Relevance Of Laissez Faire Economy In The Present Scenario

Posted in Finance Articles, Total Reads: 4001 , Published on 21 July 2012

Note: The word laissez faire economy and capitalism have been used interchangeably in this write as the essentially mean the same except for a few minor differences.

Laissez faire is defined as the theory or system of government that upholds the autonomous character of the economic order, believing that government should intervene as little as possible in the direction of economic affairs. In simpler words, laissez-faire is an environment in which transactions between private parties are free from state intervention, including restrictive regulation, taxes, tariffs and enforced monopolies.

In the current scenario of financial crisis that that the global economy is witnessing, the concept of a laissez faire economy has come under lot of criticism. We can see a lot of government interference in the form of bailout packages to the banks, examples of crony capitalism in various parts of the world. Newspapers are flooded with articles blaming capitalism for anything and everything that has gone wrong in the world. This makes one think upon the point that laissez faire economy is good as a concept but is it really relevant in today’s global settings.

I put forward my argument that it would be immature to write this off as an end point of capitalism and that assume that the laissez faire economy would not work. Taking a look at economies around none of them is a perfect example of a laissez faire economy. First let us look at the US economy, though it is dominated by the private sector, the role of the state cannot be undermined. This can be seen by looking at the government spending which is more than 40% of the national income. There is economic interference by the government in the form of more than 100 federal agencies and commission like IRS, FRB, FDIC, FBI etc. Under laissez faire capitalism all these agencies would be done away with. The link gives more substantial evidence on the same.

Talking about the euro zone we can see that it also has not been free from government interference. Greece, the worst affected of the Eurozone countries, is in such a position because of the government’s decision to run high fiscal deficits. In Ireland we can see that the government decided to finance the bad loans of 6 main Irish banks that financed the real estate bubble. Had it just allowed the investors to bear the brunt then all the citizens wouldn’t have suffered.

We call this bad capitalism because the politician and wealthy corporations tie up in a mutually beneficial fashion and abuse power and wealth for their own motives. This has led to rising inequality around the world and protests like Occupy Wall Street. Here also we can see that the involvement of government has created problems. For example, the bailing out of failing banks with taxpayer’s money in the US and rising income disparity among citizens there, the CEO of Enron still not being punished for the crime he committed because of the relationship he had with the administration. These are the outcomes of crony capitalism. As the banks have closer ties with the politicians, they are rescued with taxpayers’ money instead of them facing the lashing. This can be seen in the movie ‘Too big to fail’ also.

Now, had the government not intervened the taxpayers money would’ve been saved and the real culprits, the top management of banks who earn huge bonuses, would have suffered. This is a more desirable situation and this can be reached with minimal interference of the government or laissez faire economy. Yes, the short term effects of this would be harsh. But the long term would be more secure. Income inequalities would also decrease as the government would be able to direct money towards subsidies, tax rebates, special licenses and favourable policies. A class of economists say that without government intervention there will be lots of problems and the economies might collapse. But, such a situation would pave way for a better economy in the future and the probability of such crisis will come down. So situations like the double dip recession the world is witnessing at the moment would not be prevalent in the future.

Now that we’ve seen the negative effects the non laissez faire economy has caused, let us take a look at how a laissez faire system would benefit the economy. Such a economy rewards entrepreneurship, risk taking and innovation, and provides access to all economic activities to the citizens. There are enough evidences to suggest that private ownership without much interference of the government does well. Even though India is not a laissez faire economy, the benefits of the 1991 Privatization policy can be witnessed.

The growth of India comes from the private sector and the government is not as efficient as the private sector. It has also reduced inequality and has brought to the disposal a variety of public and private means of transportation (almost unlimited mobility for the common man), housing filled with convenience and appliances for most every chore, entertainment at every corner, luxurious dining-out facilities, and the availability of a huge variety of quality and tasty foods. These were simply not available to the average person, seventy years ago.  The benefits of capitalism can be seen in this link.

In conclusion, is laissez faire economic policy a thing of the past? No. Laissez faire economy still has immense potential to generate wealth and reduce inequalities. Is constant intervention by governments and fiscal stimulus a necessity now? No. In fact, as discussed above, it is one of the major reasons behind the present financial crisis.

This article has been authored by Mohil Poojara from SIIB.

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