Peter J Boettke. International Encyclopedia of the Social Sciences. Editor: William A Darity, Jr., 2nd edition, Volume 4, Macmillan Reference USA, 2008.
The doctrine of laissez-faire was first systematically developed by the physiocrats in France. It was at first primarily considered a moral doctrine that sanctified the freedom of the individual and had implications for economic life, not just an economic policy doctrine. Later laissez-faire came to be understood mainly as an economic policy doctrine.
Folklore has it that during the reign of Louis XIV (1638-1715), the finance minister, Jean-Baptiste Colbert (1619-1683), asked a group of French businessmen what the government could do to aid the cause of commerce, and the response was laissez-faire, or let the people do as they freely choose. The social-philosophic doctrine that emerged opposed government interference in economic affairs beyond providing the minimum functions of ensuring peace, administering justice, and providing basic public goods. In the English-speaking world, the laissez-faire doctrine came to be identified with Adam Smith (1723-1790) and in particular the argument for free trade associated with An Inquiry into the Nature and Causes of the Wealth of Nations (1776).
The moral theory aspects of the doctrine of laissez-faire remained in classical political economy, but the economic policy implications came to dominate the debates around the doctrine. The idea of economic freedom and limited government would be developed in the century after Adam Smith by Jeremy Bentham (1748-1832), J. B. Say (1767-1832), Frédéric Bastiat (1801-1850), and John Stuart Mill (1806-1873). Even as Mill made an explicit case for exceptions to the laissez-faire principle in economic life, he argued that “laisser-faire, in short, should be the general practice: every departure from it, unless required by some great good, is a certain evil” (Mill  1976, p. 950).
From the beginning, however, critics of laissez-faire attempted to paint a picture of extremism and lack of concern for the least advantaged in society. This characterization of the position was immortalized by Charles Dickens’s (1812-1870) portrayal of Scrooge (a thinly veiled depiction of Herbert Spencer [1820-1903]) and the claim that rather than give aid to the poor we should allow the surplus population to decline naturally. But as Jacob Viner (1892-1970) pointed out in his “The Intellectual History of Laissez Faire,” only “unscrupulous or ignorant opponents of it and never its exponents” used the term laissez-faire to mean a position of “philosophical anarchism, or opposition to any governmental power or activity whatsoever” ( 1991, p. 200). Instead, the term laissez-faire as used by its systematic exponents meant freedom of choice and trade and a limitation on the scope of governmental activities to defense against foreign powers, establishment of a system of justice to prevent members of the society from oppressing others in that society, and the maintenance of essential public works and institutions. Laissez-faire, Frank Knight (1885-1972) declared, “simply means freedom, in the particular case of economic policy: freedom of economic conduct from dictation by government” ( 1999, p. 435).
The nonsubtle reading of laissez-faire argues that the position is claiming that the individual pursuit of self-interest is enough to realize a benevolent social order irrespective of the social rules of interaction that are in place. In fact, the critics read the doctrine as insisting that there is an absence of governance, rather than just limits on the scope of government. In this regard, advocates of the doctrine of laissez-faire are accused of being unreasonable and doctrinaire. F. A. Hayek (1899-1992), in fact, argues that nothing has done more harm to the cause of economic liberalism than a “wooden insistence” on the principle of laissez-faire (1945, p. 17). A more nuanced and appropriate reading of laissez-faire would emphasize the essential role of institutions of governance (though not necessarily provided only by government) in explaining how a benevolent social order can result from individuals freely choosing.
Critical to understanding the defense of the doctrine of laissez-faire are two subsidiary arguments. First, the defender of laissez-faire must present a demonstration through the logic of economic analysis of the “invisible hand” proposition (see, e.g., Nozick 1974, pp. 18-22). Second, the defender of laissez-faire will proceed to conduct a comparative analysis (both theoretical and empirical) of market versus governmental decision-making within the sphere of economic affairs (see, e.g., Buchanan and Tullock 1962). The combination of these two subsidiary arguments, often alongside a moral stance derived from natural law theory, can be found in almost any presentation of the laissez-faire position from Smith to Hayek, from Bastiat to Milton Friedman (1912-2006).
As Viner pointed out in his essay “Adam Smith and Laissez Faire,” even when Smith “was prepared to admit the system of natural liberty would not serve the public welfare with optimum effectiveness, he did not feel driven necessarily to the conclusion that government intervention was preferable to laissez faire. The evils of unrestrained selfishness might be better than the evils of incompetent and corrupt government” (Viner  1991, p. 104). In order to justify intervention, Smith argued, one would have to demonstrate not only that individuals freely choosing would not advance the public welfare, but also that government officials would be in a position to know better what was in a man’s interest than he would be himself. This was a position that Smith vehemently refused to concede in the realm of economic affairs. As Smith put it:
The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would no-where be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. (Smith  1976, bk. IV, chap. 2, p. 478)
On the other hand, the individual from the vantage point of his local situation is in a better position to judge what is the best course of action for himself. Smith, it is important to stress, did not presume that acting self-inter-estedly was enough to ensure a benevolent social order. Self-interest is what guides the statesman to overburden himself; it is also what leads to Oxford dons not satisfying the educational demands of their students (Smith  1976, bk. V, chap. 1, p. 284) and to teachers of religious doctrine being less zealous and hardworking in the state-supported religious sects as compared to those sects that rely solely on voluntary contributions (bk. V, chap. 1, p. 309). Self-interest also leads the businessman to conspire with his competitors to set prices (bk. I, chap. 10, p. 144) and to seek out protection from foreign competitors (e.g., bk. IV, chap. 2, pp. 489-490). It is self-interest that is behind the sophistry of the merchants and the manufacturers in the quest for monopolistic status, just as it is self-interest among professors and preachers when they seek secure incomes and protection from competitors in the instruction of philosophy and religious doctrine.
Self-interest is also what drives the refinements in the division of labor, the coordinative activities of an economy guided by relative price movements, and the innovations of the entrepreneur. Self-interest is not unique to laissez-faire, but a regime of laissez-faire (within the specified institutions of natural liberty) will channel self-interest in a direction that will maximize the likelihood of a social order of peace and prosperity. When the institutions of natural liberty are absent, or government attempts to thwart their development, Smith’s claim was that tyranny and poverty would result. As he put it in the notebooks that preceded the Wealth of Nations:
Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel or which endeavor to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical. (Smith  1976, p. xl)
The laissez-faire doctrine would latter become identified with the harmony of interest doctrine, a doctrine that claimed that the competing interests of individuals could be reconciled through the market mechanism. The proposition is actually older than Smith, and can be traced back to Voltaire (1694-1778). In the sixth of his Letters Concerning the English Nation, Voltaire discusses how even passionate warring factions can be reconciled through commerce:
Take a view of the Royal Exchange in London, a place more venerable than many courts of justice, where the representatives of all nations meet for the benefit of mankind. There the Jew, the Mahometan, and the Christian transact together, as though they all professed the same religion, and give the name of infidel to none but bankrupts. There the Presbyterian confides in the Anabaptist, and the Churchman depends on the Quaker’s word. At the breaking up of this pacific and free assembly, some withdraw to the synagogue, and others to take a glass. This man goes and is baptized in a great tub, in the name of the Father, Son, and Holy Ghost: that man has his son’s foreskin cut off, whilst a set of Hebrew words (quite unintelligible to him) are mumbled over his child. Others retire to their churches, and there wait for the inspiration of heaven with their hats on, and all are satisfied. (Voltaire  1994, pp. 29-30)
This doux-commerce thesis, which argued that commerce was a civilizing influence on humanity, has been identified with Montesquieu (1689-1755) and Voltaire, and then received its systematization in the works of David Hume (1711-1776) and Smith. It is very much a part of the underlying argument for the laissez-faire doctrine. Understanding the logic of this argument and its implications came to be synonymous with becoming an economist or a classical political economist.
Critics of the laissez-faire doctrine emerged from the beginning and tended to focus on variants of the following arguments through the years:
- Poverty traps that cannot be escaped through free choice.
- General glut that results from overproduction or underconsumption.
- Monopoly power that emerges naturally in the market and allows businesses to exploit consumers.
- Exploitation of the working class that pushes wages down to subsistence and compels laborers to work in harsh and unsafe conditions.
- External economies that generate situations where desirable goods are underproduced on the market, and undesirable goods are overproduced on the market.
- Public goods that are not supplied by the market due to free-rider problems.
Beginning in the late nineteenth and continuing throughout the twentieth century, a stream of economic schools of thought rose to challenge the presumption for laissez-faire. In fact, the American Economic Association was formed by economists who were decidedly non-laissez-faire thinkers, but instead were government reformers and activists. Laissez-faire was identified in their minds with an economic policy of noninterventionism, which meant that the social ills of monopoly, unemployment, inequality, and exploitation would go unchecked. The institutional school of Thorstein Veblen (1857-1929), John Commons (1862-1945), and Clarence E. Ayres (1891-1972) was critical of the laissez-faire doctrine. John Maynard Keynes (1883-1946) declared “The End of Laissez Faire” in the 1920s, and the development of Keynesian economics in the 1930s and 1940s transformed the discipline of economics from one that sought philosophic understanding to one that provided tools for social control. Mid-century arguments for market socialism and market failure theory added to the dismissal of the presumption for laissez-faire that was in the classics from Smith to Mill. And the arguments against laissez-faire from Karl Marx (1818-1883) to Paul Samuelson relied on some version of the six critiques listed above. Even the most sophisticated modern criticisms of laissez-faire (e.g., asymmetric information, network externalities, or behavioral irrationalities) rely on a variant of these basic criticisms that have been leveled since the beginning of the history of the idea.
The argumentative strategy of the opponents of laissez-faire usually took the form of: (1) characterization of the laissez-faire position as based on unrealistic assumptions concerning man (e.g., atomistic and hyperrationality); (2) depiction of reality that highlighted deviations from what would be theoretically optimal (e.g., deviations from marginal cost pricing); and (3) a willful ignoring of the costs of decision-making when government is called upon to serve as a corrective to social ills.
During the twentieth century, three figures emerged as the heirs to Adam Smith and the defenders of the laissez-faire doctrine—F. A. Hayek (1974 Nobel Prize in Economics), Milton Friedman (1976 Nobel Prize in Economics), and James Buchanan (1986 Nobel Prize in Economics). Keep in mind what was argued in the beginning of this entry concerning Smith’s argument—that there were two intellectual moves in the laissez-faire argument: first, the invisible hand; second, the comparative analysis on nonmarket decision-making. Hayek, Friedman, and Buchanan argued that more often than not the breakdown of the invisible hand was a consequence of governmental policy that had previously not been considered by the critics of laissez-faire. Adam Smith, they reminded everyone, did not argue that self-interest under any conceivable set of circumstances would produce a beneficial social order. Self-interest within a system of clearly defined and strictly enforced property rights could be relied upon to channel self-interest to serve the public welfare, but if property rights are unclear or weakly enforced, self-interest may very well produce undesirable outcomes. The tragedy of the commons, in other words, is not a challenge to Smith (or Hayek, Friedman, and Buchanan) but a confirmation of their basic insight into how the “invisible hand” works. Second, even if the market order failed to produce the best of all possible outcomes (as it inevitably always did at any point in time), the critic must not leave the costs of governmental decision-making unexamined (including unintended and undesirable consequences). The standard twentieth-century argument for interventionism presumed both that the government possessed the knowledge to solve the problem, and that the decision process was relatively costless because the government actors were acting as economic eunuchs. Works such as Hayek’s The Road to Serfdom (1945) and The Constitution of Liberty (1960), Friedman’s Capitalism and Freedom (1962) and Free to Choose (1980, with Rose Freidman), and Buchanan’s The Limits of Liberty (1975) and Democracy in Deficit (1977, with Richard Wagner) challenged the government as corrective presumption, and helped forge a revitalized case for laissez-faire in the late twentieth century.
In the narrative on laissez-faire just constructed, little reference was made to the actual historical record for the simple reason that such a discussion would require multiple entries. The critics of laissez-faire attribute the late nineteenth-century robber barons, the miserable working conditions of the poor in early twentieth century, the Great Depression, and the bigotry of racial segregation to laissez-faire capitalism. The defenders of laissez-faire, on the other hand, reject each of these interpretations and attempt to show either that the root cause of the problem was government interference with the competitive process or that the competitive forces of the economy were in fact alleviating the problem at the time that government stepped in to claim credit for easing social tension. One side sees market forces as ameliorating social ills and reconciling conflicts, while the other side sees the market as augmenting social ills and aggravating conflicts. This has been an ongoing argument for three centuries, and it does not appear to be resolvable in a clear-cut empirical manner. Instead, the debate turns on analytical arguments, empirical evidence and counterevidence, and explicit or implicit moral judgments.