Rise and fall of laissez-faire

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By FERNANDO NOGUEIRA DA COSTA*

The political campaign for free trade in the face of the mercantilist State set the laissez faire in the popular mind as the practical conclusion of liberal political economy

Mercantilism became known as a set of economic ideas and practices carried out by European absolutist states, after the period of Feudalism. It represented State intervention in the economy, taking protectionist measures in order to guarantee enrichment based on the amount of precious metals (gold and silver) stored in its coffers for public spending and imports.

Mercantilism intensified from the XNUMXth century onwards, with the beginning of great maritime explorations, and went into decline in the mid-XNUMXth century, with the emergence of liberal ideas, where the Enlightenment, individualism and laissez-faire began to question the State's direct interference in the economy. Those who gained most from this economic system were the king and the nobility.

The political campaign for free trade in the face of the mercantilist State set the laissez faire in the popular mind as the practical conclusion of liberal political economy: in favor of controlling the spending of the king and rich nobles. Enlightenment liberalism defended the true freedom accepted by the bourgeoisie: “every man is left free to dispose of his own property, his own time, his strength and his ability, in the way he thinks fit, if he does no harm to his neighbors".

In short, according to John Maynard Keynes in his essay “The End of Let it do”, political philosophy, in the XNUMXth and XNUMXth centuries, forged to overthrow kings and prelates, made liberal dogma take over the educational machine, it became a school notebook maxim. Hence “almost all economists, renowned or not, are always ready to find holes in most socialist proposals”.

Economists, commented John Maynard Keynes, no longer had any connection with the theological or political philosophies from which the dogma of social harmony arose. After all, their “scientific” analysis did not lead them to such conclusions.

Cairnes (1823-1875), in a lecture in 1870, was perhaps the first economist to launch a frontal attack against the laissez faire in general. “The maximum laissez faire,” he declared, “has no scientific basis whatsoever and is, at best, a mere rule of thumb.”

Later, notable economists recognized that private interest and social interest were not harmonious. However, the non-dogmatic attitude of less ideological economists did not prevail against the general opinion of an individualistic policy of the laissez faire be both what they should teach and what they actually teach.

Economists, like other scientists, chose the starting hypothesis offered to beginners simply because it is the simplest – and not because it is the closest to the facts. They were influenced by the traditions of the subject.

They began by assuming a state of affairs where the ideal distribution of productive resources could be achieved through individuals acting independently by trial and error. In this way, individuals moving in the right direction would destroy, through competition, those moving in the wrong direction.

By this arbitration there must be no mercy or protection for those whose embarkation of their capital or their labor has gone on a journey in the wrong direction. This method would bring the most successful profit producers to the top through ruthless competition for survival and select the most efficient through the bankruptcy of the least efficient.

These economists do not count the cost of the fight. They only assume that the benefits of the presumed result are permanent. With this method of achieving the ideal distribution of instruments of production between different purposes, the assumption is also derived about how to achieve the ideal distribution of what is available for consumption.

Each individual will discover which of the possible consumer goods he or she most desires through trial and error “on the margin”. In this way, not only will each consumer distribute their consumption in the most advantageous way, but each object of consumption will serve those who have the greatest taste for it compared to the others.

This consumer, via competition, will outperform the rest... This is what the followers of the marginalist economy imagine without talking about money, directly, nor about financial wealth. The only notable neoclassicist to speak on this topic was Knut Wicksell (1851-1926).

This assumption of conditions under which unimpeded natural selection leads to progress is only one of two provisional assumptions, but taken as literal truth, it turns out to be the twin pillars of laissez faire. The other, according to John Maynard Keynes, is effectiveness as an incentive to maximum effort.

In fact, this “magic word” (always on the lips of neoliberals) refers to the best opportunity to make unlimited money. In this way, one of the most powerful human motivations, the love of money, is introduced as an argument for the task of distributing economic resources in the best calculated way to increase wealth... of those who undoubtedly deserve it, as they already have it!

The parallelism between the economy laissez-faire and social Darwinism is presented as very close. Just as Darwin invoked sexual love, acting as a helper of natural selection through competition, capable of directing evolution along desirable and effective lines, so the individualist invokes the love of money, acting through the maximization of profit, as a helper of natural competition, to provoke the production on the largest possible scale of what is most desired, measured by exchange value.

It is forgotten that such an abstract theory arises not from the facts of reality, but from an incomplete hypothesis, introduced for the sake of simplicity. The conclusion that individuals, acting independently in their own interests, will produce the greatest aggregate of wealth depends on a variety of unrealistic assumptions. The production and consumption processes presented are in no way organic.

Neoclassical economists reserve for a later stage of their argument the complications that arise in reality: (1) when efficient units of production are larger relative to units of consumption, (2) when joint costs are present, (3) when economies of scale tend to aggregate production, (4) when the time required for adjustments is long, (5) when ignorance prevails over knowledge, and (6) when monopolies and other market structures interfere with equality in negotiation.

When, finally, they recognize that the simplified hypothesis does not correspond precisely to the facts, they argue that it represents what is “natural”. Therefore, it is the ideal or what the free-market economy idealized by them should be. John Maynard Keynes ironizes the appeal to this argument: “they consider the simplified hypothesis as health and the subsequent complications as illness”. They are doctors in health defense!

But John Maynard Keynes never fails to mark his anti-communism as an English liberal. He states: “the principles of laissez faire they had other allies besides neoclassical economics books. It must be admitted: they were confirmed in the minds of sensible thinkers and the reasonable public by the poor quality of the opposing proposals – protectionism, on the one hand, and Marxist socialism, on the other.”

Reinforces the criticism: “both are examples of deficient thinking, of inability to analyze a process and follow it to its conclusion”. Of the two, he recognizes that protectionism is at least plausible. “But Marxist socialism must always remain an omen to historians of opinion: how is it possible that so illogical and monotonous a doctrine has exercised such a powerful and lasting influence on the minds of men and, through them, on the events of history.” .

In any case, for John Maynard Keynes, “the obvious scientific deficiencies of these two schools [mercantilism and Marxism] contributed greatly to the prestige and authority in the XNUMXth century of the laissez faire”. The victory of evil would be due to the defeat of good…

The experience of the war economy in organizing socialized production left some observers optimistic, eager to repeat it under conditions of peace. “War socialism,” according to John Maynard Keynes, “unquestionably achieved a production of wealth on a scale far greater than that ever known in peace, for although the goods and services provided were destined for immediate and fruitless extinction, yet they were wealth.”

However, the dissipation of effort was also prodigious. The atmosphere of waste and not to mention the cost was repugnant to any parsimonious or farsighted spirit.

Finally, “individualism and laissez faire could not, despite their deep roots in the political and moral philosophies of the late XNUMXth and early XNUMXth centuries, have secured their lasting dominance over the conduct of public affairs, were it not for their conformity with the needs and desires of the world. business at the time. They gave full scope to our ancient heroes, the great businessmen, concludes ironically Lord Keynes, a noble member of the caste of English intellectual scholars.

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP). https://amzn.to/3r9xVNh


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