Laissez-faire

Laissez-faire (lɛze fɛr) is short for "laissez faire, laissez aller, laissez passer," a French phrase meaning "let do, let go, let pass." from the French dictionary first used by the eighteenth 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 opposing economic interventionism by the state beyond that which is perceived to be necessary to maintain peace and property rights.

In the early stages of European and American economics theory, laissez-faire economic policy was usually contrasted to mercantilist economic policy, which had been the dominant system of the United Kingdom, United States, Germany, Italy, Spain, France and other Western European powers during their rise to power.

The term laissez-faire is largely antiquated outside of certain contexts replaced most often with the term "free market." Some may use the term laissez-faire to refer to "let do, let pass" attitude for concepts in areas outside of economics.Template:Fn

Economic theory

The laissez-faire school of economic thought holds a pure or libertarian market view, that the free market is best left to its own devices; 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, and distribution of goods and services makes for a better (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. One does not get his 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 pains.

History of Laissez-faire

Adam Smith played a large role in popularizing laissez-faire economic theories in English-speaking countries, though he was critical of a number of aspects of what is currently thought of as laissez-faire (such as lack of government regulation of business practices). Laissez-faire philosophy was dominant throughout the late 19th and early 20th century in the British Empire but not so in Germany or the United States where the economic philosophy of Friedrich List and Henry C. Carey dominated. Many historians also see that period as the height of laissez-faire's implementation in the United Kingdom with starting with the repealing of the 'corn laws' at the insistence of Richard Cobden. However, critics claim that what was described as "laissez-faire" policy was simply a proactive pro-business policy, and in practice there was little difference between pro-business and laissez-faire. In this context, laissez-faire rhetoric was used to justify denial of similar subsidies to the poor and working classes. Some believe these claims are still valid.

Pre-Cold War usage

Many economists and most historians argue that laissez-faire policies played a role in creating the Great Depression. However a vocal minority of economists, such as Milton Friedman, argue that by the time of the Great Depression, significant government economic regulation had already taken place and that it was a combination of Federal Reserve policies and interventionist policies by the Herbert Hoover administration (such as raising income taxes on the highest incomes from 25% to 63%, a "check tax," and the Smoot-Hawley tariff which set off a protectionist world trade war) caused the Depression, by creating an environment in which the market depended upon it to act, and then attempting to remedy the situation by further interventions. The action of the Federal Reserve at the time has been compared to putting a penny in the fuse-box of the economy. It is further argued by Friedman, and other laissez-faire advocates, that Roosevelt's New Deal further lengthened and worsened the depression; however the majority of historians and economists would disagree.

Cold War era

In the Cold War era (1945-1989), state regulation and involvement in the economy reached a peak in several parts of the world. Such 'interventionism' was practiced by most countries, no matter what side of the Iron Curtain they were on. The governments in the United Kingdom and Sweden followed the most socialistic path taking over private industry in several key areas and establishing a 'cradle to grave' welfare system for their peoples. France, Germany, Japan, and the United States took a middle root neither laissez-faire nor socialistic in nature. Lead by Charles De Gaulle, France followed what they called "Dirigisme" ushering in what is called in by the French the "Thirty Glorious Years." Germany implemented with broad coalition support between the Christian Democratic and Social Democratic party's, what is called the Social Market Economy which restored their war devastated economy. ([#ref corre|Corre]])(Gardner) Japan through her M.I.T.I. economic programs produced what modern economists call the "apanese Economic Miracle," making it the most successful economic nation outside of the United States. (Fingleton) The United States guided by the changes made during President Franklin D. Roosevelt's "New Deal" coupled with massive dominance by it's industries after World War II, continued with investments by it's Federal government in public works projects such as the interstate highway system under President Eisenhower and the successful Moon landing and space initiatives of NASA by President John F. Kennedy during the 1960's [1] that together with heavy military spending maintained through government intervention and expenditure the largest middle class in the world (Gardner 196-206)) (Collins) that had been built up under the prior American System policies of that the United States followed from 1861-1929. [2]

Rise of Laissez-faire In this environment Laissez-faire economics assumed a stronger ideological edge in some sectors, especially through the Austrian School (cf. Chicago School) and such libertarian thinkers as Ludwig von Mises and Friedrich Hayek who argued that if the Free World was truly defined by its freedom, then its citizens should have full economic freedoms. Hong Kong was the first territory to embrace Laissez-faire economic policy in this era, having officially followed that path since the 1960s.

1970's Malaise During the 1970s, the West experienced many economic difficulties due in large part to the oil embargo and in the United States the reduction of protective tariffs for industry starting with the Kennedy-Round trade talks and breaking the tie of the U.S. Dollar to gold, placing it on a floating exchange. (Batra) Britain which had long followed the path of 'free trade' and 'imperialism' had lost many of its colonies in the 1960s as a source of wealth that with heavy 'cradle to grave' welfarism lead to stagnation. (Lawrence)

In response the governments of the United Kingdom, the United States, New Zealand, and Chile began a drive towards laissez-faire. In the United Kingdom the government of Prime Minister Margaret Thatcher lead the way. She believed that lessening the power of the state in the economy would improve conditions. Hence, her government called for such measures as privatizing state run corporations and services and cutbacks in social services together with a general privatization of public services. Following Thatcher's lead, President Ronald Reagan of the United States newly elected in 1980, Finance Minister Roger Douglas of New Zealand and Chile's President Augusto Pinochet embraced a similar path toward Laissez-faire. or what was called in the United States 'free-market' economics and policy. Pinochet and Douglas in particular followed the most severe forms of 'Laissez-faire' with Social Security privatization and mail service privatization respectively. Opinions differ on whether the results where good or bad. Libertarian economist, Friedman wrote, "The Chilean economy did very well...that free markets did work their way in bringing about a free society." [3] He further stated that the free market reforms set the stage for later prosperty and that as a result Chile is "the best economic success story in Latin America today." [4] Other economists disagree pointing out that during this timeframe Chile was a military dictatorship that harshly suppressed dissent and the small middle class that did exist vanished with a severe recession that followed 'free-market' reform. The economic downturn was not confined to Chile, however, as a widespread recession also struck several other Latin American countries at the time. Economist Arnold C. Harberger said in an interview with Jeffery Sachs that "Chile led the continent in climbing out of this recession. It was the only debt-crisis country that got back to the pre-crisis levels of GDP before the end of the decade of the '80s." [5]

The New Federalism In the United States, President Reagan called his plan the "New Federalism" calling for a reduction in welfare programs across the board, deregulation of industry, and privatization of public services. Despite rhetoric, President Reagan did not follow strict 'Laissez-faire' especially towards trade. Several times during his eight year administration quotas were placed on the importaiton of Japanese cars helping American automobile manufacturers and their workers while tariffs were enacted to protect certain industries such as tool-making (Craftsman tools) or motorcycles (Harley-Davidson). (Buchanan) However, his administration did cut many social services to the poor and minorities.

Other Western leaders implemented Laissez-faire policies at this time, including France but not to the same extent as these three nations.

Laissez-faire today

Most modern industrialized nations today are not typically representative of Laissez-faire principles, as they usually involve significant amounts of government intervention in the economy. This intervention includes minimum wages to increase the standard of living, corporate welfare to assist domestic industry, anti-trust regulation to prevent monopolies, nationalized industries usually in areas where monopoly is necessary like utilities, progressive income taxes to even the playing field for middle class and working class people, welfare programs to provide a safety net for those without the capacity to find work or work because of disability, subsidy programs for businesses and agricultural products to stabilize prices - protect jobs within a country - and to ensure economic independence, government ownership of some industry (usually in natural resources), regulation of market competition to ensure fair standards and practices to protect the consumer and worker, and economic trade barriers in the form of protective tariffs - quotas on imports - or internal regulation favoring domestic industry.

However, there are some economies regarded to be Laissez-faire. The most often-cited is Hong Kong. Hong Kong is ranked number one in the Index of Economic Freedom 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 has 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. [6] Much of this growth came under British colonial control prior to the 1999 takeover by Communist China.

Like pure communism, pure capitalism has never existed in the reality, except in possibly in current-day Somalia.

Other usage

Template:FnbAs 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.

Criticism

As both laissez-faire and free markets are largely idealised concepts, critics use similar arguments against both, focusing largely on the inapplicability of any idealized theory of market economy to real world conditions. However some also have critiques of the intrinsic properties of theoretical "laissez-faire", maintaining that it has inappropriate bias of private over public goods, generates pervasive externalities throughout the system that invalidate economic calculation, etc. For example, critics believe that market failures are difficult to address in any meaningful way with market devices alone, and thus require regulation by a guardian central government or necessitate innovations in mechanisms and institutions that would effectively internalize external costs. Critics may consider laissez faire as only an ideological veneer, including for the public a simple type of folk mythology appealing to nostalgic sentiment, obscuring what is actually a system of localist protectionism often associated with typically conservative politics, which in turn may only function in the context of elite-controlled economic expansionism, (or economic imperialism).

Some perceived market failures:

• Markets without government intervention are claimed to aggregate into monopolies. One often claimed example of this is Standard Oil. However, it must be noted that when the trial that ultimately resulted in the government-imposed breakup of Standard began, the company was in competition with over 100 other refiners and Standard's share of oil refining was 64% from its high of 88% in 1890.
• Markets without oversight are claimed to tend toward collusion as in Archer Daniels Midland
• Markets without oversight are claimed to tend toward fraud as in Enron. However, laissez-faire does not mean there is no "oversight." In a laissez-faire system, fraud is illegal, and the state intervenes to stop it. Laissez-faire does not mean the lack of regulation, but the lack of regulations that go beyond protecting individuals from force and fraud.

References

• Batra, Ravi The Myth of Free Trade : The Pooring of America Touchstone, 1996. (back)
• Buchanan, Patrick J. The Great Betrayal : How American Sovereignty and Social Justice Are Being Sacrificed... Little, Brown, 1998. (back)
• Carre, Jean Jacques French Economic Growth (Studies of economic growth in industrialized countries) Stanford University Press, 1975.(back)
• Collins, Robert M. More : The Politics of Economic Growth in Postwar America Oxford University Press, 2000.(back)
• Fingleton, Eamonn Unsustainable: How Economic Dogma is Destroying American Prosperity Nation Books, 2003. (back)
• Gardner, H. Stephen Comparative Economic Systems (The Dryden Press Series in Economics) Dryden Press, 1988. (back
• Gill, William J. Trade Wars Against America Praeger Publishers, 1990. (back)
• Lawrence, James Rise and Fall of the British Empire Little Brown & Co , 1995. (back)
• Capitalism and Freedom, by Milton Friedman, describes capitalism as the most free, most fair, and most egalitarian possible system
• The Road to Serfdom, by Friedrich Hayek, describes how collectivism and socialism lead to the Nazi takeover in Germany.
• The Wealth of Nations, by Adam Smith, describes the basis of capitalism, and is considered the first work to define economics as a science.
• Capitalism: the Unknown Ideal, by Ayn Rand, argues that pure capitalism is the only moral social system

Comparative economic systems

• American System
• Collectivism
• Communism
• Corporatism
• Dirigisme
• Japanese Economic Miracle
• Market socialism
• Mixed economy
• Planned economy
• Socialism
• Social Market Economy
• Third way

See also

• Anarcho-capitalism
• Economic liberalism
• Capitalism
• Central planning
• Criticisms of capitalism
• Economic Democracy
• Government ownership
• German model
• Liberalism
• Libertarianism
• Ordoliberalism
• Manchester capitalism

Outside links

• The Economic Impacts of the U.S. Space Program about NASA's impact on America.
• The Golden Years about postwar economics.
• Energy and Depletable Resources: Economics and Policy, 1973-98 pertaining to energy shortages of 1970's etc. and economic impact.
• Are We Still a Middle Class Society? by Michael Lind of New America Foundation commenting on the rise of the American Middle Class.
• Capitalism.org site dedicated to Laissez-Faire economics and capitalism in general.