Laissez-faire

The term “laissez-faire” is derived from two French words meaning “to let” (laissez) and “to do” (faire), carrying the connotations of allowing something to take care of itself. Laissez-faire is most commonly used to describe an economic system in which the economy is allowed to regulate itself as individuals make decisions about their own best interests without government interference. The term is used in a broader sense in politics, describing the practice of limiting the powers of government in order to protect the rights of the individual. The term is believed to have come into common usage in Europe in the mid-eighteenth century as a justification for free trade . It was adopted in the United States as the concept of limited government and the significance of individual rights took hold. In the 1930s, the concept of laissez-faire economics was largely replaced by Keynesian economics and Franklin D. Roosevelt’s New Deal, which called for government intervention when necessary to prevent economic collapse and protect individuals. Under the influence of American economist Milton Friedman, President Ronald Reagan partially restored laissez-faire economics in the 1980s in what became known as Reaganomics.

Brief History

In the seventeenth and eighteenth centuries, British mercantilists were responsible for economic policies that allowed rich capitalists to continue accumulating wealth through measures that included protectionist agricultural and industrial policies and monopolies on foreign trade. In 1776, Scottish economist Adam Smith (ca. 1723–90) published An Inquiry into the Nature and Causes of the Wealth of Nations, contending that the policies of the mercantilists served only their narrow interests rather than the British national interest. Now known as the father of classical economic theory, Smith proved to be a major influence on America’s founders.

Rather than controlling the economy, Smith proposed a laissez-faire system in which economic equilibrium was achieved by allowing the market to regulate itself. Smith’s concept of the “invisible hand” that controlled the economy became popular, exerting an enduring influence over the economic systems of the world. Like most classical liberals, Smith believed that government should confine itself to ensuring that a country was safe from foreign invasion, administering justice, and providing public works that could not easily be obtained by individuals.

Niccolò Machiavelli (1469–1527) is best known for his political treatise The Prince (ca. 1513). Machiavelli’s claims that politics was all about gaining power, whatever the costs, exerted enormous influence on advocates of laissez-faire, who saw Machiavellian politics as proof that governments needed to be limited in their ability to exercise power over the rights of individuals.

Following the American Revolution, the US states set out to govern themselves. Under a weak national government established by the Articles of Confederation and thirteen autonomous state governments, the economy of the new nation was in peril. In response, political leaders such as Robert Morris and Alexander Hamilton began advocating the establishment of a strong central government that could facilitate national cooperation without infringing on state sovereignty. James Madison was convinced that a stable commercial system could be established in the United States by adopting Adam Smith’s ideas on laissez-faire.

Impact

The American founders were also influenced by English philosopher John Locke (1632–1704) and his concept of “inalienable rights.” They became determined to protect the rights of life, liberty, and property and escape the evils of tyranny and Machiavellian politics. Thus, they created an unique system of government with the writing of the Constitution in 1787, devising a laissez-faire political system that protected individuals by limiting governmental power through the separation of powers into three autonomous branches and setting ups a series of checks and balances on each branch. That concept of laissez-faire was summed up in a letter to James Madison, dated December 20 of that year, in which Thomas Jefferson wrote, “I own I am not a friend to a very energetic government. It is always oppressive.”

The framers of the US Constitution were not all in agreement about which powers should be vested in a particular branch. Influenced by their respect for George Washington, both John Adams and Alexander Hamilton placed their trust in a strong executive. Jefferson and Madison, on the other hand, believed that a strong legislature was most likely to exercise power equitably.

In the nineteenth century the United States experienced a series of major economic crises. Amid rapid industrialization, by mid-century, Americans were becoming increasingly fearful of monopolies that were allowing capitalists to enjoy lives of luxury at the expense of others. States had begun providing railroads with land grants that allowed their owners to amass even larger fortunes, resulting in a number of high-profile scandals, such as the Crédit Mobilier of America scandal in 1872. Although laissez-faire called for government to refrain from interfering in economics, new incorporation laws were passed. The prevalence of political machines signaled a retreat from laissez-faire politics as reformers launched campaigns designed to check abuses of political power.

After 1929, the Great Depression caused many Americans to demand government action to regulate the economy. Republican president Herbert Hoover favored a laissez-faire policy, insisting that the economy would right itself given time. When Hoover was succeeded by Democrat Franklin Delano Roosevelt in 1932, the government retreated from laissez-faire economics. In order to stabilize the economy, Roosevelt’s New Deal established a pattern of government intervention that turned the United States into a social welfare state.

Roosevelt was heavily influenced by John Maynard Keynes (1883–1946), who is considered the father of macroeconomics. In his General Theory of Employment, Interest, and Money(1936), Keynes offers an alternative to laissez-faire economics. Keynes believed that government had a responsibility to respond to cyclical downturns in the economy. As European countries began rebuilding their economies after the devastation of World War II, Keynesian economics became a major influence on the development of social welfare states that called for government regulation and the establishment of safety nets to ensure basic standards of living.

In the 1960s, Milton Friedman (1912–2006) and other economists at the prestigious Chicago School of Economics began advocating a return to laissez-faire economics in the United States. While government deregulation began in the 1970s with President Jimmy Carter, it gained significant momentum in the 1980s with Reaganism. Even as deregulation shaped the economics of the late twentieth century, however, new forms of regulation continued to be enacted under both Democratic and Republican presidents, suggesting that laissez-faire economics in contemporary government has become an economic concept rather than an economic guideline.

Bibliography

Chua, Amy. “A World on the Edge.” Wilson Quarterly, vol. 38, no. 1, 2014, pp. 101–22.

Keynes, John Maynard. The End of Laissez Faire: The Economic Consequences of the Peace. Rpt. Prometheus, 2004.

"Laissez-faire." Encyclopedia Britannica, 9 Jan. 2025, www.britannica.com/money/laissez-faire. Accessed 22 Jan. 2025.

Peet, Richard, and Elaine Hartwick. “Classical and Neoclassical Economics.” Theories of Development: Contentions, Arguments, Alternatives, 2nd ed., Guilford, 2009, pp. 23–52.

Wishy, Bernard. Good-Bye, Machiavelli: Government and American Life. Louisiana State UP, 1995.

"What Is a Laissez-Faire Economy, and How Does It Work?" Investopedia, 28 June 2024, www.investopedia.com/terms/l/laissezfaire.asp. Accessed 22 Jan. 2025.

Wood, John Cunningham, editor. Adam Smith: Critical Assessments. Vol. 1, Routledge, 1996.