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In economics, laissez-faire (English pronunciation: /ˌlɛseɪˈfɛər/ ( listen), French: [lɛsefɛʁ] ( listen)) is an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies.
The phrase laissez-faire is French and literally means "let do", but it broadly implies "let it be", or "leave it alone."
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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.[1] 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!! [2] (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,[3] 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.[4]
Before d'Argenson or Gournay, P.S. de Boisguilbert had enunciated the phrase "on laisse faire la nature" ('let nature run its course').[5] D'Argenson himself, during his life, was better known for the similar but less-celebrated motto "Pas trop gouverner" ("Govern not too much").[6] But it was Gournay's use of the 'laissez-faire' phrase (as popularized by the Physiocrats) that gave it its cachet.
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.[7]
Notably, classical economists, such as Thomas Malthus, Adam Smith[8] 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.[9]
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.[10] Some have characterized this metaphor as one for laissez-faire,[11] but Smith never actually used the term himself.[8]
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.[12]
In Britain, in 1843, the newspaper The Economist was founded, and became an influential voice for laissez-faire capitalism.[13] In response to the Irish famine of 1846–1849, in which over 1.5 million people died of starvation, they argued that for the government to supply free food for the Irish would violate natural law. Clarendon, the Lord Lieutenant of Ireland, wrote, "I don't think there is another legislature in Europe that would disregard such suffering."[14]
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.[15] In 1867, a free trade treaty was signed between Britain and France, after which several of these treaties were signed among other European countries.
British laissez-faire was not absolute. The United Kingdom company law,[16] the Limited Liability Act 1855, and the Joint Stock Companies Act 1856 were exceptions.
Laissez-faire policy was never absolute in any nation, and at the end of the 19th century, European countries again took up some economic protectionism and interventionism. 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.
Frank Bourgin's 1989 study of the Constitutional Convention shows that direct government involvement in the economy was intended by the Founders.[17] This had more to do with the perceived need to overcome the economic and financial chaos the nation suffered under the Articles of Confederation, and nothing to do with any desire to have a statist economy. 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.
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 publick”; 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.” [18]
Notable examples of government intervention in the period prior to the Civil War include the establishment of the Patent Office in 1802; 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 mid-19th century, the United States followed the Whig tradition of Economic nationalism, which included increased state control, regulation and macroeconomic development of infrastructure.[19] 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.[19] 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, Keynesian policies turned the state into a mixed economy. The United States, in the 1980s, for example, sought to protect its automobile industry by "voluntary" export restrictions from Japan.[20] 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.[21]