Laissez-faire

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|} Laissez-faire (IPA: [lɛse fɛr]) or laisser-faire is short for "laissez faire, laissez aller, laissez passer," a French phrase meaning "let do, let go, let pass." From the French diction 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 that maintains that private initiative and production is best to roam free, opposing economic interventionism and taxation by the state beyond that which is perceived to be necessary to maintain peace, security, and property rights.^[1] (Some extreme laissez-faire advocates even oppose taxation). It also embodies free trade, namely that a state should not use protectionist measures, such as tariffs, in order to curtail trade between nations.

In the early stages of European and American economic theory, laissez-faire economic policy was usually contrasted to mercantilist economic policy, 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 may use the term laissez-faire to refer to "let do, let pass" attitude for concepts in areas 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 did, but only with the advent of the Anti-Corn Law League did the term receive much of its (English) meaning.^[3]

Economic theory

The laissez-faire 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 (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 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.^{[citation needed]}

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]

However, laissez-faire was never the main doctrine of any nation, and 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.

North America

In the United States, laissez-faire was mainly present up to the American Civil War, although various protectionist measures were passed by the North against the South before that time (e.g. the tariff of 1828). The more abide protectionist influences came from Henry Clay and his American System.^{[citation needed]}

The Great Depression

Economists and historians (such as John Maynard Keynes) record that laissez-faire policies played a role in creating the Great Depression. Keyne's believed that classical liberal economics had a fatal flaw, and that was market instability as a result of inadequate investment. In Keynes’s view, since private actors cannot be counted on to create aggregate demand during a recession, the government has the responsibility to create demand.^[5]^[6]

To the contrary, Friedrich August von Hayek, Milton Friedman, and Ludwig von Mises, 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 Fedreal Reserve System- had been assigned responsibility for monteary 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 catastrphe." ^[7] 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. Friedman and Hayek both believed 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.^[8] 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 were eliminated. This opinion specifically blames a combination of Federal Reserve policies and economic regulation by the U.S. government, which caused the great depression and was exacerbated by raising income taxes on the highest incomes from 25% to 63%, a "check tax," and the Smoot-Hawley tariff. Friedman believes that Herbert Hoover's interventionist policies and Franklin Roosevelt's New Deal policy 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."^[9]

Return of market economies after the Second World War

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.^{[citation needed]}

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.^[10] One scholar wrote about the early 1980s that:

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.^[11]

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, welfare programs as a way 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, government ownership of some industry (usually in natural resources), regulation of market competition, and economic trade barriers in the form of protective tariffs - quotas on imports - or internal regulation favoring domestic industry, and other forms of government favoritism. However, there are some economies regarded to be based on laissez-faire. The most often-cited is Hong Kong's positive non-interventionism. The policy was first officially laid down by Sir Charles Haddon Cave who was the Financial Secretary of Hong Kong from 1971-1981. Hong Kong is ranked number one for 12 consecutive years 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. [1] 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 building of Disney, the intervention of the stock market to prevent blokering. (Ref: 2006-Sept-12: Mingpao Daily).

Other usage

References

^ Oscar Handlin (1943). "Laissez-Faire thought in Massachusetts, 1790-1880". Journal of Economic History. 3: 55–65.
^ 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.
^ Abbott P. Usher; et al. (1931). "Economic History--The Decline of Laissez Faire". American Economic Review. 22 (1, Supplement): 3–10. {{cite journal}}: Explicit use of et al. in: |author= (help)
^ Antonia Taddei (1999). "London Clubs in the Late Nineteenth Century" (PDF).
^ Yergin, Daniel., and Joseph Stanislaw. 1998. The Commanding Heights. Touchstone Book. p 21-22
^ Keynes, John Maynard. General Theory of Employment, Interest, and Money. 1936.
^ Friedman, Milton. 1962. Capitalism and Freedom. University of Chicago Press. p 38.
^ ibid, 45-50
^ ibid, 50
^ Robert W. Crandall (1987). "The Effects of U.S. Trade Protection for Autos and Steel". Brookings Papers on Economic Activity. 1987 (1): 271–288.
^ Pietro S. Nivola (1986). "The New Protectionism: U.S. Trade Policy in Historical Perspective". Political Science Quarterly. 101 (4): 577–600.

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. {{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.