Monday, October 20, 2008

'Free Market Capitalism' is Not Laissez-Faire

P. A. Triot (‘pen name of a retired journalist’) writes in OEN ( HERE:

Government right to intervene economic matters”

“Neoconservative, by any name, means only one thing: laissez faire capitalism.

Free market capitalism is the newest name for laissez faire capitalism.
Laissez faire capitalism was first introduced to the world in the 18th century by Adam Smith who wrote "Wealth of Nations." Smith is regarded as the "father of modern economics."

The term "free market" was mentioned by Smith in his book as a condition of laissez faire capitalism.

The late Milton Friedman piggy-backed on Smith's concepts by sort of tweaking the lexicon and advocating free market capitalism all the way to a Nobel prize in economics (awarded in 1976).

The concept of free markets is in sharp contrast with controlled markets or regulated markets, in which governments regulate prices or supplies--either directly or indirectly.

What's left is that laissez faire capitalism and free market capitalism are synonymous terms.

All of this is simply economic theory, not fact at all.

P. A. Triot’ (patriot – get it?) makes an argument (read it from the link) that is founded on muddled history of Adam Smith’s contributions to political economy.

Smith never mentioned ‘laissez-faire’ once. He was familiar with the ideas of its exponents – French small merchants who wanted the French Minister, Colbert, to ‘leave us alone’ instead of regulating everything they could do quite well on their own. It became a slogan of some of the Physiocrats, but not all of them – Dr Quesnay, their leader, for example did not advocate it, and has been lumped with Adam Smith, first by mid-19th century conservative agitators (the Manchester School) and then a century later by propagandists, some of them Nobel Prize winners, of neoclassical general equilibrium theories and ‘free market’ American big business.

Adam Smith, meanwhile, was far more pragmatic. He certainly advocated freer markets than were available in mid-18th century. He heavily criticized the regulation and interferences of legislators and those who influenced them, the waste and prodigality of governments, the mercantile political economy of his day, dominated as it was false notions of gold and silver being wealth and thereby subjecting the real economy to policies that encouraged ‘jealousy of trade’, hostility to trading with and the trading of political rivals (France, the Dutch provinces, and Spain), and the record of sovereigns embarking on frivolous wars and colonial adventures.

His critique of governments that intervene in the economy is often taken by rightwing ideologues as proof that he opposed government intervention per se and favoured small government; his criticism of companies engaged in distant colonial adventures (the East India Company) for their rapacious behaviour and their internal lack of controls is often taken by leftwing ideologues as proof that he would have opposed capitalist firms as they developed in the 19th century and justifies their opposition to modern corporations.

Neither view is accurate, either as statement of fact, nor as a guide to Adam Smith’s prescriptions for commercial economies. It is not just a question of Adam Smith being ‘more nuanced’ that the caricature asserts; they are just plain wrong.

Wealth Of Nations has both general application and a specific context. It is not a textbook on economics, though it is based on current knowledge of his many predecessors, plus his own contributions derived from his historical analysis of how the commercial economies were revived (they had a long history in the classical world) after the long, near thousand year interregnum following the fall of Rome in the 5th century, and what was so exciting about the steady economic growth then germinating in western Europe, and particularly in Britain.

Smith saw the mercantile political economy in its various guises as distorting what caused the growth towards opulence; its related policies of forming trade monopolies through distant colonies, and the consequent wars that followed; its waste of scarce capital in various forms of prodigality; the legal system of primogeniture and entails as blocking agricultural prosperity through yeoman farming (as was sucessfuly shown in his mind by agricultural prosperity in some of the British colonies in North America which has abolished the legal inhibitions on land ownership); and the capture of the legislature by special interest groups that imposed protection, tariffs, prohibitions, and local-producer monopolies that widened private markets but narrowed competition to the detriment of the interests of consumers – the sole end of production.

Within his analysis there are many evident indicators that there was a crucial role for the government in creating and maintaining the necessary instruments for facilitating commerce (not running it). His programme for government expenditure was extensive but focussed: public works and public institutions such as infrastructure – Britain need functioning roads and highways, dredged ports and rivers, canals, bridges, and towns with night-lighting, pavements, sewage disposal, and police, backed by an independent judicial system and a reform of education provision, including for the children of poor labourers in schools part-funded by taxes and household contributions.

The first duty of government was defence and the island situation of Britain required a navy and an army (defence was more important that opulence) but the hostile stance of Britain towards neighbours since the fall of Rome, costs tens of millions (over £100 million in the seven-years war) that would be better spent on the above projects and on commercial activity that would increase employment and living standards.

That the “the late Milton Friedman piggy-backed on Smith's concepts’ is certainly true, but the responsibility for Smith’s works appearing in the distorted frame they have become, lies in the economics profession that has chosen to ignore the history of economic thought (lowly regarded by many modern economists as fit only for the elderly, the less talented, and the untenured).

If they were to read Adam Smith in context, they would find many of the failed policies imposed on legislators by the epigones, who quote Smith, but never read him for themselves, fully explained within his fairly primitive explanations of where Europe was going wrong, and, perhaps, why the global economy is still achieving less than it could achieve, if what has so far gone right (billions lifted out of poverty), despite the politicians and their advisors, was supported by arrangements that permitted commercial markets to do their work.

At that point, ‘Patriot’ would not equate ‘laissez-faire’ to ‘free-market capitalism' nor consider them as experienced in the real world.



Blogger Arnold T said...

America is forever in Adam Smiths' gratitude for THE most important evolutionary idea of the world. Adam Smith gave us our Representative Government. Adam Smith designed it and it was adopted in full by the Continental Congress.

It was a Government designed to withstand the foibles of man and his nature. Adam Smith was a practical man, utmost and convincingly, to his contemporaries. He pointedly created our government with a cynical attitude of how men behave. The built-in checks and balances of three branches of government, two congressional houses to balance state rights, super-majority votes to protect minority views, etc all spoke to his cynical attitude that men must be monitored and leashed lest they abuse power.

I think if Adam Smith knew how Free Market Capitalism was being implemented today, he would turn over in his grave. Adam Smith would have never accepted the idea that capitalism should be self-regulating and unfettered.

Extrapolating from his cynical views on human nature, you can bet that he would have designed a modern capitalistic system with checks and balances. Unfortunately, during his lifetime, he could provide us with only one miracle, our current form of US government.

My greatest fear is that we will never see a great man again like Adam Smith who can mix ideals with reality and come out with what works best. We need an economic giant who can design a system that is realistic about greed and fear. A system that inherently checks and balances the abuses of power, money and influence.

If only we could write an Economic Constitution that exhibited the enduring strengths of capitalism while it protected the system from the abuses of men that would derail and destroy our economic freedoms.

5:49 am  
Blogger Gavin Kennedy said...

arnold t:
Thanks for your comments, but
you are mistaken (or trolling about?).

Adam Smith never said a word about 'Representative Government' for the former British colonies of North America, and nor did the American 'founders' learn about their form of government from Adam Smith.

The 'separation of powers' concept came from Montesquieu's writings, 'The Spirit of the Laws', 1748; the legislative, the executive and the judiciary are separate institutions, balanced by their relationships.

Monstesquieu was, if anything, a 'monarchist', but the separation of powers probably was the most important principle of democratic government, later adopted by the new USA (and in various forms by most modern democracies, though Britain remains a hybrid constitutional monarchy (the legislature is controlled by the executive; the sovereign can dismiss parliament and call and election; and the upper judiciary are memebrs of the legislature, wuth the most senior judge a member of the executive)

Adam Smith did not have a vote in the existing franchise in 18th- century Britain; hence he never voted in an election.

Smith was more concerned with Liberty from monarchial oppression (common on the continent), but which in the British isles had been challenged over the centuries afer Magna Carta, and the gradual transformation of the House Commons from meekly agreeing to a king's tax proposals, into a sovereign body with the final say on taxation (Cromwell, 1650)

This made 18th-century Britain (post the Hanoverian 'revolution', 1688) into a Constitutional Monarchy.

The United States Constitution was a product of the ideas of liberty (English and Scottish philosophers, and the French parliamentarian, Montesquieu)

Your panygeric about Smith is wholly misplaced, inaccurate, and misleading.

I suggest you read a biography of Adam Smith (see Ian Ross, Life of Adam Smith, Oxford University Press, 1995) and, perhaps study the works of the Founding Fathers.


6:58 am  
Blogger Arnold T said...

Americans today call our Government a Representative Democracy. That is our definition of it, the phrase we use amongst ourselves. A colloquial not historical description of the subject.

Adam Smith did originally construct all the components to our present form of government into one document. It was submitted and approved almost wholly intact. True, there is nothing new under the sun in it, but I was not trying to point out that Adam Smith was the very first person to ever think and write about an idea or group of ideas. That is ridiculous because almost every idea was thought of by someone else before him and simply expanded upon or evolved as it passed through time.

My point is that Adam Smith synthesized contemporary thinking and then created an original constitution for a Democratic Representative Government embodied in the present day United States of America.

And you should read an American version of Adam Smith. You would understand his cynicism regarding human nature and European governments. It was more about ensuring the future integrity and preservation of freedom that he put in so many checks and balances. That is the point I wanted to make with Capitalism. There are no checks and balances that ensure economic freedoms.

Booms and busts are like Economic time bombs. Just like in war, the collateral damage can be extensive and unforgiving to everyone around it. Innocent bystanders will become unemployed, invested savings evaporate and some loose everything, no fault of their own.

I do not want to write a book so I can explain everything I meant, in detail, so no one would jump to conclusions and take me wrong.

7:59 am  

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