Laissez-faire

Laissez-faire (/ˌlɛseɪˈfɛər-/ , French: [lɛsefɛʁ] ) (or sometimes laisser-faire) is an economic environment in which transactions between private parties are free from government restrictions, tariffs, and subsidies, with only enough regulations to protect property rights. The phrase laissez-faire is French and literally means "let [them] do", but it broadly implies "let it be," "let them do as they will," or "leave it alone". Scholars generally believe a laissez-faire state or a completely free market has never existed. ej is cool

Etymology

According to historical legend, the phrase stems from a meeting in about 1680 between the powerful French finance minister Jean-Baptiste Colbert and a group of French businessmen led by a certain M. Le Gendre. When the eager mercantilist minister asked how the French state could be of service to the merchants and help promote their commerce, Le Gendre replied simply "Laissez-nous faire" ("Leave us be", lit. "Let us do").

The anecdote on the Colbert-Le Gendre meeting was related in a 1751 article in the Journal Oeconomique by the French minister and champion of free trade, René de Voyer, Marquis d'Argenson—which happens to also be the phrase's first known appearance in print. Argenson himself had used the phrase earlier (1736) in his own diaries, in a famous outburst:

Laissez faire, telle devrait être la devise de toute puissance publique, depuis que le monde est civilisé ... Détestable principe que celui de ne vouloir grandir que par l'abaissement de nos voisins! Il n'y a que la méchanceté et la malignité du coeur de satisfaites dans ce principe, et l’intérêt y est opposé. Laissez faire, morbleu! Laissez faire!! (Trans: "Leave it be, that should be the motto of all public powers, as the world is civilized ... That we cannot grow except by lowering our neighbors is a detestable notion! Only malice and malignity of heart is satisfied with such a principle and our (national) interest is opposed to it. Leave it be, for heaven's sake! Leave it be!)

The laissez faire slogan was popularized by Vincent de Gournay, a French intendant of commerce in the 1750s. Gournay was an ardent proponent of the removal of restrictions on trade and the deregulation of industry in France. Gournay was delighted by the Colbert-LeGendre anecdote, and forged it into a larger maxim all his own: "Laissez faire et laissez passer" ('Let do and let pass'). His motto has also been identified as the longer "Laissez faire et laissez passer, le monde va de lui même!" ("Let do and let pass, the world goes on by itself!"). Although Gournay left no written tracts on his economic policy ideas, he had immense personal influence on his contemporaries, notably the Physiocrats, who credit both the laissez-faire slogan and the doctrine to Gournay.

Before d'Argenson or Gournay, P.S. de Boisguilbert had enunciated the phrase "on laisse faire la nature" ('let nature run its course'). D'Argenson himself, during his life, was better known for the similar but less-celebrated motto "Pas trop gouverner" ("Govern not too much"). But it was Gournay's use of the 'laissez-faire' phrase (as popularized by the Physiocrats) that gave it its cachet.

Laissez faire was proclaimed by the physiocrats in the eighteenth century France, thus being the very core of the economic principles, and was more developed by famous economists, beginning with Adam Smith. "It is with the physiocrats and the classical political economy that the term "laissez faire" is ordinarily associated." The book Laissez Faire and the General-Welfare State mentions that, "The physiocrats, reacting against the excessive mercantilist regulations of the France of their day, expressed a belief in a "natural order" or liberty under which individuals in following their selfish interests contributed to the general good. Since, in their view, this natural order functioned successfully without the aid of government, they advised the state to restrict itself to upholding the rights of private property and individual liberty, to removing all artificial barriers to trade, and to abolishing all useless laws."

In England, a number of "free trade" and "non-interference" slogans had been coined already during the 17th century. But the French phrase laissez faire gained currency in English-speaking countries with the spread of Physiocratic literature in the late 18th century. The Colbert-LeGendre anecdote was relayed in George Whatley's 1774 Principles of Trade (co-authored with Benjamin Franklin) - which may be the first appearance of the phrase in an English language publication.

Laissez-faire, a product of the Enlightenment, was "conceived as the way to unleash human potential through the restoration of a natural system, a system unhindered by the restrictions of government." In a similar vein, Adam Smith viewed the economy as a natural system and the market as an organic part of that system. Smith saw Laissez-faire as a moral program, and the market its instrument to ensure men the rights of natural law. By extension, free markets become a reflection of the natural system of liberty. "For Smith, laissez-faire was a program for the abolition of laws constraining the market, a program for the restoration of order and for the activation of potential growth."

However, Adam Smith, and the notable classical economists, such as Thomas Malthus, and David Ricardo, did not use the phrase. Jeremy Bentham used the term, but it was probably James Mill's reference to the "laissez-faire" maxim (together with "pas trop gouverner") in an 1824 entry for the Encyclopædia Britannica that really brought the term into wider English usage. With the advent of the Anti-Corn Law League, the term received much of its (English) meaning.

Adam Smith first used the metaphor of an "invisible hand" in his book The Theory of Moral Sentiments to describe the unintentional effects of economic self-organization from economic self-interest. The idea lying behind the "invisible hand", though not the metaphor itself, belongs to Bernard de Mandeville and his Fable of the Bees. In political economy that idea and the doctrine of laissez faire have always been closely related. True, Smith was familiar with the term, but he chose not to use them in his political economy and moral philosophy because they did not benefit the consumers who, as a result of them, paid higher prices and because they restricted competition, and people risked serious injuries. Some have characterized this metaphor as one for laissez-faire, but Smith never actually used the term himself.

Fundamentals of Laissez Faire

As a system of thought, laissez faire rests on the following axioms: 1. The individual is the basic unit in society. 2. The individual has a natural right to freedom. 3. The physical order of nature is a harmonious and self-regulating system. These axioms constitute the basic elements of laissez-faire thought, although another basic and often-disregarded element is that markets should be competitive, a rule that the early advocates of laissez-faire have always emphasized.

History of laissez-faire debate

China

During the Han, Tang, Song, and Ming dynasties, Chinese scholar-officials would often debate about the interference the government should have in the economy, such as setting monopolies in lucrative industries and instating price controls. Such debates were often heated with Confucian factions tending to oppose extensive government controls and "Reform" factions favoring such moves. During the Han and Tang, emperors sometimes instated government monopolies in times of war, and abolished them later when the fiscal crisis had passed. Eventually, in the later Song and Ming dynasties, state monopolies were abolished in every industry and were never reinstated during the length of that dynasty, with the government following laissez-faire policies. During the Manchu Qing Dynasty, state monopolies were reinstated, and the government interfered heavily in the economy; many scholars believe this prevented China from developing capitalism.

Europe

In Europe the laissez faire movement was first widely promoted by the physiocrats, a movement that originated with Jean-Claude Vincent de Gournay, a successful merchant. Gournay held that the government should allow the laws of nature to govern economic activity, with the state only intervening to protect life, liberty, and property. His ideas were taken up by Francois Quesnay and Turgot, Baron de l'Aulne. Quesnay had the ear of the King of France, Louis XV, and in 1754 persuaded him to give laissez faire a try. On September 17, the King abolished all tolls and restraints on the sale and transport of grain, and for more than a decade the experiment was a success. But then, in 1768, there was a poor harvest, and the cost of bread rose so high that there was widespread starvation, while merchants exported grain in order to obtain the best profit. In 1770, the edict allowing free trade was revoked.

The doctrine of laissez faire became an integral part of nineteenth-century European liberalism."Just as liberals supported freedom of thought in the intellectual sphere, so were they equally prepared to champion the principles of free trade and free competition in the sphere of economics. The state was to be merely a passive policeman, protecting private property and administering justice, but not interfering with the affairs of its citizens. Businessmen, and particularly British industrialists, were quick to associate these principles with their own economic interests." Many of the ideas of the physiocrats spread throughout Europe, and were adopted to a greater or lesser extent in Sweden, Tuscany, Spain, and after 1776 in the newly created United States. Adam Smith, author of The Wealth of Nations, met Quesnay and acknowledged his influence.

In Britain, in 1843, the newspaper The Economist was founded and became an influential voice for laissez-faire capitalism. Laissez-faire advocates opposed food aid for famines occurring within the British empire; in 1847, referring to the famine then underway in Ireland, The Economist's founder James Wilson wrote that "It is no man's business to provide for another". However, The Economist campaigned against the Corn Laws that protected landlords in the United Kingdom of Great Britain and Ireland against competition from less expensive foreign imports of cereal products. The Great Famine in Ireland in 1845 led to the repeal of the Corn Laws in 1846. The tariffs on grain which kept the price of bread artificially high were repealed. However, repeal of the Corn Laws came too late to stop Irish famine, partly because it was done in stages over three years.

A group calling itself the Manchester Liberals, to which Richard Cobden and Richard Wright belonged, were staunch defenders of free trade, and their work was carried on, after the death of Richard Cobden in 1866, by The Cobden Club. In 1867, a free trade treaty was signed between Britain and France, after which several of these treaties were signed among other European countries.

United States

In a book titled Laissez Faire and the General-Welfare State, Sidney Fine mentions:

Associated with the concept of natural rights and servings as an additional buttress to the edifice of laissez faire was the faith of Americans in the self-sufficiency of the individual. To a great extent the result of the unusually favorable economic conditions that prevailed in the United States, individualism became part and parcel of the nation's democratic faith. Americans placed their trust not in "external government" but in the free individual, who must be kept free from restrains; and it was widely held that as individuals became more intelligent and more attuned to the moral law, there would be a decreasing need for government...It was, indeed, in the writings of the transcendentalists Emerson and Thoreau that the doctrine of the free individual attained its classic expression in mid-nineteenth-century America. To Emerson, the self-reliant individual was more than a match for organized government, and he foresaw the day when the advance of the individual would render the state unnecessary. Thoreau was even more contemptuous of the state, and in his famous essay "Civil Disovedience" carried individualism to a point where it became almost indistinguishable from anarchism. The teachings of classical political economy, which were brought to America from England and France, also helped to promote the idea of the negative state.

Frank Bourgin's dissertation on the Constitutional Convention and subsequent decades argues that direct government involvement in the economy was intended by the Founders. The reason for this was the economic and financial chaos the nation suffered under the Articles of Confederation. The goal was to ensure that dearly won political independence was not lost by being economically and financially dependent on the powers and princes of Europe. The creation of a strong central government able to promote science, invention, industry and commerce, was seen as an essential means of promoting the general welfare and making the economy of the United States strong enough for them to determine their own destiny. Others view Bourgin's study, written in the 1940s and not published until 1989, as an over-interpretation of the evidence, intended originally to defend the New Deal and later to counter Reagan's economic policies.

In his 1973 study of the economic principles established at the foundation of the United States, E.A.J. Johnson wrote:

The general view, discernible in contemporaneous literature, was that the responsibility of government should involve enough surveillance over the enterprise system to ensure the social usefulness of all economic activity. It is quite proper, said Bordley, for individuals to "choose for themselves" how they will apply their labor and their intelligence in production. But it does not follow from this that "legislators and men of influence" are freed from all responsibility for giving direction to the course of national economic development. They must, for instance, discountenance the production of unnecessary commodities of luxury when common sense indicates the need for food and other essentials. Lawmakers can fulfill their functions properly only when they "become benefactors to the public"; in new countries they must safeguard agriculture and commerce, encourage immigration, and promote manufactures. Admittedly, liberty "is one of the most important blessings which men possess," but the idea that liberty is synonymous with complete freedom from restraint "is a most unwise, mistaken apprehension." True liberty demands a system of legislation that will lead all members of society "to unite their exertions" for the public welfare. It should therefore be the policy of government to aid and foster certain activities or kinds of business that strengthen a nation, even as it should be the duty of government to repress "those fashions, habits, and practices, which tend to weaken, impoverish, and corrupt the people."

Notable examples of government intervention in the period prior to the Civil War include the establishment of the Patent Office in 1802; the establishment of the Office of Standard Weights and Measures in 1830; the creation of the Coast and Geodetic Survey in 1807 and other measures to improve river and harbor navigation; the various Army expeditions to the west, beginning with Lewis and Clark's Corps of Discovery in 1804 and continuing into the 1870s, almost always under the direction of an officer from the Army Corps of Topographical Engineers, and which provided crucial information for the overland pioneers that followed; the assignment of Army Engineer officers to assist or direct the surveying and construction of the early railroads and canals; the establishment of the First Bank of the United States and Second Bank of the United States 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 George 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. In contrast to Hamilton and the Federalists was the opposing political party the Democratic-Republicans.

Most of the early opponents of laissez-faire capitalism in the United States subscribed to the American School. 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.

In the early 19th century, "it is quite clear that the laissez faire label is an inappropriate one" to apply to the relationship between the US government and industry. In the mid-19th century, the United States followed the Whig tradition of Economic nationalism, which included increased state control, regulation and macroeconomic development of infrastructure. Public works such as the provision and regulation transportation such as railroads took effect. The Pacific Railway Acts provided the development of the First Transcontinental Railroad. In order to help pay for its war effort in the American Civil War, the United States government imposed its first personal income tax, on August 5, 1861, as part of the Revenue Act of 1861 (3% of all incomes over US $800; rescinded in 1872).

Following the Civil War, the movement towards a mixed economy accelerated. Protectionism increased with the McKinley Tariff of 1890 and the Dingley Tariff of 1897. Government regulation of the economy expanded with the enactment of the Interstate Commerce Act of 1887 and the Sherman Anti-trust Act.

The Progressive Era saw the enactment of more controls on the economy, as evidenced by the Wilson Administration's New Freedom program.

Following World War I and the Great Depression, the United States turned to a mixed economy, which combined free enterprise with a progressive income tax, and in which, from time to time, the government stepped in to support and protect American industry from competition from overseas. For example in the 1980s the government sought to protect the automobile industry by "voluntary" export restrictions from Japan. Pietro S. Nivola wrote in 1986:

By and large, the comparative strength of the dollar against major foreign currencies has reflected high U.S. interest rates driven by huge federal budget deficits. Hence, the source of much of the current deterioration of trade is not the general state of the economy, but rather the government's mix of fiscal and monetary policies– that is, the problematic juxtaposition of bold tax reductions, relatively tight monetary targets, generous military outlays, and only modest cuts in major entitlement programs. Put simply, the roots of the trade problem and of the resurgent protectionism it has fomented are fundamentally political as well as economic.

Critiques

Over the years, a number of economists have offered critiques of laissez-fair economics.

Adam Smith acknowledged deep moral ambiguities towards the system of capitalism. Smith had severe misgivings concerning some aspects of each of the major character-types produced by modern capitalist society: the landlords, the workers and the capitalists. "The landlords' role in the economic process is passive. Their ability to reap a revenue solely from ownership of land tends to make them indolent and inept, and so they tend to be unable to even look after their own economic interests." "The increase in population should increase the demand for food, which should increase rents, which should be economically beneficial to the landlords. Thus, according to Smith, the landlords should be in favour of policies which contribute to the growth of in the wealth of nations. Unfortunately, they often are not in favour of these pro-growth policies, because of their own indolent-induced ignorance and intellectual flabbiness."

The British economist John Maynard Keynes condemned laissez-faire on numerous occasions. In The End of Laissez-faire (1926), one of the most famous of his critiques, Keynes argues that the doctrines of laissez-faire are dependent to some extent on improper deductive reasoning, and, Keynes says, the question of whether a market solution or state intervention is better must be determined on a case-by-case basis.

Austrian economist Friedrich Hayek stated that a freely competitive, laissez-faire banking industry tends to be endogenously destabilizing and pro-cyclical. He stated that the need for central banking control was inescapable.

See also

• Anarcho-capitalism
• Austrian school
• Capitalism
• Classical liberalism
• Economic liberalism
• Free market
• Free-market anarchism
• Market fundamentalism
• Minarchism

Bibliography

• Brebner, John Bartlet (1948). "Laissez Faire and State Intervention in Nineteenth-Century Britain". Journal of Economic History. 8: 59–73.
• Fisher, Irving (1907). "Why has the Doctrine of Laissez Faire been Abandoned?". Science. 25 (627): 18–27. doi:10.1126/science.25.627.18. PMID 17739703. {{cite journal}}: Unknown parameter |month= ignored (help)
• Taussig, Frank W. (1904). "The Present Position of the Doctrine of Free Trade". Publications of the American Economic Association. 6 (1): 29–65.

Further reading

• Bourgin, Frank The Great Challenge: The Myth of Laissez-Faire in the Early Republic (George Braziller Inc., 1989; Harper & Row, 1990)

• Template:PDFlink by Christian Gerlach, London School of Economics – March 2005
• John Maynard Keynes, The end of laissez-faire (1926)
• Carter Goodrich, Government Promotion of American Canals and Railroads, 1800–1890 (Greenwood Press, 1960)
  • Goodrich, Carter. "American Development Policy: the Case of Internal Improvements," Journal of Economic History, 16 (1956), 449–60. in JSTOR
  • Goodrich, Carter. "National Planning of Internal Improvements," ;;Political Science Quarterly, 63 (1948), 16–44. in JSTOR
• Johnson, E.A.J., The Foundations of American Economic Freedom: Government and Enterprise in the Age of Washington (University of Minnesota Press, 1973)
• Sidney Webb (1889). "Fabian Essays in Socialism - The Basis of Socialism - The Period of Anarchy". Library of Economics and Liberty. Women working half naked in the coal mines; young children dragging trucks all day in the foul atmosphere of the underground galleries; infants bound to the loom for fifteen hours in the heated air of the cotton mill, and kept awake only by the overlooker's lash; hours of labor for all, young and old, limited only by the utmost capabilities of physical endurance; complete absence of the sanitary provisions necessary to a rapidly growing population: these and other nameless iniquities will be found recorded as the results of freedom of contract and complete laissez faire in the impartial pages of successive blue-book reports.