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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 States, 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. Laisser-faire is associated with classical liberalism and libertarianism.
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; 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 his 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 labor.
History of Laissez-faire
Europe
Adam Smith and other free trade economists played a large role in popularizing laissez-faire economic theories in English-speaking countries. 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 magazine The Economist was founded in 1843, and free trade was discussed in such places as The Cobden Club.However, laissez-faire was never the main doctrine of any nation, and the end of the 19th century 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 with a December 1878 letter from Bismarck, resulting in the iron and rye tariff of 1879.
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.Depression
Some economists and historians 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. Most 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.Return of market economies after the Second World War
After the Second World War, laissez-faire was in part resurrected through the Austrian School and Chicago School, and such liberal thinkers as Ludwig von Mises and Friedrich Hayek, 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 party's, 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.
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 to assist part of the domestic industry, anti-trust regulation, nationalized industries, progressive income taxes, 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. 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. * Much of this growth came under British colonial control prior to the 1997 takeover by Communist China.
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.References
Further reading
Comparative economic systems
- American School
- Collectivism
- Communism
- Corporatism
- Dirigisme
- Japanese Economic Miracle
- Market socialism
- Mixed economy
- Planned economy
- Socialism
- Social Market Economy
- Third way
See also
- Anarcho-capitalism
- Economic liberalism
- Capitalism
- Central planning
- Criticisms of capitalism
- Economic Democracy
- Government ownership
- German model
- Liberalism
- Libertarianism
- Ordoliberalism
- Manchester capitalism
Outside links
- The Economic Impacts of the U.S. Space Program about NASA's impact on America.
- The Golden Years about postwar economics.
- Energy and Depletable Resources: Economics and Policy, 1973-98 pertaining to energy shortages of 1970's etc. and economic impact.
- Are We Still a Middle Class Society? by Michael Lind of New America Foundation commenting on the rise of the American Middle Class.
Economic ideologies | Libertarianism
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