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.
Laissez-faire is associated with classical liberalism and libertarianism. 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 present meaning.
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[edit] 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.
[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.[2]
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.
[edit] Depression
Some economists and historians (such as John Maynard Keynes) argue that laissez-faire policies played a role in creating the Great Depression, however laissez-faire policies were long abrogated by governments around the world at that time. Many economists, such as Nobel prize-winner Milton Friedman, argue that by the time of the Great Depression, significant government economic regulation had already taken place and that it was a combination of Federal Reserve policies and interventionist policies by the Herbert Hoover administration (such as raising income taxes on the highest incomes from 25% to 63%, a "check tax," and the Smoot-Hawley tariff which set off a protectionist world trade war) caused the Depression, by creating an environment in which the market depended upon the government to act, and then attempting to remedy the situation by further interventions. The action of the Federal Reserve at the time has been compared to putting a penny in the fuse-box of the economy. Thus it is argued by Friedman, and other laissez-faire advocates, that Roosevelt's New Deal further lengthened and worsened the depression.
[edit] 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.
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.[3] 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.[4] |
[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 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. [2] 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).
[edit] Other usage
↑ 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.
[edit] References
- ^ Oscar Handlin (1943). "Laissez-Faire thought in Massachusetts, 1790-1880". Journal of Economic History 3: 55-65.
- ^ Antonia Taddei (1999). London Clubs in the Late Nineteenth Century.
- ^ 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 (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.
[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
