Manual Wealth, Power, and the Crisis of Laissez Faire Capitalism

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These three tasks include the national defence, protection from each other and administering justice as well as maintaining certain public works and institutions Gibson, , p.

Wealth, power, and the crisis of Laissez Faire capitalism /

The state is in a reactive position, compared to the leading one in the welfare liberalism Gibson, , p. He supported a view of maximal economic freedom in terms of microeconomic behaviour of individuals and firms and minimal macroeconomic state intervention Skousen, , p. It is important to clarify that the Classical School was not rigidly committed to the concept of laissez-faire. In England, according to Taylor , 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, , p. 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, , p.

Laissez-faire was criticised by John Maynard Keynes, a British economist. Keynes supported individual freedom, but was a proponent of macroeconomic state intervention and nationalisation of investment Skousen, , p. Thus Adam Smith and other laissez-faire economists at this time aimed to enhance the general welfare Skousen, , p.

During the Great Depression in the s, 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, , p.

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, , p.

Taylor , p. During this century, the rights and obligations of every individual were emphasized. According to Taylor , p. England in the nineteenth century came closer to experience an age of laissez-faire than any other society Taylor, , p. 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.

According to him, the scientific deficiencies of these two schools contributed to the prosperity of laissez-faire in the nineteenth-century Keynes, , p. 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, , p.

For the majority of the people the laissez-faire policy is a failure Gibson, , p. The right kind of economic policy to pursue the current financial crisis, war, uncertainty and globalisation is still in discussion Skousen, , p. Looking at the political developments of today, the former U. According to Gibson , p. This could be confirmed by George W.

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Gibson states, that the policy-making groups in the U. This offensive of laissez-faire emerged in the s and developed through the s until it was sustained and intensified in the s and s Gibson, , p. 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.

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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, , p. Gibson, D. Hill, L. American Journal of Economics and Sociology, Inc. American Journal of Economics and Sociology, 23 4 , pp. During the mercantilist period, military conflict between nation-states was both more frequent and more extensive than at any other time in history. The armies and navies of the main protagonists were no longer temporary forces raised to address a specific threat or objective, but were full-time professional forces.

Most of the mercantilist policies were the outgrowth of the relationship between the governments of the nation-states and their mercantile classes.

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In exchange for paying levies and taxes to support the armies of the nation-states, the mercantile classes induced governments to enact policies that would protect their business interests against foreign competition. These policies took many forms. Domestically, governments would provide capital to new industries, exempt new industries from guild rules and taxes, establish monopolies over local and colonial markets, and grant titles and pensions to successful producers.

In trade policy the government assisted local industry by imposing tariffs, quotas, and prohibitions on imports of goods that competed with local manufacturers. Governments also prohibited the export of tools and capital equipment and the emigration of skilled labor that would allow foreign countries, and even the colonies of the home country, to compete in the production of manufactured goods.


Shipping was particularly important during the mercantile period. With the growth of colonies and the shipment of gold from the New World into Spain and Portugal, control of the oceans was considered vital to national power. Because ships could be used for merchant or military purposes, the governments of the era developed strong merchant marines. In France, Jean-Baptiste Colbert, the minister of finance under Louis XIV from to , increased port duties on foreign vessels entering French ports and provided bounties to French shipbuilders.

In England, the Navigation Act of prohibited foreign vessels from engaging in coastal trade in England and required that all goods imported from the continent of Europe be carried on either an English vessel or a vessel registered in the country of origin of the goods.

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Finally, all trade between England and its colonies had to be carried in either English or colonial vessels. The Staple Act of extended the Navigation Act by requiring that all colonial exports to Europe be landed through an English port before being re-exported to Europe. Navigation policies by France, England, and other powers were directed primarily against the Dutch, who dominated commercial marine activity in the sixteenth and seventeenth centuries.

During the mercantilist era it was often suggested, if not actually believed, that the principal benefit of foreign trade was the importation of gold and silver. According to this view the benefits to one nation were matched by costs to the other nations that exported gold and silver, and there were no net gains from trade. For nations almost constantly on the verge of war, draining one another of valuable gold and silver was thought to be almost as desirable as the direct benefits of trade. Adam Smith refuted the idea that the wealth of a nation is measured by the size of the treasury in his famous treatise The Wealth of Nations , a book considered to be the foundation of modern economic theory.

Smith made a number of important criticisms of mercantilist doctrine. First, he demonstrated that trade, when freely initiated, benefits both parties. Second, he argued that specialization in production allows for economies of scale, which improves efficiency and growth. Finally, Smith argued that the collusive relationship between government and industry was harmful to the general population. While the mercantilist policies were designed to benefit the government and the commercial class, the doctrines of laissez-faire, or free markets, which originated with Smith, interpreted economic welfare in a far wider sense of encompassing the entire population.

While the publication of The Wealth of Nations is generally considered to mark the end of the mercantilist era, the laissez-faire doctrines of free-market economics also reflect a general disenchantment with the imperialist policies of nation-states. The Napoleonic Wars in Europe and the Revolutionary War in the United States heralded the end of the period of military confrontation in Europe and the mercantilist policies that supported it. Despite these policies and the wars with which they were associated, the mercantilist period was one of generally rapid growth, particularly in England.

This is partly because the governments were not very effective at enforcing the policies they espoused. While the government could prohibit imports, for example, it lacked the resources to stop the smuggling that the prohibition would create. In addition, the variety of new products that were created during the industrial revolution made it difficult to enforce the industrial policies that were associated with mercantilist doctrine. By England had removed the last vestiges of the mercantile era.

Industrial regulations, monopolies, and tariffs were abolished, and emigration and machinery exports were freed. In large part because of its free trade policies, England became the dominant economic power in Europe. Protectionism remained important in the interwar period. World War I had destroyed the international monetary system based on the gold standard. A country could simultaneously lower the international prices of its exports and increase the local currency price of its imports by devaluing its currency against the currencies of its trading partners.

A number of factors led to the reemergence of mercantilist policies after World War II.

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The Great Depression created doubts about the efficacy and stability of free-market economies, and an emerging body of economic thought ranging from Keynesian countercyclical policies to Marxist centrally planned systems created a new role for governments in the control of economic affairs.

In addition, the wartime partnership between government and industry in the United States created a relationship—the military-industrial complex, in Dwight D. In Europe, the shortage of dollars after the war induced governments to restrict imports and negotiate bilateral trading agreements to economize on scarce foreign exchange resources. These policies severely restricted the volume of intra-Europe trade and impeded the recovery process in Europe in the immediate postwar period.