LAISSEZ-FAIRE

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'Laissez-faire' () is a French phrase meaning "let it be" (litterally,"Let do"). From the French diction first used by the 18th century physiocrats as an injunction against government interference with trade, it became used as a synonym for strict free market economics during the early and mid-19th century. It is generally understood to be a doctrine that maintains that private initiative and production are best allowed to roam free, opposing economic interventionism and taxation by the state beyond that which is perceived to be necessary to maintain individual liberty, peace, security, and property rights.^[1] Free-market anarchists take the idea to its full length by opposing all taxation.
In the laissez-faire view, the state has no responsibility to engage in intervention to maintain a desired wealth distribution or to create a welfare state to protect people from poverty, instead relying on charity and the market system. Laissez-faire also embodies the notion that a government should not be in the business of granting privileges. As such, advocates of laissez-faire support the idea that the government should not create legal monopolies or use force to damage de facto monopolies. Supporters of laissez-faire also support the notion of free trade on the grounds that the state should not use protectionist measures, such as tariffs and subsidies, in order to curtail trade through national frontiers.
In the early stages of European and American economic theory, laissez-faire economic policy was in conflict ''mercantilist'', which had been the dominant system of the United Kingdom, Spain, France and other European countries, during their rise to power.
The term ''laissez-faire'' is often used interchangeably with the term "free market". Some use the term ''laissez-faire'' to refer to "let do, let pass" attitude for matters outside of economics.^[2]
Laissez-faire is associated with classical liberalism, libertarianism, and Objectivism. It was originally introduced in the English-language world in 1774, by George Whatley, in the book ''Principles of Trade'', which was co-authored with Benjamin Franklin. Classical economists, such as Thomas Malthus, Adam Smith and David Ricardo did not use the term. Bentham employed it, but only with the advent of the Anti-Corn Law League did the term receive much of its (English) meaning.^[3]

Contents

Economic theory

Political theory

History of Laissez-faire

Europe

United States

The Great Depression

Return of market economies after the Second World War

Laissez-faire today

References

Bibliography

Further reading

Comparative economic systems

See also

Economic theory

The ''laissez-faire'' means that the neoclassical school of economic thought holds a pure or economically liberal market view: that the free market is best left to its own devices, and that it will dispense with inefficiencies in a more deliberate and quick manner than any legislating body could. The basic idea is that less government interference in private economic decisions such as pricing, production, consumption, and distribution of goods and services makes for a better, or more efficient, economy.
Economist Adam Smith in his book 'Wealth of Nations' argued that the ''invisible hand'' of the market would guide people to act in the public interest by following their own self-interest, since the only way to make money would be through voluntary exchange, and thus the only way to get the people's money was to ''give the people what they want.''
Smith pointed out that one does not get one's dinner by appealing to the brother-love of the butcher, the farmer or the baker. Rather one appeals to their self interest, and pays them for their labour.

Political theory

Laissez-faire is largely premised on the notion that all citizens have equality in rights, and that governments should not be in the business of enforcing an equality of outcome through government redistribution and other actions. As such, advocates of laissez-faire favor a state that is neutral between the various competing interest groups that vie for privileges and political power in a country. Supporters of laissez-faire are critical of mixed economies on the grounds that it leads to an interest-group politics where each group is seeking to benefit itself at the expense of another and the consumer.

History of Laissez-faire

Europe

In 19th century Britain, laissez-faire found a small but strong following by such Manchester Liberals as Richard Cobden and Richard Wright. In 1867, this resulted in a free trade treaty being signed between Britain and France, after which several of these treaties were signed among other European countries. The newspaper ''The Economist'' was founded earlier in 1843, and free trade was discussed in such places as ''The Cobden Club'', founded a year after the death of Richard Cobden, in 1866. ^{[4] [5]}
However, laissez-faire was never the main doctrine of any nation, and at the end of the eighteen-hundreds, European countries would find themselves taking up economic protectionism and interventionism again. France for example, started cancelling its free trade agreements with other European countries in 1890. Germany's protectionism started (again) with a December 1878 letter from Bismarck, resulting in the iron and rye tariff of 1879.

United States

Although the period before the American Civil War was notable for the limited extent of the federal government, there was still a considerable degree of government intervention in the economy--particularly after the 1820s. Notable examples of government intervention in the period prior to the Civil War include the establishment of the First National Bank and Second National Bank as well as various protectionist measures (e.g. the tariff of 1828). Several of these proposals met with serious opposition, and required a great deal of horse trading to be enacted into law. For instance, the First National Bank would not have reached the desk of President Washington in the absence of an agreement that was reached between Alexander Hamilton and several southern members of Congress to locate the capital in the District of Columbia.
Most of the early proponents of a mixed economy in the United States subscribed to the American School (economics). This school of thought was inspired by the ideas of Alexander Hamilton, who proposed the creation of a government sponsored bank and increased tariffs to favor northern industrial interests. Following Hamilton's death, the more abiding protectionist influence in the antebellum period came from Henry Clay and his ''American System''.
Following the Civil War, the movement towards a mixed economy accelerated with even more protectionism and government regulation. In the 1880s and 1890s, significant tariff increases where enacted (see the McKinley Tariff and Dingley Tariff). Moreover, with the enactment of the Interstate Commerce Act of 1887, the Sherman Anti-trust Act, the federal government began to assume an increasing role in regulating and directing the country's economy.
The Progressive Era saw the enactment of even more controls on the economy, as evidenced by the Wilson Administration's New Freedom program.

The Great Depression

Main articles: Causes of the Great Depression

There is much debate over the relationship between laissez-faire economics and the onset of the Great Depression. Some economists and historians (such as John Maynard Keynes) argue that laissez-faire economic policy fostered the conditions under which the Great Depression arose. Other scholars, such as Milton Friedman and Murray Rothbard, say that the Depression was not a result of laissez-faire economic policy but of government intervention on the monetary and credit system. The issue, as outlined below, remains heavily debated in economic, historical, and political spheres.
In Keynes's 1936 work, ''The General Theory of Employment Interest and Money'', Keynes introduced concepts and terms that were intended to help explain the Great Depression. One argument for a laissez-faire economic policy during a recession was that if consumption fell, then the rate of interest would fall. Lower interest rates would lead to increased investment spending and demand would remain constant. However, Keynes believed that there are reasons why investment does not necessarily automatically increase as a response to a fall in consumption. Businesses make investments based on expectations of profit. According to Keynes, if a fall in consumption appears to be long-term, businesses analyzing trends will lower expectations of futures sales. Therefore, according to Keynes, the last thing they are interested in doing is investing in increasing future production even if lower interest rates make capital inexpensive. In that case, according to Keynes and contrary to Say’s law, the economy can be thrown into a general slump. ((Keen 2000:198)) Keynesian economists and historians argue that this self-reinforcing dynamic is what happened to an extreme degree during the Depression, where bankruptcies were common and investment, which requires a degree of optimism, was very unlikely to occur. The solution to this problem, according to Keynes, was to alleviate market instability through government intervention. In his view, since private actors cannot be counted on to create aggregate demand during a recession, the government has the responsibility to create demand.^[6]

As a consequence of this view, Keynes seems to have had a more favorable view of the fascist governments of the time, because, as he goes on to highlight in the foreword to the German edition of 'The General Theory of Employment Interest and Money'', "the theory of aggregated production, which is the point of ['The General Theory of Employment Interest and Money'], nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire." ^[7]
Friedrich August von Hayek and Milton Friedman, in contrast, argued that the Great Depression was not a result of laissez-faire economic policy but a result of too much government intervention and regulation upon the market. They note that the Great Depression was the longest depression in U.S. history and the only depression in which the government heavily intervened. In Friedman's work, ''Capitalism and Freedom'' he argues: "A governmentally established agency--The Federal Reserve System--had been assigned responsibility for monetary policy. In 1930 and 1931, it exercised this responsibility so ineptly as to convert what otherwise would have been a moderate contraction into a major catastrophe."^[8]
Furthermore, the U.S. Federal government had created a fixed currency pegged to the value of gold. At one point the pegged value was considerably higher than the world price which created a massive surplus of gold. Demand for gold surged and the world price increased but the pegged value was too low in the U.S. and this created a massive migration of gold from the U.S. Milton Friedman and Hayek both argued that this inability to react to currency demand created a run on the banks that the banks were no longer able to handle, and that and the fixed exchange rates between the dollar and gold both worked to cause the Great Depression by creating, and then not fixing, deflationary pressures.^[9] He further argued in this thesis, that the government inflicted more pain upon the American public by first raising taxes, then by printing money to pay debts (thus causing inflation), the combination of which helped to wipe out the savings of the middle class. Friedman concludes that the effects of the Great Depression were not mitigated until after World War II when the economy saw a return to normalcy with the elimination of many price controls. This opinion specifically blames a combination of Federal Reserve policies and economic regulation by the U.S. government as causes of the Great Depression, and that the depression was exacerbated by raising income taxes on the highest incomes from 25% to 63%, a "check tax", and the Smoot-Hawley tariff. Friedman believed that Herbert Hoover's interventionist policies and Franklin Roosevelt's New Deal further lengthened and worsened the depression. Friedman concludes, "The Great Depression in the United States, far from being a sign of the inherent instability of the private enterprise system, is a testament to how much harm can be done by mistakes on the part of a few men when they wield vast power over the monetary system of a country."^[10]

Return of market economies after the Second World War

Main articles: Neoliberalism, Ordoliberalism, Social market economy, Reaganomics, Thatcherism

After the Second World War, laissez-faire thinking was in part resurrected through the Austrian School and Chicago School, and such liberal thinkers as Ludwig von Mises, Friedrich Hayek and Milton Friedman, who argued that if the Free World was truly defined by its freedom, then its citizens should have full economic freedom. Hong Kong was the first territory to embrace laissez-faire economic policy in this era, having officially followed that path since the 1960s.
Germany implemented, with broad coalition support between the Christian Democratic and Social Democratic parties, what is called the Social market economy, which restored Germany's war-devastated economy by letting prices float freely. Later in the 1970s and 1980s, the ideas of the Chicago School found "resonance" in Pinochet's economic policies in Chile, Ronald Reagan's Reaganomics, and in the privatization policies of Thatcher.
The return of market economies after the Second World War is still a far cry from laissez-faire proper. The United States, in the 1980s, for example, sought to protect its automobile industry by "voluntary" export restrictions from Japan.^[11] One scholar wrote about the early 1980s that:

Laissez-faire today

Most modern industrialized nations today are not representative of laissez-faire principles or policies, as they usually involve significant amounts of government intervention in the economy. This intervention includes minimum wages, corporate welfare, anti-trust regulation, nationalized industries, and welfare programs among other forms of government intervention. Subsidy programs for businesses and agricultural products; government ownership of some industry (usually in natural resources); regulation of market competition; economic trade barriers in the form of protective tariffs - quotas on imports - or internal regulation favoring domestic industry; and other forms of government favoritism.
According to the 2007 Index of Economic Freedom issued by the Heritage Foundation, the seven countries with the most free economies are currently the following: Hong Kong, Singapore, Australia, United States, New Zealand, United Kingdom and Ireland (all of them former constituents of the British Empire). Hong Kong is ranked number one for 12 consecutive years in the Index which attempts to measure "the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself." Milton Friedman praised the Hong Kong Laissez-faire approach to the economy and credits that policy for the rapid move from poverty to prosperity in 50 years.^[12] Much of this growth came under British colonial control prior to the 1997 takeover by Communist China.
However at a press conference on 11 September 2006, Donald Tsang, the Chief Executive of Hong Kong said that "Positive non-interventionism was a policy suggested by a previous Financial Secretary many years ago, but we have never said that we would still use it as our current policy... We prefer the so-called 'big market, small government' policy." Responses in Hong Kong were widely divided, some see it as an announcement to abandon the positive non-interventionism, others see it as a more realistic response to the government policies in the past few years, such as the intervention of the stock market to prevent brokering.^[13].

References

1. Laissez-Faire thought in Massachusetts, 1790-1880, Oscar Handlin, , , Journal of Economic History, 1943
2. As well as being used in economic management, the term has also been applied more broadly to a style of management and leadership, where it typically describes any form of control where the controlled are given most or all of the decision-making power. In this limited usage, ''laissez-faire'' (imperative) has come to be distinct from ''laisser faire'' (infinitive), which refers to a careless attitude in the application of a policy, implying a lack of consideration or thought.
3. Economic History--The Decline of Laissez Faire, Abbott P. Usher et al., , , American Economic Review, 1931
4. The London Economist and the High Tide of Laissez Faire, Scott Gordon, , , Journal of Political Economy, 1955
5. London Clubs in the Late Nineteenth Century Antonia Taddei
6. Yergin, Daniel., and Joseph Stanislaw. 1998. The Commanding Heights. Touchstone Book. p 21-22
7. Keynes, John Maynard. Foreword to the General Theory. Foreword to the German Edition/Vorwort Zur Deutschen Ausgabe [1]
8. Friedman, Milton. 1962. ''Capitalism and Freedom.'' University of Chicago Press. p 38.
9. ibid, 45-50
10. ibid, 50
11. The Effects of U.S. Trade Protection for Autos and Steel, Robert W. Crandall, , , Brookings Papers on Economic Activity, 1987
12. The Hong Kong Experiment by Milton Friedman on Hoover Digest accessed at March 29 2007
13. (Ref: 2006-Sept-12: Mingpao Daily)

Bibliography

★ Laissez Faire and State Intervention in Nineteenth-Century Britain, Brebner, John Bartlet, , , Journal of Economic History, 1948

★ Why has the Doctrine of Laissez Faire been Abandoned?, Fisher, Irving, , , Science, 1907

★ The Present Position of the Doctrine of Free Trade, Taussig, Frank W., , , Publications of the American Economic Association, 1904

Further reading

★ Die Maxime Laissez faire et laissez passer : ihr Ursprung, ihr Werden. Ein Beitrag zur Geschichte der Freihandelslehre, August Oncken, , , K.J. Wyss, 1886,

★ by Christian Gerlach, London School of Economics – March 2005

Comparative economic systems

★ American School

★ Collectivism

★ Communism

★ Corporatism

★ Dirigisme

★ Japanese Economic Miracle

★ Market socialism

★ Mixed economy

★ Planned economy

★ Socialism

★ Social Market Economy

★ Third way

See also

★ Anarcho-capitalism

★ Capitalism

★ Planned economy

★ Classical liberalism

★ Criticisms of capitalism

★ Economic Democracy

★ Economic liberalism

★ German model

★ Government ownership

★ Liberalism

★ Libertarianism

★ Manchester capitalism

★ Market fundamentalism

★ Objectivist philosophy

★ Ordoliberalism