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What is a Private Sector?

By Dale Marshall
Updated May 16, 2024
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A private sector is that part of a nation’s economy not controlled by its government. It includes all for-profit and not-for-profit enterprises, and accounts for all economic activity not initiated by the government, such as the construction of factories and other buildings, the purchase of raw materials to be converted to finished goods, and the wages and salaries paid to workers. The other part of a national economy is the public sector, which is the part of the economy controlled by the government, including such things as salaries paid to its employees, construction of government buildings or the purchase of weapons, vehicles and uniforms for its military.

Few modern economies, however, have private sectors that act solely in their own interests, motivated primarily by profit or mission. Most governments influence their private sectors' actions, either directly or indirectly, through regulations like safety requirements and financial mandates, such as wage and hour laws. It’s difficult to say with any precision what actions private sectors would take without this government influence, but it’s inaccurate to suggest that their behavior is, in fact, completely private. Thus, when analyzing modern economies, it’s easy to differentiate between public and private sectors, but more difficult to differentiate between the two when analyzing the actions of those private sectors. For instance, compensation by private businesses is influenced by the government’s wage and hour laws, so that wage and salary amounts aren’t set solely at the private sector’s discretion.

Significant government influence in private sectors is a relatively recent phenomenon. In the United States, it began in earnest in the early 20th century, largely in response to what were perceived as excesses of unbridled capitalism during the industrial revolution. The passage of legislation controlling child labor, regulating the food and drug industry, and mandating hour and wage standards all had a dramatic impact on the private sector’s actions. Modern legislation has updated those earlier regulations, as well as mandating additional employer activities, such as specific actions in protecting the safety and health of employees and monitoring the results.

Government influence in the private sector is considered by some to be beneficial because it’s so often oriented toward accomplishing socially desirable goals, such as stable families and safe transportation. Some political models, in fact, promote total government control of the entire economy, totally supplanting the private sector. Two of the most notable attempts to do so took place in the 20th century in the Soviet Union and China, two large communist nations.

The Soviet Union, the first nation to attempt a comprehensive command economy, nationalized all businesses after its 1917 revolution. The agrarian nation’s sheer size gave it momentum as it attempted to transform itself to a heavily industrialized nation, and the economy grew under centralized control. After World War II, though, when the industrialization was as complete as practical, the process of economic decision-making was dominated by politicians and political ideology, rather than economic necessity, which led to a continual deterioration of the economy until the government’s collapse in 1991.

China’s rigid government control of its economy, which began when the People’s Republic of China was founded in 1949, was relaxed in 1978 in response to a stagnant command economy marked by inefficiency and corruption. The government allowed the establishment of sole proprietorships and small businesses. The loosening of restrictions continued, and by 2010, the Chinese economy had expanded to a point 90 times larger than it was in 1977. While the government has remained as the dominant factor in some industries, such as heavy manufacturing and energy, it has adopted many capitalist management principles. The expansion of China’s private sector has been the driving force in the unprecedented growth of its economy.

These experiments, which impacted the lives of billions of people, made it clear that a private sector is crucial to an economy’s success. An unregulated private sector, however, such as was seen during the American industrial revolution, is widely perceived as being harmful to the people and ultimately to society as a whole. Historically, then, the most successful modern economies are those that have strong but regulated private sectors.

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Discussion Comments

By EliseP — On May 11, 2011

What economies do not have private sectors and why?

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