors are made, how many of them are made, what they sell for and whether they work or not—these are all decisions made by those in political power. Their incentives are very different from those of private entrepreneurs who have to invest properly, compete well, price their product and serve their customers or run the risk of going bankrupt.
In other countries, governments allow private people to start their own enterprises and to “own” them, at least on paper, but then tax and regulate them so heavily that they end up taking as many orders from politicians and bureaucrats as they do from customers. You may find some “enterprise” there but not much of the “free” part.
Many people make the mistake of thinking that free enterprise means special favors, protections and subsidies for business. But those things can only be granted by government to some businesses at the expense of other businesses, and also at the expense of many characteristics that define true free enterprise. Madison also addressed this problem in the 1792 essay:
“A just security to property is not afforded by that government, under which unequal taxes oppress one species of property and reward another species: where arbitrary taxes invade the domestic sanctuaries of the rich, and excessive taxes grind the faces of the poor; where the keenness and competitions of want are deemed an insufficient spur to labor, and taxes are again applied, by an unfeeling policy, as another spur…If the United States mean to obtain or deserve the full praise due to wise and just governments, they will equally respect the rights of property, and the property in rights” (James Madison, “On Property,” 1792).
What are the most important characteristics of free enterprise?

Private Property

Who “owns” resources such as tractors, factories, coal mines and restaurants? Someone has to! It’s really one or the other of these two options: 1) The owners are the people who created them or voluntarily traded something for them; or 2) The owners are the people with political power who seized those resources or forced others to pay to create them.

Sometimes a third alternative is suggested, namely, “common” ownership: “We all own it because it belongs to the people.” But genuine common ownership is woefully impractical. Everyone would have strong incentives to use and abuse the property and no one would have much reason to take care of it. “Common” ownership always reduces to those in political power deciding how and when everybody else gets to use the stuff.
Free enterprise requires a legal framework that recognizes and protects the private ownership of property—the right to create it, the right to use it, the right to trade it away—so long as in doing so, the private owner does not infringe on the equal rights of other property owners. If it’s yours, then it’s “theft” if somebody takes it without your consent, even if they claim they “need” it more or can put it to better use than you. Private property under free enterprise means you can use, invest and deploy it, and enjoy the fruits of success from efficiency and good judgment, but it implies no right to other people’s property if you fail.
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Free enterprise requires a legal framework that recognizes and protects the private ownership of property—the right to create it, the right to use it, the right to trade it away—so long as in doing so, the private owner does not infringe on the equal rights of other property owners.
This is essentially the perspective of America’s Founders, reflected in the Declaration of Independence, the Constitution, and other writings. Signers of the Declaration objected to arbitrary seizures and regulation of private property by the king, and the Constitution’s Framers provided protections for private property in law.
The Fourth Amendment declares that “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probably cause” (The United States Constitution, Fourth Amendment, 1791).
Protecting private property has a genuine, poverty-reducing result. Without it, economic growth is severely hampered because incentives to save, invest, take risks, build, create and produce are curtailed.

Free Prices

If you bring your product or service to the marketplace to trade with others, who determines the price? If it’s a government official, you don’t have free enterprise. If it’s voluntary agreement between buyer and seller—influenced of course by such things as consumer tastes, viable alternatives, supply and demand—then an indispensable condition for free enterprise is present. Just as critical is the fact that prices must be free to fluctuate as conditions and preferences change.

Prices in a free enterprise system send important signals to both producers and consumers. They tell us what is needed where and how urgently, what the most efficient use of a scarce resource is and when to produce or consume more and when to produce or consume less.
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Prices in a free enterprise system send important signals to both producers and consumers. They tell us what is needed where and how urgently, what the most efficient use of a scarce resource is and when to produce or consume more and when to produce or consume less.

Competition

Many businesspeople don’t like competition and would prefer to be protected from it by such artificial, political devices as subsidies, tariffs against foreign goods, or regulations that make it harder for the little guy or the newcomer to do business. True free enterprise is not just defending the interests of business. It means even large firms must behave as if they are surrounded by competition because if they don’t, they soon will be; the law must not grant them any special advantages or protections. When the law grants such special privileges, the result is called crony capitalism, which violates principles of free trade and rule of law. British philosopher John Locke recognized the importance of the rule of law in protecting natural rights:

“They [legislators] are to govern by promulgated established laws, not to be varied in particular cases, but to have one rule for rich and poor, for the favorite at court, and the countryman at plow” (John Locke, Second Treatise of Civil Government, 1690).
Madison believed one of the most important protections of the rule of law was the watchdog function of the three branches keeping one another in check.
“Ambition must be made to counteract ambition. The interest of the man, must be connected with the constitutional rights of the place. It may be a reflection on human nature, that such devices should be necessary to control the abuses of government. But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions...” (James Madison, Federalist No. 51, 1788)
Recognizing the many temptations that elected officials would have to write special advantages into law, interfering with competition in an open market, the Founders designed a system that was intended to keep unjust motives in check.
Competition appears in many forms--from existing companies producing the same thing to companies that produce reasonable substitutes to companies that develop a totally new, alternative technology. In one sense, every firm competes against every other firm for the consumer’s dollar. For example, if a person earns an extra thousand dollars, he or she might either buy a plane ticket and take a vacation, or might buy a new washer and dryer. In that instance, an airline is competing with an appliance manufacturer for the money.
Profit and loss are important elements of competition in a free marketplace. It’s easy to lose money. This might happen through lack of preparation, laziness, guessing wrong about the future market, and many other ways. But turning a profit and doing so year after year is both a challenge in competitive markets and a tribute to the entrepreneurial skill of business managers.
Free enterprise involves constant change. Consumers are always looking for new and better things. Companies that can’t keep up give way to those who can, producing what is called “creative destruction.” Businesses that cannot survive this process may seek special advantages from government, but if government protects them from the natural cycle of competition, the result is not “free enterprise.” It would be neither “free” nor “enterprising.”
Free enterprise is a dynamic force in the world. It says to each and every one of us: “If you want to do better for yourself, find a way to produce goods and services that please other people. You can’t command the patronage of customers, you must earn it.” Under the Constitution, no one has the right to command special privileges from government, either.
Free enterprise protects property, which according to James Madison “embraces every thing to which a man may attach a value and have a right; and which leaves to every one else the like advantage.” (James Madison, “On Property,” 1792)

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Law of Demand
As prices decrease, the quantity demanded increases or as prices increase, the quantity demanded decreases.
Natural rights
Rights which belong to us by nature and can only be justly taken away through due process.
Inalienable rights
Rights which belong to us by nature and can only be justly taken away through due process.
Liberty
Except where authorized by people through the Constitution, government does not have the authority to limit freedom.
Popular sovereignty
The power of government flows from the people.
Separation of powers
A system of distinct powers built into the constitution, to prevent an accumulation of power in one branch.
Checks and balances
Powers distributed among the branches of government allowing each to limit the application of power of the other branches and to prevent expansion of power of any branch.
Federalism
The people delegate certain powers to the national government, while the states retain other powers; and the people, who authorize the states and national government, retain all freedoms not delegated to the governing bodies.
Justice
Fairness or reasonableness in the way people are treated or decisions are made.
private property
The natural right of all individuals to create, obtain, and control their possessions, beliefs, faculties, and opinions, as well as the fruits of their labor.
limited government
Citizens are best able to pursue happiness when government is confined to those powers which protect their life, liberty, and property.
representative government
(or republican government) Form of government in which the people are sovereign (ultimate source of power) and authorize representatives to make and carry out laws.
republican government
(or representative government)Form of government in which the people are sovereign (ultimate source of power) and authorize representatives to make and carry out laws.
civil discourse
Reasoned and respectful sharing of ideas between individuals is the primary way people influence change in society/government, and is essential to maintain self-government.
Constitution
The fundamental principles by which a state or nation is governed. The United States Constitution, written in 1787, lays out the roles and powers of each of the three branches of government (legislative, executive, and judicial), the protections of due process and rule of law in the states, a republican form of government, and the manner in which to amend the document.
Thomas Jefferson
Jefferson was a Virginia plantation owner who was the principle author of the Declaration of Independence. Jefferson served as a legislator and governor in Virginia, as well as an ambassador to France, Secretary of State under George Washington, Vice President under John Adams, and the third President of the United States. During his political career, Jefferson founded the Democratic-Republican Party with James Madison, and he bought the Louisiana Purchase from France. After his presidency, Jefferson started the University of Virginia near his home, Monticello.
Bill of Rights
The first ten amendments to the Constitution, ratified in 1791, which limit government power and protect individual liberties, including the freedoms of speech, press, religion, petition, and assembly, as well as protections against cruel and unusual punishment, unreasonable search and seizure, and other due process rights.
Second Amendment
Ratified in 1791, it protects citizens’ rights to create a militia and to bear arms. “A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms, shall not be infringed.”
Due Process
The government must interact with all persons according to the duly-enacted laws; applying these rules equally among all persons.
Equality
Every individual is equal to every other person with respect to natural rights and treatment before the law.
Consent of the governed
The authority of the government must come from the people through elections and through the people’s interaction with government.
Individual responsibility
Individuals must take care of themselves and their families, and be vigilant to preserve their liberty and the liberty of others.
Rule of law
Government officials and citizens all abide by the same laws regardless of political power.
Declaration of Independence
The document written in 1776 by the Founders to send to Britain’s King George III in which independence from Britain was declared and the reasons for the separation were explained.
Articles of Confederation
The first national government document developed in 1781 by the Founders. The Articles created a federal legislative branch, but there was no executive or judiciary. The states retained most of the governmental powers.
Founders
The group of people who wrote and influenced the Declaration of Independence, the Articles of Confederation, the United States Constitution, and the United States Bill of Rights. These men were instrumental in establishing the nation and its governmental documents and practices.
Federalist Papers
A series of 85 essays written to convince the people of New York to ratify the Constitution. The authors were James Madison, Alexander Hamilton, and John Jay. These documents are considered to be the most authoritative explanation of the political theory of the Constitution.
First Amendment
Ratified in 1791, it protects the freedom of speech, the freedom of religion, freedom of the press, freedom to assemble, and freedom to petition the government. “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.”
Law of Supply
As the price drops, the quantity supplied also drops.
Fourth Amendment
Ratified in 1791, it protects citizens’ rights against unreasonable searches and seizures of property and explains that warrants must be issued with probable cause. “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”
Fifth Amendment
Ratified in 1791, it protects the right indictment by a jury, against double jeopardy, self-incrimination, loss of life, liberty, or property without due process, and just compensation for private property taken for public use. “No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”
Tenth Amendment
Ratified in 1791, it states that the powers not enumerated or delegated in the Constitution are reserved for the states and the people. “The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.”
Eighth Amendment
Ratified in 1791, it protects against excessive bail and fines and cruel and unusual punishments. “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”
Ninth Amendment
Ratified in 1791, the listing of certain rights protected by the Constitution cannot be used to deny rights not enumerated in the document. “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.”
Alexander Hamilton
One of the Founding Fathers of the United States, Alexander Hamilton served as General Washington’s chief of staff, promoted the ratification of the Constitution in the Federalist Papers, and founded the nation’s financial system and first political party.
James Madison
Madison was a Framer who was instrumental in writing the Constitution and Bill of Rights. He is known as the “Father of the Constitution.” Madison partnered with Alexander Hamilton and John Jay to write the Federalist Papers in support of the ratification of the Constitution. He also served as a member of the Virginia House of Delegates, the United States House of Representatives, Secretary of State under Thomas Jefferson, and the fourth president of the United States.
George Washington
First President of the United States, George Washington served as commander-in-chief of the Continental Army during the American Revolution and was one of the Founding Fathers of the United States.
John Locke
An English philosopher and physician, John Locke was one of the most influential Enlightenment thinkers and is known today as the Father of Classical Liberalism.
Continental Congress
The Continental Congress, comprised of delegates from 12 of the 13 American colonies, represented the colonists during and after the American Revolution. The Continental Congress issued the Declaration of Independence and ratified the Articles of Confederation.
King George III
King George III was the King of Great Britain at the time of the American Revolution. His actions towards the American colonies, outlined in the Declaration of Independence, spurred the American Revolution.
Great Depression
Spanning ten years from 1929 to 1939, the Great Depression was one of the longest-lasting economic downturns in the history of the United States affecting the U.S. and most of the world.
Preamble
An introductory statement, preface, or introduction.
Tyranny
Cruel and unfair treatment by people with power over others.
Tyrannical
Using power over people in a way that is cruel and unfair.
John Adams
Before becoming the second President of the United States, John Adams served as the country’s first Vice President under George Washington. Adams was an advocate of American independence from Britain and a Federalist.
John Jay
Founding Father John Jay was one of the signers of the Treaty of Paris and served as the first Chief Justice of the United States. He was also one of the authors of the Federalist Papers.
Third Amendment
Ratified in 1791, it protects citizens against the quartering of soldiers in private homes without their approval. “No soldier shall, in time of peace be quartered in any house, without the consent of the owner, nor in time of war, but in a manner to be prescribed by law.”
Sixth Amendment
Ratified in 1791, it protects the rights of impartial jury trials, the right to be informed of the accusations against you, the right to be confronted by witness, and the right to be assisted by counsel. “In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the state and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the assistance of counsel for his defense.”
Seventh Amendment
Ratified in 1791, it protects the right of jury trials in law suits dealing with more than twenty dollars and protects against reexamination of the trial in any court if decided by a jury. “In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise reexamined in any court of the United States, than according to the rules of the common law.”
Alexis de Tocqueville
French political thinker and historian, Alexis de Tocqueville is best known for his works Democracy in America and The Old Regime and the Revolution. He visited the U.S. in the 1830s and wrote admiringly about many aspects of American law and society.
Democracy in America
Written by Alexis de Tocqueville after visiting the United States, Democracy in America contains de Tocqueville’s analysis of and reflections on the United States’ democratic system and society. The first volume was published in 1835 and the second in 1840.
Magna Carta
Written in 1215, it is the oldest document in the British and American heritage of rights. Contributed to the adoption of the First, Third, Fourth, Fifth, Sixth, and Eighth Amendments of the Bill of Rights, and speaks of these rights as ancient.
Two Treatises of Civil Government
Written by John Locke in 1690, the Two Treatises of Civil Government criticize absolute power for kings and outline Locke’s suggestions for a more civilized society based on natural rights and the social contract.
Thirteenth Amendment
The Thirteenth Amendment to the Constitution abolished slavery and involuntary servitude, except as punishment for a crime. “Section 1. Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction. Section 2. Congress shall have power to enforce this article by appropriate legislation.”
Framers
The group of people who actually attended the Constitutional Convention and participated in writing the Constitution.
Fourteenth Amendment
Ratified in 1868, it states that all people born or naturalized in the United States are citizens and ensures that “No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”
Sixteenth Amendment
Ratified in 1913, the Sixteenth Amendment gave Congress the ability to collect income taxes. “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census of enumeration.”
Eighteenth Amendment
atified in 1919, the Eighteenth Amendment introduced Prohibition, the period of United States history when the manufacture, sale, and transportation of alcohol was made illegal throughout the country. “Section 1. After one year from the ratification of this article the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes is hereby prohibited. Section 2. The Congress and the several states shall have concurrent power to enforce this article by appropriate legislation. Section 3. This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by the legislatures of the several states, as provided in the Constitution, within seven years from the date of the submission hereof to the states by the Congress.”
Twentieth Amendment
The Twentieth Amendment was ratified in 1933, and it establishes procedures for presidential succession and the start and end of federal officials’ terms of office. “Section 1. The terms of the President and Vice President shall end at noon on the 20th day of January, and the terms of Senators and Representatives at noon on the 3rd day of January, of the years in which such terms would have ended if this article had not been ratified; and the terms of their successors shall then begin.
Twenty-First Amendment
In 1933, the Twenty-First Amendment repealed the Eighteenth Amendment, ending Prohibition. “Section 1. The eighteenth article of amendment to the Constitution of the United States is hereby repealed. Section 2. The transportation or importation into any state, territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited. Section 3. This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by conventions in the several states, as provided in the Constitution, within seven years from the date of the submission hereof to the states by the Congress.”
English Bill of Rights
Passed by the British Parliament in 1689, the English Bill of Rights limited the power of the British monarch, outlined the rights of the Parliament, and guaranteed Protestants the right to bear arms.
Parliament
The legislative body of the United Kingdom (known as Great Britain or England during the Founding era).
Benjamin Franklin
One of the Founding Fathers of the United States, Benjamin Franklin was a statesman, author, publisher, scientist, inventor and diplomat. He served in the Second Continental Congress during the American Revolution and helped draft the Declaration of Independence. In addition, Franklin helped negotiated the Treaty of Paris which ended the Revolutionary War and later served as a delegate to the convention that produced the U.S. Constitution.
Suffrage
The right to vote.
Republic
A government in which the power belongs to citizens through the right to vote.
Fifteenth Amendment
Ratified in 1870, it states that the right could not be restricted based on “race, color, or previous condition of servitude.” “Section 1. The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any state on account of race, color, or previous condition of servitude. Section 2. The Congress shall have power to enforce this article by appropriate legislation.”
Seventeenth Amendment
Ratified in 1913, the Seventeenth Amendment introduced direct election of Senators. “The Senate of the United States shall be composed of two Senators from each state, elected by the people thereof, for six years; and each Senator shall have one vote. The electors in each state shall have the qualifications requisite for electors of the most numerous branch of the state legislatures. When vacancies happen in the representation of any state in the Senate, the executive authority of such state shall issue writs of election to fill such vacancies: Provided, that the legislature of any state may empower the executive thereof to make temporary appointments until the people fill the vacancies by election as the legislature may direct. This amendment shall not be so construed as to affect the election or term of any Senator chosen before it becomes valid as part of the Constitution.”
Nineteenth Amendment
Ratified in 1920, the amendment stated that a citizen’s right to vote must not be restricted based on gender. “The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any state on account of sex. Congress shall have power to enforce this article by appropriate legislation.”
Direct Democracy
Direct democracy is a political system in which the people vote directly on policies or laws, as opposed to voting for representatives who enact laws on their behalf.
Arbitrary
Not planned or chosen for a particular reason; done without concern for what is fair or right.
Judicial Review
The process by which courts analyze the constitutionality of an act of government.
Majority rule/minority rights
laws may be made with the consent of the majority, but only to the point where they do not infringe on the inalienable rights of the minority.
Fiat
An arbitrary order or decree.
Property
Something that is owned by a person, business, etc. This includes possessions, beliefs, faculties, and opinions, and the fruits of one's labor.
Democracy
A government in which the power is held by the people.
Electoral College
A body of electors chosen by each state to vote for the president and vice president of the United States.
Virtue
Conduct that reflects universal principles of moral and ethical excellence essential to leading a worthwhile life and to effective self-government. For many leading Founders, attributes of character such as justice, responsibility, perseverance, etc., were thought to flow from an understanding of the rights and obligations of men. Virtue is compatible with, but does not require, religious belief.