The political economy of laissez-faire.

Author:Waller, William
Position:Analysis of industrial economy

Laissez-faire has several complicated roles in our culture. It is an intellectual construct in the history of economic thought; it has significance for economic theory; it is and has been a policy proposal or position in every public policy debate in the West since the eighteenth century; it is an ideological position--a logically inconsistent part of classic liberalism, a mild embarrassment to modern liberalism; it is a fetish of the lunatic right wing of the American political scene, a mantra for conservative think tanks, and a potent cultural symbol in industrial and industrializing economies--especially the United States. All of these roles contribute to the political economy of laissez-faire.

Laissez-Faire and the State

Classic Liberalism

The nation-state's sovereignty ultimately depends on the ability to establish, maintain, control, and defend borders and maintain order within those borders. It is from these necessities that the police powers of the state derive. Classic liberalism's focus on the minimal state usually leaves little for the state to do except provide for the common defense and maintaining courts of law. Yet the liberal state is usually combined with a notion of laissez-faire with regard to economic policy. The intellectual foundation for laissez-faire policy emerged from the classical economists' criticism of mercantilist policies--particularly the use of trade barriers including tariffs and custom duties to regulate international trade. But adopting a policy of not controlling and regulating trade across borders is to abandon sovereignty--because sovereignty is the ability to determine who and what can cross a nation-state's border and under what conditions. Consequently, as Rexford Tugwell (1968) noted, the very definition of the liberal state requires that the police powers of the state be used to regulate the borders, including commerce across those borders, and maintain order and stability within the borders, including insuring the ongoing process of provisioning and necessarily commerce. This builds a fundamental contradiction into the classic liberal state.

Modern Liberalism

Modern liberalism's embarrassment with regard to laissez-faire policy derives from recognition of this above-mentioned fundamental contradiction in the classical liberal notion of the state and wishing it weren't so.

The Pragmatic State

As I have argued elsewhere (Waller 1992 and forthcoming), institutional economics incorporates a theory of the state that is pragmatic and problem solving. Consequently, what is referred to as laissez-faire has no meaning at all--in that the decision to not have a government policy regarding an aspect of provisioning is simply another government policy. Laissez-faire policy as used in economic discourse is prescriptive in that absent any compelling reason, laissez-faire is the presumptive, default policy. As an economist at the U.S. Environmental Protection Agency once told me in private conversation:

 In a way, all the professional economists [excepting political appointees] at the EPA are institutionalists because in the interdisciplinary environment in which we work you cannot walk into a meeting with scientists, engineers and lawyers and say that all we need to do is free the market--it won't pass the laugh test. If you actually say that phrase everyone in the room will laugh at you. Besides they don't need an economist to say "Free the Market!" you can train a parrot to do it whenever you feed it a cracker. 

Alas, at least in part because of the aforementioned laugh test, these days my colleague finds that our environmental policy assessment comes from the White House to the EPA, not the other way around.

Laissez-Faire in Economic Thought

John Maynard Keynes, in his essay "The End of Laissez-Faire," noted that the term laissez-faire appears in its economic form in the private writing of Marquis d'Argenson in 1751. Keynes characterized laissez-faire as meaning "that by the working of natural laws individuals pursuing their own interests with enlightenment in conditions of freedom always tend to promote the general interest at the same time!" (1972, 274). He noted the term does not appear in Adam Smith, Ricardo, or Malthus. He further noted that "[t]his is what the economists are supposed to have said. No such doctrine is really to be found in the writings of the greatest authorities. It is what the popularisers and the vulgarisers said" (277). Indeed, he noted that from John Stuart Mill to Alfred Marshall, economists spent a great deal of their effort elucidating the occasions when private interests and social interests do not correspond. He noted "the guarded and undogmatic attitude of the best economist has not prevailed against the general opinion that an individualistic laissez-faire is both what they ought to teach and what in fact they do teach" (282).

 As Keynes moved on to discuss what he called the Agenda, he summarized-- Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. It is not true that individuals possess a prescriptive "natural liberty" in their economic activities. There is no "compact" conferring perpetual rights on these who Have or on those who Acquire. The world is not so governed from above that private and social interests always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest

generally is enlightened; more often individuals acting separately

to promote their own ends are too ignorant or too weak to attain

even these. Experience does not show that individuals, when they

make up a social unit, are always less clear--sighted than when

they act separately. (1972, 287-8)

It is interesting that Keynes' essay would spark a small industry to search out recommendations in favor of laissez-faire policy in the work of the classical economists.

Of course, Keynes did not settle the issue. And it will surprise no one that the cause of finding the lazy fairy was taken up in the University of Chicago's economics department.

Jacob Viner and Laissez-Faire--Or, Laissez-Faire, Anyone? Really?

The defense of laissez-faire as both a theoretical economic construct and as a policy proposal derived from sound economic judgment begins with an assessment of the work of Smith by Jacob Viner in 1927. Viner constructed the definition of laissez-faire from Smith's text in The Wealth of Nations:

 In ... [Smith's] one deliberate and comprehensive generalization dealing with the proper function of the state, Smith made it clear ... that he would narrowly restrict the activities of government. "According to the system of natural liberty, the sovereign has only three duties to attend to;.... first, the duty of protecting the society from the violence and invasion of other independent societies; secondly.... the duty of establishing

an exact administration of justice; and thirdly, the duty of erecting and maintaining certain public institutions and certain public works." (218, quoting Smith II, 185) Viner later opined--

Smith made many exceptions to his general argument for laissez-faire. But his interest as a reformer and a propagandist was not in these exceptions which he would have made to his general restrictions of government activity to protection, justice, and the maintenance of a few types of public works and public institutions. When considering in general terms the proper functions of government, he forgot all about these exceptions. (218) ... There is no possible room for doubt, however, that Smith in general believed that there was, to say the least, a strong presumption against government activity beyond its fundamental duties of protection against its foreign foes and maintenance of justice. (219)

Of course, all this does is assert that whatever Smith was in favor of in terms of the appropriate role for government is, by definition, laissez-faire. The circularity of this argument is perfect, and consequently the argument is not terribly compelling--however, this is hardly a unique case of tautology in the history of economic thought.

Mark Francis (1978, 317-319) in his analysis of Herbert Spencer and laissez-faire noted this tendency in Viner and other writers who have evaluated the historical importance of laissez-faire as a concept or a policy regime. A person who favors limited government or free trade in the abstract but allows for some number of exceptions in practice is a proponent of laissez-faire. So any policy regime of limited government and support of free trade, but also including some undetermined number of violations of and exceptions to these policy proscriptions, is a regime of laissez-faire policy. Francis said in a footnote, "Some historians talk of a 'tendency' towards laissez-faire in the nineteenth century, a figure of speech which allows them to ignore any exceptions" (318, footnote 6).

While some arguments regarding who was or was not in favor of laissez-faire as a policy regime or whether a regime of laissez-faire in policy ever occurred continued in the fields of economic history and the history of economic thought (Gordon 1955; Schwartz 1966; Holmes 1976; Francis 1978; Gordon 1971; Viner 1960), eventually a consensus does seem to have emerged. This consensus...

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