The Free Market

Thoughts on the founding of capitalism and the importance of free enterprise

I have recently spoken with business owners and entrepreneurs concerned over the rising costs of imported raw materials—many of which, such as precious minerals, cannot be easily obtained domestically. This issue’s letter is a response to these worries—an opening volley for a conversation that should take place without rancor among fiscally conservative minds. From time to time, it is healthy to recall a brief history on the strengths of capitalism as intended by our founding fathers and the great minds that created our nation.

In the Wealth of Nations, Adam Smith, the father of capitalism, said, “By directing industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Proponents and critics of this philosophy agree that unfettered capitalism can create market failures, inequality, and the potential for monopolies, so some guardrails are necessary for a stable, equitable economy. However, there is a distinction between policy aimed at protecting small businesses versus legislation that passes additional taxes onto entrepreneurs for importing raw materials from the global market.

Milton Friedman, a Nobel laureate in economic sciences and a staunch champion for individual liberty, said in Capitalism and Freedom, “There are few measures we could take that would do more to promote the cause of freedom at home and abroad. We could assume a consistent and principled stance by saying to the rest of the world: We believe in freedom and intend to practice it. No one can force you to be free. That is your business. But we can offer you full cooperation on equal terms to all. Our market is open to you. Sell here what you can and wish to. Use the proceeds to buy what you wish. In this way, cooperation among individuals can be worldwide yet free.”

Most economists largely agree that the impacts of taxes on imported goods have few benefits and, at best, are a negative-sum game. Theoretically, taxes on imports can temporarily boost domestic industries, increase employment opportunities in the short run, and create additional revenue for governments; however, these practices damage the free market by decreasing overall trade, incur retaliatory taxes from global trading partners, and inexorably decrease jobs and GDP in the long term. And ultimately, the majority of the costs are passed on to businesses and consumers.

Friedman also said, “Concentrated power is not rendered harmless by the good intentions of those who create it.”

Policy is never created with the intention of causing harm to markets; however, perceived short-term gains are often prioritized over long-term growth. Our current economy promises neither. Policy uncertainty causes unpredictable markets, which stifles investments and growth. J.P. Morgan Research and Goldman Sachs project a 60 percent and 65 percent chance, respectively, that we will enter a recession within the next year as a direct result of undue taxes on imports against our global trading partners. Apollo Global Management places the chances higher at 90 percent, while Morgan Stanley has the number at 40 percent.

A recession, from the National Bureau of Economic Research, is a significant decline in economic activity that is spread across the economy, lasting more than a few months.

Indicators of a recession are largely measured by assessing the labor market and commodities, such as oil and gas. Then there is the most unpredictable factor: the mood of the populace.

Though jobs seem stable, the price of oil is low. Generally, savings at the pump are welcomed, but there has not been an increase in supply—no new drilling. In fact, forecasts from Goldman Sachs project the price at $56 per barrel of WTI Crude in 2026, and OPEC+ predicts a small surplus this year. Prices below $60 per barrel impact new drilling efforts, reducing investment and closing down drilling rigs.

If supply is not the problem, Macro Economics 101 teaches us that the price decrease must be due to demand, indicating a likely retraction in consumer travel and spending.

Maybe our policymakers have a few good points regarding unfair practices with some of our trading partners; however, drastically taxing our markets during periods of uncertainty will likely result in unfavorable outcomes for everyone involved and contribute to the impending recession.

These practices are not the intention of those who built our capitalistic system.
Or in the words of Friedman, “Government should be a referee, not an active player,” in our market. The design of capitalism is to use policy to enforce contracts, and the government’s role is to provide a strong military and to protect citizens. Anything beyond this is government overreach. Not too far in the not-so-distant past, the financial sector and entrepreneurs agreed with this school of thought.

Why are we suddenly dismissing the breadth of knowledge that has shaped us into one of the wealthiest nations in the world?

Shackling the proverbial invisible hand of capitalism by taxing our global trading partners contradicts the principles that have made the U.S. a global economic powerhouse.