Laissez-faire vs. Government Intervention

Less government intervention in economic affairs means more economic freedom and prosperity. In other words, when people are free to choose and pursue profitable opportunities, the economy of a country runs more efficiently, creating greater wealth and improving the standard of living. While this is a true statement for some people, others argue that government involvement is necessary in order to respond to market failures and limit abuses of market power.

Laissez-faire is a French expression based upon the theories of Adam Smith, an 18 century Scot political economist, whose writings greatly influenced the growth of capitalism in several parts of the world (Biography). Smith believed that as long as markets were free and competitive, the actions of private individuals, would lead to better social results. The idea behind the concept of Laissez-faire is that economies function more efficiently when people can pursue their economic activities and interests freely. Laissez-faire opposes governmental regulation and intervention in commerce and states that the government should not interfere with decisions made by individuals. The theory also embodies free trade. It indicates that protectionist measures should not be used.

Protectionism is a view that free trade is injurious and should be restricted. Protectionist policies are used in order to protect domestic industries. Protectionism is often criticized by the supporters of free trade as harming economies instead of assisting them (Frank and Bernanke). Tariff is an example of a protectionist measure which the supporters of Laissez-faire view as an obstacle to free trade among nations limiting their opportunities to benefit from exchanging goods and services with one another.

People who support a laissez faire system are against minimum wages and any other forms of trade restrictions. They also consider limited government interference in private economic decisions such as pricing and production of goods and/or services as very beneficial, because it strengthens and makes the economies more efficient (Frank and Bernanke). One strong argument against government intervention that the supporters of Laissez-faire often use is the fact that economic freedom has been shown to associate strongly with higher incomes, higher quality of life, and so on. This means that when government limits its participation, the economies run more efficiently making it possible for the countries to improve the standard of living.

The supporters of Laissez-faire claim that government does not have any right to accuse thriving companies of having monopoly power. For example, Microsoft Corporation, which is a computer technology corporation with global annual revenue of $44,282 as of July, was accused by the United States of enjoying monopoly power (Income Statement). Many people claim the government is wrongly punishing Microsoft for being productive and successful, arguing that Windows dominates the market because of the product’s popularity. Others who argue in favor of the government claim that Microsoft’s monopolistic practices are harmful to people who also want to get involved in the same market. Many anti-Microsoft people think that when there is a company such as Microsoft, which is extremely successful, there must be something wrong.

These people believe that one has to be doing something illegal in order to become number one in the world and to put other businesses out of the market. This is not always the case. Microsoft simply produces products to satisfy peoples’ needs and then obviously people from all over the world purchase those products. The company continually releases new and improved versions of its PC operating system. The fact that there are a large numbers of people using Windows makes the product more attractive to consumers. So does the government have the right to interfere in today’s marketplace and accuse successful companies of dominating the market? The opponent of Laissez-faire will most probably say “yes” and demand the break-up of the giant company.

People opposing the theory argue that laissez-faire practices have not prevented private interests from turning to the government for help on a number of occasions. This fact shows that there were times when free markets experienced problems and had to turn to their local governments for assistance. Another argument against Laissez-faire is the example of the American agriculture which has benefited from government assistance several times even though it has been private most of the time (Welling).

People in favor of government involvement in business affairs argue that the main objectives of government intervention are aimed at preventing monopoly power, which creates a strong potential for market failures and limiting abuses of market power. These people also believe that regulation of capital, goods, and services by government promotes equality, encourages employment, and copes with failures in market. The conclusion that one can draw from all these information is that government intervention seeks to correct the economic damages created by market failure and to improve the efficiency in the way that markets operate.

The opponents of laissez-faire often cite too much economic freedom as a primary cause of the Great Depression. They point out that increased productivity, easy access to credit, and the uneven distribution of wealth can lead to financial collapse which many years ago caused a rapid economic downturn in the United States. As the depression spread, millions of people lost their jobs. Thousands more traveled from state to state searching for employment. Americans were angry that the attempts to fight the depression were failing. The Great Depression caused a lot of chaos on the stock market, banking, and industries. It not only affected the United States but many European countries as well.

Laissez-faire principles proved unable to deal with the social and economic problems throughout the history. Even though a lot of people still favor Laissez-faire, most countries today are not representative of it, since they usually involve some amounts of government intervention in the economy. Government intervention includes setting minimum wages, regulation of market competition in order to let other businesses try their luck as well, and so on. The most often cited economy that is regarded to be based on the principles of laissez-faire is that of Hong Kong’s. According to the Economic Freedom of World, 2004 annual Report, Hong Kong is ranked number one for its economic freedom (Dorn).

There are people who feel that the Laissez-faire principles are the best and believe that the economies should be based on it, because they think that when undisturbed by regulation, the natural economic order tends to secure the maximum well-being for the majority of individuals and the surrounding community. On the other hand, those who do not like such economic principles argue that government intervention is vital in the economic affairs if one wants to create equality and avoid abuses of market power in a country.

Both sides have strong opinions representing their respective viewpoints, and the vast majority of the population is divided when it comes to taking a stand in the issue. After observing all factors on the two conflicting sides, one can think that government intervention is the only way an economy can expand for the benefit of its citizens and the country as a whole.

Works Cited

“Adam Smith, important advocate of laissez-faire policies” Microsoft Encarta Online Encyclopedia 2006″Biography of Adam Smith”. The Concise Encyclopedia of Eonomics. The library of Economics and Liberty.

Dorn, James A. “Hong Kong: World’s Freest Economy”. July 2004Frank, Robert H, and Bernanke Ben S. Principles of Economics. Third Edition”Income Statement”. Microsoft Corporation Annual Report 2006Welling, George M. “From Revolution to Reconstruction”. 2006