It is usually held that orthodox economic theory supports a (generally) laissez faire, noninterventionist position that is traceable to Adam Smith. Perhaps the strongest argument for this view emanates from Chicago (see, for example, Coase 1976), but it is the prevalent position among most economists. Yet, a thorough reading of social theorists leading to Smith, and a critical evaluation of Smith himself does not support this position. It is true, however, that a generally laissez faire position did dominate the profession by the late 19th century, and while this view waned in the first half of the 20th century, it has resurfaced in the present period. The libertarian wing of the discipline has led this recrudescence, in particular through the work of von Hayek, though the promotion of the laissez faire program should not be confined to the Austrians: the theoretical work of Robert Lucas in particular is clearly of this persuasion (see Kasper 2002). In general, "free trade" or "market fundamentalism" are current watchwords in the discipline, and the Washington Consensus, regardless of its observable dismal record, remains a standard by which proper policy is to be judged. It should also be noted that this resurgence is not confined to economic theory, but has permeated social theory in general. The initial success of Robert Nozick's Anarchy, State, and Utopia (1974) and the encroachment of rational choice theory in political science and sociology are indications of this general trend (see Friedman 1996; Green and Shapiro 1994).
To introduce some order into the argument that follows, a preliminary statement as to what constitutes a laissez faire ideology is necessary. I believe it is necessary to distinguish between what I term a "soft" laissez faire and a "hard" laissez faire position. It is also necessary to clear the ground on the distinction between government interventions in society in general from intervention in the economy, specifically in market relations. Let us initially consider the second issue.
It is rare, perhaps impossible, to find any thoughtful economist who advocates a hands off policy for government in influencing at least the social order within which the economy functions. All recognize, though not all emphasize, the need for some supra-economic organization to determine the rules within which the economy then operates. Even Jean Baptiste Say, one of the most ardent laissez faire advocates, saw government as the mechanism through which not only would property rights be developed and enforced, but also the institution in charge of developing a broadly defined educational program through which the "ignorant" sections of the population would come to understand their "true" self-interests. Government was also to develop a civil code that would enforce "proper" behavior necessary to allow markets to function well (Forget 2001). So, while the economy might arise as a spontaneous natural order, it could only do so within a strongly interventionist government in the social order. This same view is contained in Milton Friedman's very influential Capitalism and Freedom (1962), and forms part of the core argument of Austrian theorists.
Such a stance, however, does not imply government intervention in the workings of the market. Once that market economy is up and running, adherents of a laissez faire program confine their arguments to analyzing economic arrangements that appear as disembedded structures functioning within a framework initially established by the state-imposed rules of the game. The quest, then, is for a theoretical structure demonstrating that a market system, responding to its internal workings, leads to a smoothly operating equilibrium system where natural tendencies, left to themselves, generate optimal outcomes.
The distinction between soft and hard laissez faire ideologies is linked to the above. Early economists, including Smith, were soft laissez faire ideologists--they advocated limited government intervention in the economy itself, including violations of the supposed law of markets. For example, William Petty recommended that government should hoard stocks of grain to prevent market adjustment processes resulting in lower prices of foodstuffs. The reason for the maintenance of a price floor in grain was to reduce real wages, forcing workers to a greater work-effort, thus facilitating the early British capitalist accumulation process (Petty  1899, 275).
James Steuart implored government to assist in the structuring of a capitalist economy, in particular through the organization of the social division of labor so that exchange relations might be quickly established. He also recommended regulation of both profits and wages, though he was considerably more emphatic about the need to regulate the latter: "when a statesman looks coolly on, with his arms across, or takes it into his head, that it is not his business to interpose, the prices of the dexterous workman will rise" (Steuart  1967, 314).
And, while it is true that Smith adhered to a natural order framework in the main, it is also true, that in addition to the standard exceptions surrounding defense, the provisioning of justice, and the construction of public works, he proposed so many exceptions to a generally laissez faire program in market relations themselves that it is unseemly to cast him as a forerunner of modern Chicago. As enumerated by Jacob Viner, such exceptions included a government-imposed ceiling on interest rates, government programs to direct capital toward beneficial investment, export restrictions on agricultural products, subsidies to business firms to assist them in reaching an economically viable size (a primitive "infant industry" argument), and so on. An actual reading of The Wealth of Nations (Smith  1937) would convince many, if not most, to agree with Viner's assessment: "He did not believe that laissez faire was always good, or always bad. It depended on circumstances; and as best he could, Adam Smith took into account all of the circumstances he could find" (Viner 1928, 155; see also, Samuels 1966, passim).
Further, as Samuel Fleischacker has recently demonstrated, Smith was quite keen for his time to point out the need for governments to undertake some redistribution program in a system of private property rights as those rights, necessary for "natural liberty," could well result in poverty. And poverty, as caused by the market system arising on those rights, was unjust (Fleischacker 2004, 203-26). Essentially:
No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged. (Smith  1937, 79) Equity or justice, then, required interference with the workings or outcome of the market processes. That is, Smith and other soft laissez faire theorists did not adopt laissez faire as a standard by which economic relations and outcomes should be judged. Rather, laissez faire was a policy recommendation only if it was in conformity with larger social concerns, including concerns that clearly involved or resulted from the operations of a capitalist market economy.
The "hard" ideologists, while perhaps allowing for a quite limited number of exceptions, particularly surrounding externalities (though, since Coase (1960), even these issues have become less exceptional), do promote a clearly articulated laissez faire program as the only correct approach to economic matters, and devote a great deal of energy demonstrating the inefficiencies associated with government activity. The hard laissez faire program was aggressively promoted in the 19th century, and is clearly associated with neoclassical rather than classical political economic theory. It was the French School, led by Say and promoted by the brilliant popularizer Frederic Bastiat, that established the most consistent foundation on the basis of which laissez faire not only made impeccable logical sense, but which led to a particular view of the consequences of laissez faire for the social order. If one adopted exchange as the foundation for economic activity, and one hypothesized an economy of rational, self-interested individuals attempting to maximize utility, then one could posit an outcome of economic relationships that were not only optimal, but harmonious: "All men's impulses, when motivated by legitimate self-interest, fall into a harmonious social pattern" (Bastiat  1964, xxi; emphasis in original).
This rather unassuming foundation leads, through Walras, Pareto, and Arrow-Debreu, to modern theory demonstrating the efficacy of a (perfectly) competitive market order in allocating resources to make everyone as well off as possible in utility terms. If one posits that voluntary exchange between two parties must increase the welfare of each--or exchange simply would not occur--then, it is argued, voluntary exchange among n parties must also be welfare-enhancing. Hence, unrestricted, unlimited exchange will generate an equilibrium outcome that is optimal, as resources have then been allocated and outputs have been produced to be in accord with the subjective interests of all members of the (Benthamite) community. Ostensibly, the germ of this theory is found in The Wealth of Nations (Starr 1997, 146).
But, as most recently pointed out by Marc Blaug (2007), this attribution to Smith is not correct, and the distinction between Smith's position and that of conventional economics further augments the argument above pertaining to Smith's "soft" laissez faire position. In addition to basing theory on exchange rather than production (as did Smith), the neoclassical welfare demonstration requires the assumption of perfect competition--a theoretical...