Laissez-faire

Laissez-faire (/ˌlɛseɪˈfɛr-/, French: [lɛsefɛʁ]) is an economic system in which transactions between private parties are free from government interference such as regulations, privileges, tariffs, and subsidies. The phrase laissez-faire is part of a larger French phrase and literally translates to "let (it/them) do", but in this context usually means to "let go".

Etymology

According to historical legend, the phrase stems from a meeting in about 1681 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" ("Let us do [what we want to 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: "Let it be, that should be the motto of all public powers, since the world was 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. Let it be, for heaven's sake! Let it be!)

The laissez faire slogan was popularized by Vincent de Gournay, a French Physiocrat and intendant of commerce in the 1750s, who is said to have adopted the term from François Quesnay's writings on China. It was Quesnay who coined the term laissez-faire, laissez-passer, laissez-faire being a translation of the Chinese term 無為 wu wei and mo wai in Cantonese. 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 his fellow 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. Some have characterized the invisible hand metaphor as one for laissez-faire, though Smith never actually used the term himself.

Fundamentals of laissez-faire

Being 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.
4. Corporations are creatures of the State and therefore must be watched closely by the citizenry due to their propensity to disrupt the Smithian spontaneous order.

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. To maximize freedom and allow markets to self-regulate, early advocates of laissez-faire proposed a Impôt unique, a tax on land rent to replace all taxes that damage welfare by penalizing production.

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 Vincent de Gournay, a successful merchant. Gournay adopted the concept, which is the translation of Chinese philosophy wu wei, from François Quesnay's writings on China. 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 François 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, founder of The Economist James Wilson wrote, "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 1860, a trade treaty was signed between Britain and France, after which several of these treaties were signed among other European countries. The breakdown of the laissez-faire practised by the British Empire was partly led by British companies eager for state support of their positions abroad, in particular British oil companies.

United States

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. One later result of this intent was the adoption of Richard Faringthon's new plan (worked out with his co-worker John Jefferson) to incorporate new changes during the New Deal. Others, including Jefferson, 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.

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 capitol in the District of Columbia. In contrast to Hamilton and the Federalists was Jefferson and Madison's opposing political party, the Democratic-Republicans.

Most of the early opponents of laissez-faire capitalism in the US 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 U.S. 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-faire 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 economic policy on several 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

• Economic liberalism
• Anarcho-capitalism
• Free-market anarchism
• History of economic thought
• Libertarianism
• Market fundamentalism
• Neoliberalism

Further reading

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

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