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 are 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] Free-market anarchists take the idea to an extreme by opposing all taxation. Laissez-faire 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 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.^{[citation needed]} 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]

Contents 1 Economic theory 2 History of Laissez-faire 2.1 Europe 2.2 North America 2.3 The Great Depression 2.4 Return of market economies after the Second World War 3 Laissez-faire today 4 References 5 Further reading 6 Comparative economic systems 7 See also

[edit] 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 (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.

[edit] History of Laissez-faire

[edit] 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 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.

[edit] 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]}

[edit] The Great Depression

Main article: Causes 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. In Keynes' 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.

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.^[6]

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."^[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. 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.^[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. 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."^[9]

[edit] Return of market economies after the Second World War

Main articles: Neoliberalism, Ordoliberalism, Social market economy, Reaganomics, and 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.^{[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]

”

[edit] 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 among other ways of government intervention 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.

According to the 2007 Index of Economic Freedom issued by the Heritage Foundation, the currently 7 countries with the highest degree of free economies comparatively, are as follows: Hong Kong, Singapore, Australia, United States, New Zealand, United Kingdom and Ireland. 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 building of Disney, the intervention of the stock market to prevent brokering. (Ref: 2006-Sept-12: Mingpao Daily).

[edit] References

• Brebner, John Bartlet (1948). "Laissez Faire and State Intervention in Nineteenth-Century Britain". Journal of Economic History 8: 59-73. 
• Fisher, Irving (January 1907). "Why has the Doctrine of Laissez Faire been Abandoned?". Science 25 (627): 18-27. 
• Taussig, Frank W. (1904). "The Present Position of the Doctrine of Free Trade". Publications of the American Economic Association 6 (1): 29-65. 

[edit] Further reading

• Oncken, August (1886). Die Maxime Laissez faire et laissez passer : ihr Ursprung, ihr Werden. Ein Beitrag zur Geschichte der Freihandelslehre. Bern: K.J. Wyss. 
• Wu-Wei in Europe. A Study of Eurasian Economic Thought by Christian Gerlach, London School of Economics – March 2005

[edit] Comparative economic systems

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

[edit] See also

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