Jonathan Beatty
Professor Craig
World Politics 001H
Submission Date: 2 October 2011
Laissez-Faire Economic Policy
Laissez-Faire is defined by Merriam-Webster as “a doctrine opposing governmental interference in economic affairs beyond the minimum necessary for the maintenance of peace and property rights.” (Meririam Webster) Developed around Adam Smith’s idea of the “invisible hand,” a laissez-faire economic policy is based around minimal governmental interaction (Business Dictionary). Many examples of near-laissez-faire policy exist throughout history. When the British were the Hegemon in the world system, they had adopted a near-laissez-faire-policy of free trade. The deregulation of the trading system and of the economic system allowed the British to establish and increase their influence over the world. In addition, France had a system situated around laissez-faire. The United States also had this system during the Antebellum period. (Case for Laissez-Faire)
The clearest example of a successful economy based on a Laissez-Faire policy is Great Britain during the period it served as a Hegemon. Laissez-Faire policy allowed the British to remove trade restrictions and to deregulate international trade. This allowed the British to expand their Commonwealth. The book The Wealth of Nations, written by Adam Smith, contained forward thinking advice, such as giving more money to the capitalists to invest (Wealth of Nations). Mr. Smith’s guidance allowed Great Britain to become the world’s leading economic power. The decreased regulation by the government allowed the British East India Trading Company to flourish and increase British Power (Mercantilism). The poor treatment of newly-conquered people by the British government brought the Hegemon to its demise. The use of a laissez-faire economic policy was a sustaining factor in British Hegemony.
Throughout its history, France has exhibited laissez-faire economic policies several times. France was one of the initial countries to use a laissez-faire economic policy. It is suggested that laissez-faire was initially suggested by Jean-Baptiste Colbert. When asking industry titans in France during the period of Louis XIV what could be done to improve industry, the industrialists replied simply “Leave us alone.” (Britannica, Laissez-Faire) Decreased regulation was practiced during the reign of Louis XIV, allowing him to grow his empire into one that extended the boundaries of France. France did find itself losing power exponentially towards the end of his reign. This loss was not due to French economic policies. This loss was due to misinformed social decisions and the involvement in many wars (Britannica, Louis XIV). The French revisited laissez-faire heavily during the Fourth Plan, where the market was based around laissez-faire policy and the government was centralized. Because of the success of this plan, the laissez-faire policy was furthered into the Fifth Plan.
The United States has also exhibited laissez-faire economic policies in the past. The clearest example was during the Antebellum Period. As Kevin Dowd wrote in A Case for Financial Laissez-Faire, banks in the United States had “virtually no federal regulations and yet had capital ratios in most years of over 40%.” The only reason the laissez-faire was not continued in the United States was because of the start of the Civil War. The destabilization of most institutions was a direct consequence of the Civil War. After the Civil War, most institutions were in need of financial support (Case for Laissez-Faire). The government decided to intervene. Consequently, the United States’ economic section has heavily relied on its government to be its backbone. As a result economic growth has been sporadic and financial crises have developed.
The results of laissez-faire economic policies are why laissez-faire policies are implemented. Laissez-faire policies result in uninhibited economic growth. This results in improved infrastructure and a self-reliant economic system. Laissez-faires are unpopular, especially after financial crises. The reason for it being unpopular is because the lack of help from government results in the recovery taking a longer period of time. Its unpopularity arises because of the extraordinarily length of time that recovery takes when under a laissez-faire policy. This is because the economy has to recover on its own; no stimulus package is put into place by the government. Presently, the stock levels in the last week have been decent, but it was recently reported that this quarter has been the worst quarter since 2008 (Stock Market). Economists are suggesting that we are starting to experience what is referred to as a “Double-Dip Recession” (Double Dip Recession). If history is any indication, the second recession in a Double-Dip Recession will be worse than and longer than the first recession. Part of the current economic crisis can be blamed on the instability of other world markets. Ultimately, some of the blame resides in Washington D.C. and its decision to forego a laissez-faire policy (Applet).
There are defects with a laissez-faire policy. The main defect is the potential for corruption if it is not managed correctly. The absence of regulation is a determining factor. In a laissez-faire system, economic powers have to regulate each other with minimal intervention from the government. This is difficult. But if a laissez-faire system is successful, economic benefits far outweigh these defects.
A decision to switch to a more laissez-faire-influenced economic policy is an unpopular decision. But, this policy would result in uninhibited economic growth. The United States is in desperate need of economic growth, especially with the threat of another recession. The decision to use a stimulus package was a bold decision made in Washington. Even though it was more effective than originally thought, the effects are already starting to wane. Initially, the policy of getting banks back on their feet met its intended result. Unfortunately, as the months passed, more money was handed out. Eventually the economic system of the United States became more intertwined with the government. In hindsight, if the United States had adopted a policy of laissez-faire during the recession, the recession would have lasted longer. Likewise, the United States’ economy would currently be stronger and not facing the threat of another recession.
Works Cited
Applet-magic.com. "The Economic History and the Economy of France." Index Page for Applet-magic.com. Applet Magic. Web. 01 Oct. 2011.
Britannica. "Laissez-Faire (Economics) -- Britannica Online Encyclopedia." Encyclopedia - Britannica Online Encyclopedia. Britannica Academic Edition, 2011. Web. 01 Oct. 2011.
Britannica. "Louis XIV (King of France) - Britannica Online Encyclopedia." Encyclopedia - Britannica Online Encyclopedia. Britannica Academic Edition, 2011. Web. 01 Oct. 2011.
BusinessDictionary.com. "What Is Laissez-faire Economics?" BusinessDictionary.com - Online Business Dictionary. WebFinance, Inc. Web. 29 Sept. 2011.
Dowd, Kevin. "The Case for Financial Laissez-Faire." The Economic Journal 106.436 (1986): 679-87. JSTOR. Blackwell Publishing for the Royal Economic Society, 9 Aug. 2009. Web. 29 Sept. 2011.
Merriam Webster. "Laissez-faire - Definition and More from the Free Merriam-Webster Dictionary." Dictionary and Thesaurus - Merriam-Webster Online. Merriam Webster. Web. 02 Oct. 2011.
Norris, Floyd. "Time to Say It: Double Dip Recession May Be Happening." Editorial. The New York Times 5 Aug. 2011. Nytimes.com. The New York Times, 4 Aug. 2011. Web. 1 Oct. 2011.
Scarlett. "Adam Smith The Wealth Of Nations Summary." Scarlett: History of Economic Theory and Thought. Scarlett, 2011. Web. 02 Oct. 2011.
Smith, Adam. "Mercantilism: The Concise Encyclopedia of Economics." Library of Economics and Liberty. Library of Economics and Liberty, 2008. Web. 01 Oct. 2011.
Wagner, Daniel, and David K. Randall. "Stock Market: Worst Quarter Since 2008 - CSMonitor.com." The Christian Science Monitor - CSMonitor.com. The Christian Science Monitor, 30 Sept. 2011. Web. 01 Oct. 2011.
Examining the effect of further laissez-faire policy on the American economy, I am doubtful that it would have a clear-cut beneficial impact. BEing an import heavy nation, free trade would most likely impact the American economy by undercutting domestic industry through cheap imports. This would have two effects. The first would be to have a large net gain for all consumers, since certain goods would be cheaper. Producers, specifically workers, would be undercut however, and most likely fail. The effect on the average consumer would be slightly good, and slightly stimulate spending. THe effect on the average worker in the affected industries however, would be devastating. They would lose their job, and massively cut back on their spending.
ReplyDeleteThe question is then, would the large gain in spending spread out throughout all consumers be enough to counteract the massive cutbacks in spending from a relatively small group? I am not throwing this one way or the other, just raising the question. My point here is only that the issue is not clearly beneficial; it is complex.
John,
ReplyDeleteI really liked that you were able to reference examples of how laissez faire has been used in the US and abroad; that evidence definitely helped to support your main point. I agree that a decision to move toward a laissez faire economy is an unpopular one; I think that when people hear "laissez faire" they panic and picture complete pandemonium at a lack of restriction (similar to how they freak out over the word "anarchy" and immediately picture Somalia and burning cars). I think a lack of knowledge about exactly what laissez faire is (beyond the well known "invisible hand") contributes to its unpopularity. I agree with Sean's above comment; we have to ask ourselves if such a move would be "worth it" in the long run. And, is uninhibited growth really the only thing that this economy needs?
As I read your arguments for how laissez faire would create uninhibited growth, I began flashing back to the class discussion on liberalism and the idea that a strong economy and flourishing trade can ultimately foster peace. Do you think laissez faire can be so powerful as to have such a social effect? Can it run deeper than just "lots of growth"?
Of course economics is confusing, Sean (?). Laissez-Faire policy wouldn't impact international trade as much. During the paper I spoke of Laissez-Faire in terms of the domestic economy. In terms of international policy, the government could not use a free-trade policy because not many countries use free-trade as their international trading policy. That would be counterproductive. Domestically, a laissez-faire policy would work quite well. Laissez-Faire policies actually promote job creation. While Great Britain was a Hegemon, it had periods of large job growth because as an economic empire increases, workers are needed to maintain it and the increased infrastructure as a result of increased spending.
ReplyDeleteIn response to the shared question, at this point in our broken economy, anything could honestly help it improve.
Caroline, I definitely think that laissez faire can have a social effect. During the period of British Hegemony, the British public was more together than it has ever been. During periods of economic prosperity, the public is more positive and receptive to change.
Good discussion, everyone. I think there are some elements of it which we'll see again when we talk about international trade and the North-South gap, but I want to add to Jonathan's analysis the idea that British merchants did not triumph during the 18th and 19th centuries solely because they were smart businessmen; they triumphed because the Royal Navy was able to safeguard trade routes against pirates, blast apart recalcitrant monarchs who did not wish to trade (cf. the Opium Wars in China), safeguard colonies as markets and sources of raw material, and break attempts at Portuguese, French, and Dutch monopolies. This is 'laissez faire with a bodyguard' at best; imperial corporatism at worst.
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