Question

Briefly answer using at least one economic term please.

Explain the term “laissez faire capitalism.”

Answer 1

Laissez-faire capitalism is referred to as free market capitalism or market capitalism. “Laissez-faire” is a french term which translates to “leave us alone” meaning that the government should remain out of the economy and instead allow individuals to freely carry out their own economic affairs. Laissez-faire capitalism is a right-wing ideology that is fundamentally based on private ownership, competition, free trade, self-reliance, self-interest, and the principles of supply and demand. It was first coined by French economic theorists Dr. Francois Quesnay and the Marquis de Mirabeau.

Laissez-faire capitalism was most common during the 18th and 19th centuries in the time frame of the Industrial Revolution. Then it was a revolutionary idea, because in the previous centuries, mercantilism had been the dominant economic system. In general, mercantilism is viewed as an economic system that favored heavy government control and regulation. During that time, absolute monarchs ruled over vast empires and controlled almost all aspects of the economy. However, prominent thinkers, including Adam Smith, began to argue against mercantilism in favor of an economic system with more freedom for individuals. Adam Smith in his 1776 classic ‘The Wealth of Nations’ explained that the forces of supply and demand allow a market economy to self-regulate and that price levels, wages and employment are automatically adjusted by an “invisible hand”. Consequently, governments have no reason to and should not interfere by imposing tariffs and minimum-wage restrictions. Beyond the taxes necessary for ensuring public well-being, such constraints foster only inefficiency and unnecessarily inhibit production.

The Laissez faire philosophy heavily impacted economic policy during the industrial revolution of the 1800s. In the wake of widespread poverty resulting from exploitative low wages combined with dangerous, unhygienic work environments, it became evident that laissez-faire economic attitudes can result in the social environment that governments must stop, namely, the exploitation and poor treatment of their citizens. Following the economic collapse of 1929, governments began to institute economic policies designed not to control production or inhibit efficiency, but to protect workers and consumers.

There are several examples in United States history of successful governmental interventions, such as the establishments of the Patent Office in 1802, and the Office of Standard Weights and Measures in 1830. In addition, various Army expeditions to the West throughout the 1800s, starting with Lewis and Clark’s Corps of Discovery in 1804. The U.S. government also had a hand in establishing both the First and Second Banks of the United States.

Of course, many of these proposals were not instantly accepted by all, and most who were opposed to a laissez faire approach to U.S. capitalism supported the American School of thought, which was founded on the ideas of Alexander Hamilton. Hamilton’s ideas included the creation of a government-sponsored bank, and an increase on certain tariffs.

At the beginning of the 19th century, it became an accepted reality that the U.S. government’s relationship to the country’s industry was quite different from laissez faire in other countries. In fact, the U.S. embraced a mixed economy, which grew stronger during the period immediately following World War I and the Great Depression. Even now, from time to time, the government will involve itself in actively supporting the American industry so as to protect it from overseas competition.