Classical liberalism and the laissez-faire policy
The political ideology of classical liberalism is a coherent vision how society should be organized. It became the dominant political philosophy in the middle of the nineteenth century (Hudelson, 1999, p.38). But it is important to distinguish between the different forms of liberalism. It has different meanings, depending on the century the expression was used. In the eighteenth and nineteenth century it can be labeled as ‘classical liberalism’ (Hill, 1964, p.394). In the twentieth century it can be denoted as ‘welfare liberalism’ (Hill 1964, p.394). The main difference between these two is the extent of governmental action (Hill, 1964, p.394). Core features of the classical liberalism are the liberty of individual citizens and the commitment to free markets and free trade, which are seen as the best way to organise economic life (Hudelson, 1999, p.37). Some important representatives of the classical school are Smith, McCulloch, Senior, Cairnes, Ricardo and Mill (Taylor, 1972, p. 27).
Classical liberalism draws on the economic science of Adam Smith (Hudelson, 1999, p.37). Among the classical liberalists, he is the first one in time and of particular significance (Taylor, 1972, p.19). In The Wealth of Nations, he argued, that individual work and free trade, achieved through the operation of the invisible hand, is the best way to advance the wealth of a nation (Schotter, 1985, p.44). More precisely, an optimal social state is created through barter and exchange of free individuals (Schotter, 1985, p.28) and natural order together with individual freedom (Taylor, 1972, p.19). A perfectly competitive market economy will determine a Pareto optimal competitive equilibrium outcome (Schotter, 1985, p.12). Given limited resources, there can be no outcome that leaves all members of society better or at least as well off, as the outcome of a freely competitive market (Schotter, 1985, p.12). But the invisible hand theory has its limitations (Schotter, 1985, p.28). The theory states, that there must not be externalities in the economy. The utility each consumer gets from the goods he consumes, must be independent of the utility from goods consumed by others (Schotter, 1985, p.28).
To describe where Adam Smith could be classified in the history of economists, Skousen (2009) recommends the pendulum formula. It categorizes every economist along a political spectrum, from extreme left to extreme right. In this approach, Karl Marx is located as radical on the extreme left-hand side, Adam Smith as conservative on the extreme right-hand side. John Maynard Keynes is placed as liberal in the middle (Skousen, 2009, p.7).
The expression ‘laissez-faire’ first appeared when the famous French mercantilist minister, Jean-Baptiste Colbert, asked a group of businessmen what he could do for them. One of the men, a merchant called Legendre (Keynes, 1926, p.18), is supposed to have replied, ‘Laissez nous faire’ meaning ‘Leave us alone’ (Skousen, 2009, p.48). The first writer, who used this expression, was Marquis d´Argenson about 1751 (Keynes, 1926, p.18), but it was used by several French authors in subsequent years. There exist different other expressions with a similar meaning, such as ‘laissez passer’ or ‘Pour gouverner mieux, il faudrait gouverner moins’. The latter means ‘in order to govern better, we ought to govern less’ (Skousen, 2009, p.48) and is originated from Marquis d´Argenson (Keynes, 1926, p.19).
One of the earliest statements of laissez-faire is originated from Adam Smith, whose famous hands-off policy is often connected to laissez-faire, although he never used the phrase (Skousen, 2009, p.48), as well as it is not to be found in the works of Ricardo or Malthus (Keynes, 1972, p.20). According to him, the “sovereign should never attempt to control or influence the economic decisions of private individuals and should limit itself to three tasks” (Gibson, 2011, p.9). These three tasks include the national defence, protection from each other and administering justice as well as maintaining certain public works and institutions (Gibson, 2011, p.9). The state is in a reactive position, compared to the leading one in the welfare liberalism (Gibson, 2011, p.9). Smith was a free trader and an opponent of many trade restrictions during the eighteenth-century, but even his famous work about the invisible hand didn´t reflect the economic dogma of laissez-faire (Keynes, 1926, p.20). He supported a view of maximal economic freedom in terms of microeconomic behaviour of individuals and firms and minimal macroeconomic state intervention (Skousen, 2009, p.8). He was also described as ‘the great apostle of laissez-faire’ (Taylor, 1972, p.18) by Alexander Gray and Charles Rist mentioned ‘the laissez-faire doctrine preached by the school of Adam Smith’ (Taylor, 1972, p.18). Compared to other countries, the ones that have adopted Smith´s vision of laissez-faire capitalism have achieved the highest standard of living (Skousen, 2009, p.8).
It is important to clarify that the Classical School was not rigidly committed to the concept of laissez-faire. In England, according to Taylor (1972), only in the work of Herbert Spencer is it possible to find evidence to support this principal. For a vast amount of classical economists, even when they did not support the laissez-faire idea in public, intervention was a necessary evil and needed specific justification (Taylor, 1972, p.24). An exception is John Stuart Mill, who wrote in his fifth and final book of the Principles of Political Economy about grounds and limits of laissez-faire and non-interference principles. In this chapter and in his later writings the exceptions to laissez-faire were so numerous and far-reaching, that some economists located him on the socialist side (Taylor, 1972, p.23).
Laissez-faire was criticised by John Maynard Keynes, a British economist. According to him, it represented the “do-nothing” policy, prevalent during the Depression years and government should rescue the laissez-faire capitalism (Skousen, 2009, p.48). Keynes supported individual freedom, but was a proponent of macroeconomic state intervention and nationalisation of investment (Skousen, 2009, p.8). Laissez-faire was never understood as a “do-nothing” policy, but as a way to abolish the old system of regulations and special privileges. Thus Adam Smith and other laissez-faire economists at this time aimed to enhance the general welfare (Skousen, 2009, p.48).
During the Great Depression in the 1930s, the classical economists who defended the laissez-faire policies argued with the Marxists and socialists, who were in favour of overthrowing the old system. Amid this intellectual conflict, Keynes appeared with a new proposal, which required government intervention in the monetary and fiscal field to stabilize the market economy (Skousen, 2009, p.3). After the second world war, and after Milton Friedman demonstrated that the Federal Reserve, a government creation, was the source of the Great Depression, the self-regulating market economy of Smith experienced a comeback (Skousen, 2009, p.3).
Taylor (1972, p.53) states, that laissez-faire played a major role in the mindset of the nineteenth century in England but lost its dominance in the years from 1865 to 1885 (Taylor, 1972, p. 51). During this century, the rights and obligations of every individual were emphasized. According to Taylor (1972, p.53), the strong religious currents of this century could be related to the belief in individualism. England in the nineteenth century came closer to experience an age of laissez-faire than any other society (Taylor, 1972, p.64). Besides the economic textbooks, laissez-faire had additional support. It must be admitted, that it experienced support from several economists and also the reasonable public, for the lack of opponent proposals. Keynes describes both, Protectionism and Marxian Socialism, as “examples of poor thinking, of inability to analyse a process and follow it out to its conclusion” (Keynes, 1926, p.34). According to him, the scientific deficiencies of these two schools contributed to the prosperity of laissez-faire in the nineteenth-century (Keynes, 1926, p.35). The principle of laissez-faire was an assertive idea set the terms in debates in the nineteenth century in Britain. During this time, the classical school and the principle of laissez-faire had a pervasive influence in ministerial circles and the House of Commons (Taylor, 1972, p.30).
For the majority of the people the laissez-faire policy is a failure (Gibson, 2011, p.179). The right kind of economic policy to pursue the current financial crisis, war, uncertainty and globalisation is still in discussion (Skousen, 2009, p.4). Looking at the political developments of today, the former U.S. presidency gives a good example of aggressive promotion of laissez-faire politics. According to Gibson (2011, p.198) the core of George W. Bush´s political program was propped by long standing laissez-faire policies. This could be confirmed by George W. Bush´s foreign policy of promoting global free trade and free flow of investments. Gibson states, that the policy-making groups in the U.S. and the upper class in Britain are likely to continue with this set of policy, for achieving global economic dominance by global investments and subordinating governments to those private upper-class interests. This offensive of laissez-faire emerged in the 1970s and developed through the 1980s until it was sustained and intensified in the 1990s and 2000s (Gibson, 2011, p.179). Since the new century, the Bush administration remains committed to laissez-faire and additionally attempted to strengthen the commitment to laissez-faire in the U.S. and also in the international field. The latest political developments begin to challenge their commitment to laissez-faire, by inventing new forms of protectionism, government controlled investment funds and the divergence from the dollar (Gibson, 2011, p.215).
Gibson, D., 2011. Wealth, Power, and the Crisis of Laissez Faire Capitalism, Basingstoke: Palgrave Macmillan.
Hill, L.E., 1964. American Journal of Economics and Sociology, Inc. American Journal of Economics and Sociology, 23(4), pp.393-396.
Hudelson, R., 1999. Modern political philosophy, M.E. Sharpe.
Keynes, J.M., 1926. THE END OF LAISSEZ-FAIRE, London: The Hogarth Press.
Schotter, A., 1985. Free Market Economics, New York: St. Martin´s Press.
Skousen, M., 2009. The Making of Modern Economics: The Lives and Ideas of the Great Thinkers, New York: M E Sharpe.
Taylor, A.J., 1972. Laissez-faire and State Intervention in Nineteenth-century Britain, London: The Macmillan Press Ltd.
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- Classical Liberalism Keynes laissez-faire laissez Ricardo Smith Adam Smith invisible hand state intervention mercantilist pendulum formula liberal classical school Depression Taylor protectionism economist economy Adam competitive market competitive cairnes welfare philosophy