Touching on the principle of freedom is a timeless and often successful political strategy because it is easy to communicate and harkens back to a prideful national identity. Former President George W. Bush has called the free market “more than economic theory,” “the engine of social mobility,” and “the highway to the American dream.” Former President Barack Obama believes that freedom is the “engine of our progress” through which “Americans have always pursued our dreams.”
But are politicians practicing what they preach? Democrats and Republicans have outdone each other in increasing the federal deficit each year. Large-scale tariffs and subsidy programs have flourished under both sides, especially when justified as supporting American business. We cannot seem to stop bailing out large companies, distorting their incentives, and effectively choosing which are successful.
There is a real danger here, and it is not that politicians are deliberately deceiving their constituents and running back on promises. Rather, it is that the United States has developed a legitimate confusion as to what “free market” means.
Of the two leading parties in the United States, Republicans have been able to more successfully claim ties to free-market roots, but this has skewed our narrative. By roundly labeling the other side “socialists,” even those whose views are quite moderate, leading Republican officials have created a false dichotomy. Additionally, prominent Democrats have at times demonized capitalism as “irredeemable,” leading some voters to believe that the party thinks a less free market is the only solution. In actuality, both parties promote policies that contribute to and hinder a more free, competitive market. Labeling policies under these singular, fraught epithets can be severely misleading.
In the confusion, some innovative policies which could contribute to a more efficient system have been branded “anti-free market.” With its wide applicability obstructing a common goal for us to shoot for as a nation, possibly “freedom” has become too easy a term for politicians to communicate.
While a large majority of Americans view the free market favorably, a similarly large majority actually favor keeping government spending at or above its current level. On one hand, this could simply be a case of wishing to have mutually exclusive things. But it could also signal a desire to reconcile the two ideas and a willingness to believe we can have both at once. I think that by revisiting our definition of the free market, we can see that some government intervention may not be as contrary to free-market principles as expected.
What is a Free Market?
In broad terms, the free market is a way of organizing commerce and society. Adam Smith’s famous 1776 Inquiry into the Nature and Causes of the Wealth of Nations helped convince the world that the feudal system—where one’s occupation was largely predetermined at birth—was not the only stable way to structure society. Because free citizens would naturally be drawn to industries and crafts where there was the greatest profit, and therefore the greatest need, a free market system could also provide for everyone’s desires. This freedom was important to Smith because it allowed for the division of labor, which would increase economic efficiency dramatically and, in turn, a nation’s wealth.
Although the exact characteristics of a free market society have been debated since Milton Friedman describes the general structure as “coordination through voluntary co-operation”. Ideally, by voluntarily producing what will earn them the most and purchasing what they desire most with how much money they believe it is worth, each individual contributes to a more prosperous and efficient society. This is why a free market has a smaller role for the government. If a governing body is controlling or interfering in an industry, optimal quantities and prices tend to be distorted, resulting in a less desirable distribution of goods and services.
However, there is still a place for government. First, as Friedman describes, the government should serve as an unbiased umpire, determining the rules of the game we all play by. Next, law and order need to be maintained to avoid coercion, which compromises voluntary action. Monopolies should be confronted for a similar reason. By reducing alternate options, they also impair voluntary choice. Government action can also be justified to achieve common goals that are near impossible to coordinate through individual action. Building roads is a classic example. Finally, sometimes government intervention is needed to fix market failures. Policies such as pollution caps, for example, help address the negative environmental harm that is not accounted for in the price of fossil fuels.
What did our Founding Fathers think of this system? For one, they tended to agree that the free market was “efficient — as the best way of generating a large flow of goods and services — and as a way of protecting other personal liberties from despots” according to Dr. Hugh Rockoff, a professor of economics at Rutgers University and co-author of History of the American Economy. However, what was and was not allowed to influence commerce did not have a unanimous answer. For example, some Founding Fathers saw no problem with extensive price-fixing in their local administrations, while others, such as Madison, despised the idea of the government supporting one industry over another. Alexander Hamilton brought yet another viewpoint, favoring “economic nationalism” and rejecting laissez-faire policy to bolster industry through government intervention. Rather than an innately perfect system, Rockoff asserts that both Smith and the Founding Fathers saw the free market as “innocent until proven guilty.”
In the end, the most radical aspect of our Founding Fathers’ thinking was not an unshaken belief in efficient markets, but their commitment to preserving voluntary action. The inalienable rights of “Life, Liberty and the pursuit of Happiness,” originally outlined in the Declaration of Independence, are meticulously protected by the Constitution and Bill of Rights to the best of the Founder’s abilities. To the Founding Fathers, where the free market excelled was in its preservation of equality of opportunity.
Shifting the Public Discourse
By applying these definitions of the free market to modern-day issues, we can see them in a new light:
Regulation can at times be quite harsh and demanding on businesses, reducing their efficiency, increasing costs on taxpayers, and perverting private market decisions. However, when executed correctly, regulation contradicts none of the core tenets of a free market because it is accepted that the government must defend the “rules of the game”. Yet proposed regulations are often dismissed as “socialist,” while Reagan-era deregulation was deemed a “free market” revolution.
If one area of finance, for example, is deemed illegal and subsequently monitored, that is not necessarily harming the free market. The playing field is not less even, only smaller, and we are still free to do whatever we want within those bounds. We should center not on whether regulation itself is an evil, which is usually the narrative, but which forms of regulation we believe are creating a more just, fair world and which are little more than glorified forms of corporate harassment and bureaucratic bloating.
Generally, reducing taxes promotes a freer market by giving citizens a broader choice of what to voluntarily spend their money on. So, if we are only funding the government for the essential activities outlined above, then the issue becomes not how much to tax (the answer is as little as possible), but where that money should come from.
While arguments from the left or right often center on rates for the income tax, focusing more on taxing wealth and estates is probably the best route to achieving what the Founding Fathers wanted out of a free market. Such a policy would reduce the role of inheritance—something Thomas Jefferson himself saw as “manifestly absurd”—and stop penalizing “new” income earned through labor. This aligns perfectly with the Founders’ objective of equality of opportunity.
I am not here to convince you that a wealth tax is the best route or would even be easy. In fact, instituting one produces a host of problems. A high wealth tax could disincentivize high-risk, high-reward bets from both entrepreneurs and lenders and dampen investment country-wide by reducing rates of return. It would also be a demanding task to measure the value of each person’s wealth or estate and address tax evasion. But it is deceptive for political leaders to dismiss the idea as a “tenet of Marxism.”
As noted earlier, one of the roles of a government in a free market system is to eliminate monopolies, which obstruct voluntary choice and eliminate the efficiencies that make a free market so great in the first place. So, although government control over industry is a serious matter that has its distinct downsides, we must weigh those downsides against the alternative. The utility gained may exceed the potential costs.
Yet many politicians either do not recognize or do not want to recognize this nuance. The debate around the healthcare system in the United States is a perfect example. It seems we have artificially restricted our debate to two options: the “free market” ideal of private insurance where each person is responsible for their coverage, or the “socialist” ideal of single-payer healthcare where each person is rationed care by the government, similar to Britain’s NHS. The problem is, if the free market is to be defined as “coordination through voluntary cooperation,” neither of these satisfy the conditions. Insurance and pharmaceutical monopolies’ misaligned incentives are a horrible proxy for individual choice, while a single-payer option takes the individual out of the equation. Our narrow conception of what a free market is has limited our creativity and shielded us from finding a truly superior solution to the system we have now. After all, if the Founding Fathers considered the free market a generally good system until proven faulty, what would be considered defective if not drugs priced 10x higher than in Canada and a healthcare system in which the average person pays more and receives less than most other developed countries?
Potential For Common Ground
Our Founding Fathers never actually agreed in the first place about what our nation wanted from a free market. So it would be foolish to ask that we settle once and for all on a single definition for our ideal economic system—especially when part of what makes America great is our open debate and exchange of ideas. But disagreeing on the merit of something is different than disagreeing on what something is. Far too often, one group will advocate for a policy only for another to respond by criticizing a completely different concept.
Falsely dividing our options into a binary choice between crony capitalism or full-blown socialism is a great way to stop even the most sensible of proposals in their tracks. A more concrete and nuanced definition of the free market in our public dialogue could help us see that some policy proposals align with our beliefs more than we thought they did.