Is Laissez-Faire mere textbook economics?

‘‘Laissez-faire, leave us alone’’, affirmed the French Industrialists when Jean Baptiste-Colbert, the then comptroller general of finance under King Louis XIV, asked them for suggestions for the French government to facilitate business. This was followed by a discourse lasting for centuries, about whether or not the government should ‘intervene’ in the affairs of the economy. “Laissez-faire” literally translates into an imperative ‘let go’ or ‘leave alone’. From the economics approach, it denotes the ‘letting go’ of entrepreneurs by the government or ‘leaving them alone’ to do business on their own terms. A laissez-faire approach is characterised by minimum to no government intervention in finance, production, consumption and private contracts. However, the government exercises control over security corps like the army and the police force.

The approach, having the father of economics, Adam Smith, as its chief proponent, posits that the fiscal behaviour of each individual, be it producer or consumer, is driven by an invisible hand. The invisible hand in question, is an individual’s will to act in his own interest, a force majeure catalysing an individual’s own pursuit of success and eventually, the development of the collective economy. Laissez-faire theory considers each individual as a fully empowered, rational economic actor, cognizant of his self-interest. Any government aid causes interference in this system that is expected to work with a metronome-like efficiency; not merely unnecessary, but also harmful. Accordingly, the doctrine rejects all forms of market regulations like working hours, safety standards and minimum wages. According to Herbert Spencer, "If it (the government) takes from him who has prospered to give to him who has not, it violates its duty towards the one to do more than its duty towards the other."

Perusing the history of the term

The concept was first propounded by the Physiocrats, a school of French economists in the 18th century. American laissez-faire capitalism originated in classical liberalism, a political theory protecting individual rights by restricting government interference. Since small scale cottage industries were prevalent during the pre-Civil War era, one could not have predicted the advent of modern-day capitalism. Consequently, entrepreneurs and bankers happily hopped on to the ‘classical liberalism’ bandwagon. After the Civil War, classical liberalism evolved into laissez-faire economics as America saw the most widespread defence of the theory in its history. Individuals were dubbed the best judges of their own desires with proponents equating the good of the community with the sum of individual preferences. Demand and supply were considered literal ‘forces’ regulating prices, profits, rent, wages and interest. Economists reinterpreted the theory, tailoring it to the needs of a post-civil war, industrial economy; while the laissez-faire beliefs of pre-Civil War America, were a part of the ‘American liberty’ hangover from the pre-independence era. For capitalists, the government was slow, lethargic and inefficient; the market- efficient, orderly and prompt. The government would hinder economic growth, the market would accelerate it.

Market: 1, Government: 0.

American laissez-faire soon underwent a radical transformation. Even corporations, irrespective of their magnitude, were endowed with the rights of individual entities. In the hands of profit-hungry capitalists, it led to incessant corporate warfare, legitimising the accumulation of vast fortunes; meanwhile managing to keep the government at bay. What followed was an increase in mine and railroad deaths and the oppression of the proletariat by the capitalists. A group called the social darwinists cited a social survival of the fittest, turning a deaf ear to calls to help. The acclaim of the doctrine consequently declined as philosophers questioned its empirical basis, economists criticised its flawed assumptions and religious leaders dubbed it unchristian.

The case for laissez-faire

For proponents, a laissez-faire approach facilitates free trade and allows for much needed entrepreneurial independence, encouraging innovation. Each individual expected to be self-sufficient in tandem with the government not favouring anyone fosters self-reliance. For instance, in an economy where one cannot approach the government for aid in times of misfortune, people are encouraged to work hard and create a better tomorrow for themselves. Self-interest is also viewed as constructive, highlighting its indirect positive outcomes.

When a wealthy entrepreneur works in his own interest, it translates into the growth of his company, in turn creating jobs and contributing to economic development. Many also believe that the competition created by a laissez-faire economy nurtures meritocracy as each producer mandatorily maintains product quality in face of competitors. Similarly, consumers would have no dearth of goods with some entrepreneur or the other always producing the desired commodity.

The case against laissez-faire

Conversely, critics have a plethora of reasons to refute the theory. Starting with its flawed premise, the assumption that each individual is ‘fully empowered’ to look after his own needs, which may be true of privileged entrepreneurs, however, does not even come close to describing the less fortunate. Further, the right to reject a bad employment contract is only enjoyed by the wealthy. Moreover, the approach does not practice what it preaches as it leads to the creation of monopolies, making it difficult for new entrants to exercise their economic ‘freedom’. Rejecting worker-friendly measures, the theory further seems to be biased towards the producer.

The ethical dilemma of laissez-faire

The implementation of laissez-faire by any modern government is inhibited by an ethical dilemma - should the government abandon the underprivileged, leaving them to fend for themselves?

If the answer were to be in the affirmative, it would be counterproductive to the role of an ideal government, a betrayal of sorts of the citizens who voted it into power. Further, one cannot ensure that people will always work in their best interest. Alcoholics, for instance, when faced with a choice as to what they should do vs. want to do, choose the latter, succumbing to temptation. Moreover, capitalism creates a conflict between technological and economic progress and environmental preservation with economic progress overshadowing ecological sustainability. The view has also been criticised for its Social Darwinism, a survival of the (financially) fittest. According to the sociologist William Sumner, ‘’The fact that a man is here is no demand upon other people that they shall keep him alive and sustain him".

Does it work in real life?

Owing to the ethical dilemma, absolute laissez-faire has not been implemented by any government and is a myth. While it was seen in the post-Civil War USA, it led to widespread poverty. Some amount of government regulation and aid is indispensable, without which the people would feel helpless. Especially in a pandemic like the one in the midst of which we currently find ourselves, the aftermath would intensify, with efficient vaccination programmes feeling like a distant dream. Similarly, in an economic crisis like the 2008 recession with millions of employees being laid off, government intervention seems inevitable.

Countries that practice partial laissez-faire

There are various instances, however, of free trade practices leading to considerable growth, Hong Kong being a notable one. In a comparison by Milton Friedman, Hong Kong’s average per capita income was 28% of that of England in 1960, which rose to 137% in 1997, the year of its handover to China, due to its non-interventionist policies. Even today, Hong Kong’s per capita income ($46,323.9) is higher than that of the UK ($40,284.6). Similarly, low tax rates and no price control have made Singapore one of the world’s richest countries. Among European nations, Switzerland witnessed a ‘Swiss miracle’ after the 2008 recession, managing to recover without accumulating colossal debts, owing to laissez-faire practices. In New Zealand too, strong property rights and trade freedoms ensured quick recovery from the 2011 earthquake.

Conclusion

While some support the laissez-faire theory, citing potential for economic growth, others see it as benefiting only the top 1%. Though it sounds quite effective at first, deeper analysis makes it seem unrealistic or even barbaric towards the underprivileged. Even countries which do implement certain laissez-faire practices do not follow it absolutely, since society would always benefit from social welfare schemes. Thus, though the term laissez-faire technically means ‘to leave alone’, given the circumstances and the times we are living in, it is best ‘to leave it alone’.