Laissez-faire (/ˌlɛseɪˈfɛr-/, French: [lɛsefɛʁ] (
listen)) is an economic environment in which
transactions between private parties are free from intrusive 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."
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 be," literally "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: "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. 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
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.
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.
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 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 1867, 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.
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