laissez faire definition us history

laissez faire definition us history

The Concept of Laissez-Faire in U.S. History

1. Introduction to Laissez-Faire Economics

Basically, the application of the principles of laissez-faire places emphasis on individual initiative and the primacy of the private sector in the decision-making processes of the economy. Problems of resource allocation are settled through the price mechanism as mediated through the forces of supply and demand. It follows that laissez-faire denies the efficacy of extensive government intervention in the operation of the private sector. Examples of such interference would be the institution of price controls, the regulation of producer behavior, or the exercise of extensive governmental direction and control over the level and distribution of economic activity. While there are many examples of extensive government participation, control, and actual operation of social and economic activities, the basic thrust of the American system has been toward limited governmental direction of private-sector activity rather than toward an actual takeover of the private sector. Reasonable people may employ a variety of criteria and circumstances to determine the extent of government intervention to be “excessive” and the consequent necessity for correction; the fact of extensive participation by the government is not in dispute. What is important is the recognition of the fundamental importance of the economic concept of laissez-faire, a concept that has broad implications for U.S. economic history.

Laissez-faire and its theological counterpart, the separation of church and state, have generally been recognized as important underlying principles in American society. Freedom of individual action has been one of the essential characteristics of “the American way,” and it implies that people should be free to act within the broad limits defined by their moral or ethical beliefs and not be unduly restrained in their economic activity by governmental power and influence. The American economic system has, with some notable exceptions, predominantly operated under the principles of laissez-faire. The application of laissez-faire or the extent of its application has been the topic of much debate and controversy over generations, but its fundamental importance is quite clear. The concern is with the principles of laissez-faire rather than with the question of its definition. The terms have been adequately defined in many places.

2. Historical Origins of Laissez-Faire in the United States

The intellectual relativism of laissez-faire in the United States is better understood when seen in the light of an extended historical context. It was not borrowed but a product of formative experience. English commercial practice took root in America in the context of struggle for individual freedom and economic independence. Economic growth meant social progress and improvement. This combination of materialism and idealism is identified by the Greek political term “eudaimonia.” The environment is conducive to what is observed. English commercial practice matched human behavior and its constant flaws. The concept of laissez-faire was specifically shaped into the American socioeconomic consensus of equal rights as revealed in the liberal rhetoric. Its source and guiding spirit was the socioeconomic context of an American Dionysian reaction. Through it, the “Athenian arch” of laissez-faire was expanded into an integrated whole. It was economic behavior subsumed in a life-style motivational structure. The concept gave relative stability and durability to the overall socioeconomic system. Its roots were also formed in an extended historical context.

The application of the English commercial principles in 18th-century America is stressed in American economic history. Adam Smith’s Wealth of Nations is considered to be their first statement. Economic history also stresses the thesis that the United States managed to practice them because institutional impediments were fewer there than they were in Great Britain. This institutional reversal in logic is historically driven in the United States by a concept called “laissez-faire.” Laissez-faire is a conclusion and not a paradigm. It is always relative, and it is implemented not by one particular way of planning but by a diversity of means.

3. Impact of Laissez-Faire Policies on Economic Development

To date, most of the empirical work on the consequences of a laissez-faire regime characterized distinct periods of policy intervention and non-economic exogenous events could result in a biased estimate of those effects. For instance, such work provides no information about what these policy instruments “could have” done in the absence of intervention. Presumably, a better basis for understanding the impact of laissez-faire policies would be to observe policy-induced changes in government special protections. Unfortunately, there are very few examples of policy changes that reallocated the mobilizable fraction of income.

Economic historians debate the impact of laissez-faire policies, meaning policies that allow the economy to move unfettered from artificial constraints, on economic development. The economy always has laws – market laws – by which it operates. Economic policy itself affects this legal functioning by altering the incentives faced by people in the market. In this regard, policies designed to announce the structure of downside risks associated with investment have immediate effects on growth through altering those incentives. In other words, the links between policies – their operational content – and the functioning of markets are clear. Longer-term policies can be seen as affecting growth through incentives somewhat differently, by altering the nature of the economy’s “endogenous” growth dynamics.

4. Critiques and Challenges to Laissez-Faire Ideology

The economic benefit to Britain and, more precisely, to the society was uncertain. Nonetheless, the members were fully aware of the society’s commercial activities and that its resources were better spent upon plantations, chartered companies, or joint-stock companies. The society was not alone in this position. Only a few years earlier, in 1699, Thomas Moore, a critical observer of the City, characterized the concept of laissez-faire as very unsatisfactory. “Although goods and people go where they will with little regulation, nevertheless this does not release weights and other such burdens which are everywhere a source of considerable injury.” Fifteen years earlier, John Massie wrote that not only did the country lose much mineral wealth but also many of the “ragged poor” who worked in the mines could have been made useful Englishmen.

Laissez-Faire represented extreme confidence in individuals and their capacity to handle their own affairs. The Society, on the other hand, was rich in experience and wisdom, and it was aware that much, much more was necessary than faith and freedom. As Richard Hakluyt observed in 1600, if the government had a welfare responsibility to its people, then a sound policy would also have to be devised and implemented. The economic program of Sir William Petty, characterizing him as an “early” English economist, believed in the necessity of government control over the up-to-date economy. He wrote, “To leave all things to themselves and to let them take their course, as things under the law of nature, is not only to leave the best things undone, but to make the others laws less perfect.”

The Society was confronted, however, with an age-old problem: how could the bulk of individuals in a society be expected to subordinate their narrow, personal interests to those of society as a whole? The solution was a progressive system of stock ownership and control. Unlike banks and corporations, the individuals who owned and controlled joint stock companies were also the participants in the economy. Thus, this “common” capital would promote greater sharing in the national wealth, great peace and prosperity, rescue the landed interests, encourage employment, and establish “some sort of fraternity” with the merchants and the gentry. For several centuries there was a constant tug-of-war between the exclusive and the common.

In the same entry in which he wrote that he was “obliged” to follow the economic precepts that he popularized, there can also be found an important challenge to laissez-faire. Josiah Child, an early mercantilist writer, noted that a country’s capital could be either “exclusive” or “in common.” Capital that was exclusive was brought together in large quantities, such as that X might belong to the East India Company, Y to the South Seas Company, and Z to the Russia Company. These joint funds enhanced British strength, promoted commerce and manufactures, served as guarantees against oppressions or injuries suffered abroad, increased trade, and prevented the “weakening and fragmentation of the whole.”

5. Contemporary Relevance and Debates Surrounding Laissez-Faire

In practice, applying laissez-faire ideas has proven exceedingly difficult. The ideal, that government should not intervene in a market economy, has often proven difficult to maintain when faced with significant economic problems. Is an economic depression created by a sequence of financial panics a proper time for government to allow laissez-faire? Similarly, even in the classic cases where the presence of external costs is widely acknowledged, such as smokestack emissions or other forms of pollution, governments struggle to address them adequately. Classical economists, who first elaborated the principles of laissez-faire, suggested several requirements for its implementation into the realm of policy. However, as valuable as these benchmarks are for creating a laissez-faire approach to government, their implementation has proven both controversial and difficult to realize in practice. The history of U.S. policy is one of moving back and forth between periods of emphasis on laissez-faire ideas and greater government intrusion into American markets and then back again. Indeed, should it prove possible to develop effective policy responses to the economic and social challenges to which a market economy seems prone, the term may have little relevance for future generations.

The ideas of limited government and laissez-faire remain a vibrant presence in American politics. Laissez-faire entered the lexicon alongside government and identifies an alternative approach to the organization of economic activity. In the United States, laissez-faire has periodically entered debates about the proper role of government in economic life and influenced policies. Presidents as diverse politically as Thomas Jefferson, Rutherford Hayes, and Ronald Reagan have defended it, while the United States has passed various legislative acts to promote some of its tenets. In the post-Cold War era, laissez-faire acolytes such as Ayn Rand and Friedrich von Hayek remain influential. Laissez-faire ideas challenge economists and historians both to trace their origins and evolution in U.S. history and to weigh the evidence with respect to its supposed benefits.