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Saturday, June 09, 2012

"Adam Smith and the Myth of Laissez Faire"

Gavin Kennedy continues to fight against cartoonish mis-representations of what Adam Smith actually said and believed:

Adam Smith and the Myth of Laissez Faire, by Gavin Kennedy: ...Let us be clear: Adam Smith did not use the words “Laissez-faire” in anything that he wrote, published in his lifetime or posthumous, or in any student notes that have so far been found, or in any reports of his lectures by those who attended them (John Millar, James Woodrow, Lord Buchan, John Stuart, etc.,) or by those who knew him intimately (such as Dugald Stewart, whose father was a student at Glasgow with Smith). ...
We know that Smith knew of the use and meaning of laissez-faire from his close association with the Physiocratic circle around Quesnay during his visits to Paris (1764-67). The fact is that laissez-faire never entered his vocabulary. Nor did an English translation. This has not prevented many commentators from seeking to use Smith’s use of Natural Liberty as a synonym for laissez-faire. It was not the same thing.
Natural Liberty was a philosophical concept based on Natural Law theories as expressed by Grotius and Pufendorf... The originator of laissez-faire was a ‘plain spoken’ French merchant, M. le Gendre, a deputy of commerce, who responded to the question put to them by Colbert, the French minister, what he could do for them at a meeting that Colbert convened: “lassez nous faire’ le Gendre replied in 1690. Those who quote the phrase today often miss these details. Note that it was a merchant who favoured laissez faire. Consumers were not asked but are supposed to be the main beneficiaries of laissez-faire. Smith remained suspicious of merchants who from Elizabethan times had monopolised who could practise their trade and where, in the infamous Town Guilds. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation sends in a conspiracy against the public, or in some contrivance to raise prices” (WN I.x.c.27: 145). Laissez-faire was of dubious benefit, given its claimants hence Smith never advocated it.
He believed that consumption was the sole end of production and competition was the antidote to open and secret monopolies. Far from leaving merchants alone, he wanted them under the pressure of free competition of consumer choice. Colbert typified state regulations of trade and France was a prime example where government regulations abounded, with numerous officious Inspectors of French street markets and fairs inspecting every detail, not to ensure open competition, but to ensure the State’s passion for order. Absent these regulated orders, enforced by the Inspectors ,the merchants would have imposed their own orders, and their likely behaviours, if free to do so, would not have worked for the best interests of their captive customers. Trade guilds, legal or unofficial, under the cloak of laissez-faire worked for the interests of merchants, not consumers.
So where did cries by merchants and manufacturers for ‘laissez faire come from throughout the 19th century? Two French economists, Say and Bastiat, were prominent in cries for laissez-faire, using Adam Smith’s name as cover for its popularity among politicians and merchant campaigners against the ‘Corn Laws’ and the newly passed but limited Factory Acts. ...

This is a point I've made in another context. Free, unregulated markets -- those absent government oversight of any kind -- are not the same as the ideal competitive markets found in textbooks, those that produce optimal outcomes. In a free market, producers are free to organize, for example, "in some contrivance to raise prices," and this takes us away from the optimal outcome free market enthusiasts are trying to defend. Government oversight and regulation are needed to stop producers from engaging in behavior that is harmful to consumers, excessive market power and the associated political power that come with it are both problematic, a point Smith's so-called disciples ought to take to heart.

    Posted by on Saturday, June 9, 2012 at 01:35 PM in Economics, History of Thought, Market Failure | Permalink  Comments (28)


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