Laissez-faire is an economic philosophy that literally translates to ‘let do’ or ‘let go.’ It generally means ‘leave it alone’ in reference to economic policy. Laissez-faire is an import word from the French because the genesis of modern economic thought connected to these ideas was physiocrats in the 18th-century. However, these ideas go back to ancient times.
Specifically, Laissez-faire economics defined takes the view that the relationship between economic agents and the government should be left unhindered. Free market trade and commerce, if unregulated, results in a more efficient outcome, and higher general prosperity than interventionist policies. It also results in greater individual happiness or at least self-actualization through unrestricted social interaction in the economic arena. This interaction tempered by moral choice and social awareness.
A laissez-faire economic philosophy relates to local regulation as well as macroeconomic financial and monetary policy. In the area of political debate, topics include trade, taxation, regulation, property rights, central banking and choice, and human action. It does not include moral issues that deprive others of life, liberty and the pursuit of happiness. Libertarians, classical economists, and laissez-faire economists are not anarchists; this is an important point. On the contrary, their goal is to improve human cooperation and peace as these ideas facilitates economics freedom.
However, the critical point often missed by too many of my students at first glance is, Laissez-faire economics is a spectrum rather than an either/or. You do not have to embrace one idea or the other. Even within the community of free-market economists, there are those that are extreme Laissez-faire and others that see government as ‘the night watchman.’
Therefore, it is essential to reserve judgment until one develops an economic philosophy that tests assumptions of any idea on the spectrum logically and if need be with empirical research.
Why there is confusion about Laissez-faire economics
The confusion is people often mixed with human normative statements about what ‘should be’ based on personal views on ‘justice’ with economics. They extrapolate and project the ends onto the means.
We can acknowledged that justice is the ultimate good. However, our conception of what justice is varies as does the way to achieve it. I recommend the book Six Great Ideas by Mortimer J. Adler for a clarification of this topic and why justice is the summon .
Yes, most people have compassion and sincere intentions to better humanity and a desire for justice; however, how we define and achieve this is the issue.
Some people subscribe to the classical liberal philosophy in economics, and others follow the derivatives of Karl Marx, e.g. socialism and communism.
Austrian economists like Mises, Hayek, Rothbard, and Robert P. Murphy want to make the world a better place for us to live by emphasizing choice and individual human action as the drivers for improvement.
Similarly on another group of economists like John Maynard Keynes, Michael Woodford, and Paul Krugman also want to make the world a better place, by developing theories about how political entities (central governments and central banks) should engineer people’s economic activity because of perceived market failures.
How can both of these educated, intelligent, knowledgeable economist vary so radically in their ideas is their ultimate aim is a more just society?
Adding to this confusion is the current trend in economic research. That is the desire to empirically test ideas, even if they are on an aggregate macro level. This empirical approach stems from the belief that economics is science closer to physics than social science. It is a science with laws and generalizations that are universal and humans are the particles.
The problem with this is individuals and their actions, and most important, purposeful intentions are not abstractions. Their dreams and desires that are changeable and uniquely human. It is not like if I drop an object on a planet with a specific gravity it will fall. Rather, humans are complex and even transcendent.
To abstract into seeing humans as objects and data points to be steered into a model’s constructs with the end goal of the model being a statistical average based on an economic index is an academic loss of objectivity. Words like output gap and average income, the natural rate or CPI are the targets of these models (despite their conflicting definitions) and do not represent individual choice.
Therefore at the core, an understanding about laissez-faire economics are not about which group of economists care more about humanity or can build a better model, rather it is about which group of economists understand some fundamental philosophical ideas.
Recommended thinkers in laissez-faire political economy
Adam Smith’s Wealth of Nations in 1776 and the Theory of Moral Sentiment are two works which detail this discussion.
However, it was Ludwig von Mises who in his book Human Action in 1949 helped clarify these issues.
A modern discussion is a book by Robert P. Murphy titled Choice Cooperation, Enterprise, and Human Action clarifies this further for the modern reader.
The underlying premise of the above mentioned political economists is, that when people are left to their ‘enlighted self-interest’ then society as a whole benefits through innovation and cooperation, even if the arena of economics is competitive. It is this free human expression that allows for society to prosper and individuals to be happy.
Conversely, the restriction of liberties stagnates society and has a significant social welfare cost. There is a loss of consumer and producer surplus. This loss of productive and allocative efficiency often exacerbates microeconomic loss and transmutes into large scales cycles, such as the Great Depression or Great Recession (caused by monetary mismanagement) or the collapse of the Soviet Union (caused by central planning of human goals and desires).
Plans by the many or plans by the fewKeynes versus Hayek
Subjectivity theory of value
A major contribution for Austrian Economics is taking Carl Menger’s subjectivity of value theory and understanding this applied to price. Price being the an inter-temporal information point. Price conveys information to individuals in society about how to satisfy others people in the market place. In contrast, if you take an objective theory of value such as Marxism which is tied to cost, specifically labor, then you see humans acting contrary to individual and societal happiness.
This can also be applied to monetary theory and the price of money/loan-able funds, that is the interest rate. However, that is another topic.
Selfishness or Service
Arguments that laissez-faire economics is governed by selfishness paints humans or society as innately evil. Further, it implies there are a few elite, ‘the good ones’, government bureaucrats and politicians or Ivory tower PhDs that are untainted by this malaise of humanity, so we surrender our individual rights to allow them to steer us for the ‘greater good’.
Whether it be Marxism, Socialism or Keynesianism, the market interventionist philosophy misunderstands the subtle point that there is a difference between pathological self-absorption and enlighted self-interest. This self-interest, which is aware of the whole of humanity, acts, to satisfy the wants of desires of others. This is manifest formally in the supply and demand construct but generally, in countries, higher on the freedom index are more prosperous.
Consider this, that generally, people are not robbing ATMs but rather, people are making Youtube channels and search engines and growing local organic produce for the farmer’s markets, finding cures for pollution like bacteria that eats plastic waste. This is why Malthusian predictions of the apocalypse caused by economic demand outstripping supply has not come to fruition, except in restricted economies like modern day Venezuela or North Korea. Innovation brought about by creativity (almost by definition free thinking), combined with enlighted self-interest is what makes laissez-faire economics not something to be maligned but rather understood.
We are always searching for ways we can serve one another. Laissez-faire capitalism and is not evil, but rather merely another word for human freedom and the belief that most people are innately good.