Laissez-Faire is a French term, which lives on the principle of letting the market alone (Carlyle, Tarr, & Engel, 2000). During its early phases, it is originally meant to suggest that the government should stay away from the affairs of the market (Carlyle, Tarr, & Engel, 2000). Moreover, trade should be characterized as free and without restrictions from the government to allow for the market to achieve the goals it has without intervention (Carlyle, Tarr, & Engel, 2000).
Placed in the context of capitalism, laissez-faire is “considered to be the ‘purest’ form in that it couples private ownership of a nation’s resources with a ‘hands-off’ posture of government” (Rogers, 2000, p. 37). The definition provided herein shows a picture wherein the market, including the private industries, is given the leeway to operate and utilize resources without the intervention of the government. This is done in light of the realization that there are certain advantages that are derived from this particular type of economic system and that the market, together with its other economic agents, are given the chance to achieve optimum efficiency.
Placed in a much simpler context, laissez-faire capitalism exists in a condition wherein there is no state ownership and that there is also the absence of state control (Wu, 1994). This means that all the aspects of ownership are given to the private sector and that the government does not allow itself to interfere in the economy.
Laissez-faire as a form of capitalism is a concern for both the economists and the countries where its application is seen as something that could affect the economic development of nations. This paper aims to show the arguments that lead people to think that this is, indeed, the best and suitable economic system that should be adopted. More specifically, arguments are made to show that it benefits people from the different socioeconomic strata, which range from the richest to the poorest. Likewise, it is important to present Milton Friedman, a great advocate of the laissez-faire capitalism for his thoughts adds a great value for the discussions. Lastly, the means through which the government could stay out of the market and keep their hands off the affairs of the same is also shown in order to provide insights as to the possibility of keeping the government at the sides in terms of economic development and affairs.
Foundations and Assumptions of Laissez-Faire Capitalism
There are several foundations and assumptions to which laissez-faire capitalism stands. This is where it solicits a strong footing and a stable argument in order to prove that it is an effective system for the economic aspects of a nation. These are some of the common and obvious foundations and assumptions that can be spoken of laissez-faire capitalism.
Foundations of laissez-faire capitalism
There are religious foundations that are seen on several arguments made in support of laissez-faire capitalism. While not everything is backed with rational and empirical evidence, these arguments still warrant a deep observation for it has its corresponding sociological impacts for the society.
In relating the human nature to that of laissez-faire capitalism, John Eidsmore states that
because of man’s sin nature, he is basically selfish and interested in that which directly benefits him or those close to him. He is incapable of sustained activity motivated solely by altruism or the benefit of others [and] the strength of the free enterprise system, then, is that it is based on a realistic biblical view of the nature of man. It recognizes that for the most part fallen men will not produce, over a long period of time, unless they and their loved ones profit thereby. (as cited in Walsh, 2000, p. 13).
In the statement made by Eidsmore, there is a strong adherence towards a free market which is dependent on the nature of laissez-faire capitalism. The view of man, in this sense, is that individuals work where there is a corresponding profit that is expected from the completion of labor and is relative to the efforts exerted. From a psychological perspective, it sees man as a being that is motivated by gains. True enough, this is a principle that reflects the image of human beings and allows people to work at their optimum level. An added element to this is the notion that there should be no intervention by the government in order for people to strive harder and to avoid discouragements due to restrictions and interference made by the government.
Another argument made in the same direction comes from R.C. Sproul wherein it is stated that:
equality of material ownership may be a noble idea in a world where sin is not present… but to enforce such an equality in a world where some are industrious while others are slothful, and some are productive while others are wasteful, is not to establish justice but to destroy it. (as cited in Walsh, 2000, p. 13).
Similarly, this argument suggests that the best form of economic system draws away from the welfare state and on towards a state which adheres to the principles of a free market. In lieu of the nature of man where there an unequal initiative exists among the people, equality in terms of material possessions is not possible and further perpetuates the disturbance of social justice. It is seen that for people to exert more effort and receive what they deserve, it is important for them to be in a competitive environment where everyone is motivated by the natural forces of the economy.
Assumptions of the Government
The government is said to be a bystander in the laissez-faire capitalism and is not given the power to meddle in the affairs of the private sector. There are three underlying assumptions in relation to that of the government that have rendered the principle of laissez-faire capitalism valid.
First, the “futility thesis” gives the notion that the government is incapable of leading the economy or the society (Thompson, Dorsey, Miller, & Parrott, 2003). This is in relation to the unknown circumstances to which the economy operates, as represented by the “invisible hand” (Thompson, Dorsey, Miller, & Parrott, 2003). Where the economy operates on unknown forces, it follows that the government does not have the full grasp to understanding the economy and the society (Thompson, Dorsey, Miller, & Parrott, 2003). This complexity leads to the inability of the government to effectively achieve regulation and it is better for it not to intervene in something that is unknown and has its own set of natural operations. It is better for the economy and the society to be left on their own that interfere in it with uncertain plans.
Second, the “perversity thesis” presents the idea that “government activities inevitably produce serious, perverse, unintended, and unanticipated consequences” (Thompson, Dorsey, Miller, & Parrott, 2003, p. 416). The intervention that is introduced by the government creates adverse effects that are not within the expectations of the economy. To a certain extent, it could be considered that these government regulations are not part of the economic system and when mixed with the economic factors, it leads to events which are not within its natural course.
Third, according to the “jeopardy thesis” there is the notion that, seemingly, the actions of the government are directed towards altering or interrupting the natural flow of capitalism and the profits (Thompson, Dorsey, Miller, & Parrott, 2003). The public sphere, as observed from the previous arguments made above, is not a player that should be involved and participation that comes from this sector is seen to be a disturbance to the economy.
An analogy can be made between the economy and that of the water in a stream. It flows incessantly with its own direction and at its own pace. Anything that is not of the same characteristic, which is known to be fluid, would create a different direction and could affect the flow of water to unexpected circumstances. For example, a piece of wood, which represent government regulations and activities, is placed in the middle of the stream; the weight and size of which could not be carried by the flow of water. As previously mentioned, this would affect the flow of water and could even form a dam and lead the water to become stagnant for a considerable amount of time.
Keeping this in mind, the unobstructed flow of the economy in order to achieve the goals of laissez-faire capitalism creates an economic system where everything is running efficiently with the gains of a free-market always in existence. This leads to economic growth as trade is also free and the fruits of comparative advantage are also seen in the picture. The country gains from the welfare that is derived from producing the products which another country could produce more efficiently and exchanging this for the products produced locally. Without government regulations to such, all of the countries are able to gain an increased level of welfare through trade. The effects of the growth produced by this particular situation also trickle down the economic ladder through different means such as a reduced rate of inflation, reduced rate of unemployment and underemployment, and reduced price of goods and services. However, with several imposed government restrictions and regulations, there is the tendency for the economy to be restricted and additional costs to be incurred by the different players that may come in the form of taxes and other methods that intend to redistribute the wealth equally among the people through social services. As could be remembered, it is mentioned earlier that this leads to the idea of the government being unfair for those who do not work as hard as the rest. This is because the situation brings losses for the economy wherein there is an unequal distribution of wealth among those who exert a considerable amount of effort compared to those who do not but still get their share of the profits.
Milton Friedman and Laissez-Faire Capitalism
Milton Friedman is considered to be among the pioneers of the monetarist school of thought and is a popular economist (O’Connor, 2004). He earned his bachelor’s degree at the Rutgers University in the year 1932 and proceeded to the University of Chicago and Columbia University for the completion of his graduate studies in the field of economics (O’Connor, 2004). He successfully received his doctorate degree in the said field in the year 1946 and became a professor at the University of Chicago (O’Connor, 2004). The succeeding three decades of his career is spent doing research, teaching, and writing (O’Connor, 2004). He became an expert in the field of economics and earned the respect of the academic community. He is even assigned as the “chief spokesperson for the Chicago School monetarists” (O’Connor, 2004, p. 269).
During his term as the chief spokesperson of the Chicago School, a very strong argument is made with regard to the issue of laissez-faire capitalism. According to J. Rosser and M. Rosser (2004), attention should be given to the “irrelevance or unimportance of the various exceptions and limits. Markets are almost always efficient, so government should keep its hands off” (p. 48). The strong thesis is made that shows the superiority of the degree to which the market is efficient when it is allowed to work on its own.
It is in his work “Capitalism and Freedom” wherein his thoughts of the free market liberalism is ingrained and presented. It is often seen by members of the field of political science as a document which provides the archetypal representation of the free market as it is related to the principles of the laissez-faire capitalism (Wood & Woods, 1990). Interestingly, he considers that the principles of capitalism are prerequisites for political freedom (Wood & Woods, 1990). There are arguments he made that suggest that the two are conditions which are related to one another and has corresponding impacts for the nation. Likewise, it has become necessary for political freedom to exist first in order for the capitalist institutions to prosper and function well (Wood & Woods, 1990). In a sense, there is a need for the advocates of capitalism to gain political freedom prior to the establishment of a full set of capitalist institutions (Wood & Woods, 1990). Just the same, where there is economic freedom, a degree of political freedom is also upheld (Wood & Woods, 1990).
He has a great sense of passion for proving the principles of laissez-faire and the applicability of its principles to the economies of different nations. His ideas on how to provide for a free-market that lasted up to the global level is placed in his work “Capitalism and Freedom” (Klein, 2007). His ideas on how the government could draw itself out of the economic scene are all placed in the said book.
The Invisible Government
There are still functions that are to be performed by the government in a nation but for the proponents of the laissez-faire capitalism, it is important that it is limited only to the protection of the private properties and the establishment of an enabling environment for the market to achieve its full potential (McConnell & Brue, 2005). These are the two remaining functions that are given to the hands of the government in a free market and steps made further to regulate the market are not accepted. There are several ways by which the government could become invisible and remain in the shadows of the market.
The tenets of upheld by Smith is that there should be less activities that are related to “government regulation of business activity, government restraints on external and internal trade, central planning of economic activity, costly government bureaucracies, and the use of public money to support the poor [and] excessive taxation” (O’Connor, 2004, p. 52). These areas where the government could lessen its control are discussed in detail below.
First, the government should regulate the ways by which capitalists operated their businesses. In every state or country, there are several rules that are followed in order to operate a particular type of enterprise. This requires licenses and several permits to be obtained and along with these are the rules and regulations to which the businesses have to agree. As far as practicable, these regulations that set the limits on the movements and actions of the businesses should be eliminated in order to provide an atmosphere where the key economic players are able to compete and become industrious while expecting their profits to be commensurate of their efforts.
Second, the government should advocate for free trade up to the international level. This can be done through reduced tariffs and taxes on the importation and exportation of goods. In addition to this, the government should also encourage the local producers or the cottage industries to produce the commodities to which they have a comparative advantage. The enabling environments for the local industries should be present so as to ensure that these small-scale businesses are still able to continue their operations.
Third, the government should keep itself away from planning for the economic aspect of the nation. As the forces of the economy works through the principle of the “invisible hand,” it is important for them redirect their efforts to other activities aside from that of the economy. This is because it is harder for the government to plan for something that is uncertain and is unknown. It is better for the government not to plan and let the economy flow on its own.
Fourth, the government should lessen the agencies it has that deal with the economic aspects as these are seen to be of no use in an economic system that adheres to the tenets of the laissez-faire capitalism. It is unnecessary to maintain these agencies that seek to regulate the economy if the concerns or areas to which their mandates respond to no longer exist. Likewise, this frees the government from the operations and other expenses incurred with the existence of these agencies.
Fifth, the government should restrict its efforts that are direct towards redistribution of wealth. This is seen as an activity that opposes the free flow of the economy wherein people are not given the chance to persevere and gain through their own efforts. This is a form of intervention that does not allow the economy to gain from pure competition in terms of labor and capital.
Lastly, the government should not tax the agents of the market. Taxes are additional costs for the economy and there are other sources that could be used by the government for their operations. This should not also be used as a means through which the wealth is redistributed because it becomes unfair for those individuals and corporations that strive hard in order to gain profits.
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