Laissez-Faire Economics? It's a Code Word for One-Sided Interventions

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Mr. Conn is a professor of history at Ohio State University and a writer for the History News Service.

As he refines his economic message on the campaign trail this summer, Republican John McCain has made it clear that, previous positions notwithstanding, he has now embraced the Republican economic orthodoxy: eliminate regulation, cut taxes on corporations and the wealthy, and the free and unfettered market will take care of everything.

This economic formula was fashioned most thoroughly by economist Milton Friedman in the mid-20th century, and brought to the federal government by Ronald Reagan. Friedman and his current devotees have looked to the late 19th century for their model of how an economy should work. They have imagined that era as a golden age of free-market competition and laissez-faire government. Many of these Friedmanites want us to return to that golden age.

The problem is that these free marketeers have their history exactly wrong. The Gilded Age, as Mark Twain and Charles Dudley Warner archly called it, was certainly not a period of a genuinely free market or of laissez-faire government. Government at a variety of levels and in many ways intervened regularly in the economy. It did so, however, on behalf of big business. Take just a few examples:

Railroads were among the biggest enterprises of the industrial age. After the Civil War, much of their expansion came because of government land grants. In fact, in the trans-Mississippi West, railroads received roughly 185 million acres of public land free in exchange for laying track. Free public land, therefore, lay at the foundation of the railroad industry.

The courts did their part to help big business as well. In a series of cases, most importantly the 1886 decision in Santa Clara County v. Southern Pacific Railroad, the Supreme Court used the 14th amendment, written originally to protect the rights of newly freed slaves, to define corporations as "persons." As such, they thus enjoyed the same constitutional protections as individual citizens. The effect of these decisions was to put corporations largely beyond the reach of any state legislature or Congress that might regulate their abuses.

Nowhere was the laissez-faire ethos flouted more than over the question of labor unions and strikes. During the 1890s, as the Supreme Court was refashioning the 14th amendment to protect corporations, it used the 1890 Sherman Antitrust Act to undermine many union activities, ruling that unions constituted illegal "cartels." When workers went on strike, big business repeatedly called upon the armed force of the state -- local police, state guards, federal troops. They got it.

Far from "leaving alone," government intervened in the economy during the late 19th century over and over, but almost always in one direction, on behalf of private businesses and against the interests of citizens, consumers and workers.

So it is today in our new Gilded Age. Banks and mortgage companies, which lobbied to have regulations in their industry loosened, came to Washington expecting to be bailed out when the real estate bubble popped. And they were, even as millions of Americans faced foreclosure without any help from government. Oil companies want access to even more public land, and large-scale agribusiness lobbies successfully for tariffs on lower-cost ethanol from Brazil.

Even Free-Marketer-in-Chief George Bush has benefited from the public intervention in the private market. When he sold his stake in the Texas Rangers, Bush profited handsomely because the value of the team increased dramatically when a new stadium was built. The citizens of Arlington, Tex., subsidized that stadium to the tune of nearly $200 million. They have seen almost none of the revenue returned to them.

Since the late 19th century, those who have called for laissez-faire government have never really wanted government to stay out of the economy. Rather, they believe that the power of government ought to be used to promote business interests, whether suppressing strikes one hundred years ago, or propping up the mortgage industry today.

Over the next several months, we ought to have a vigorous debate over the direction of the nation's economic policies. When we do, we ought to acknowledge that there never was a golden age of laissez-faire economics. Government has been and will always be involved in the economy. The real question we need to ask is: on whose behalf?

This piece was distributed for non-exclusive use by the History News Service, an informal syndicate of professional historians who seek to improve the public's understanding of current events by setting these events in their historical contexts. The article may be republished as long as both the author and the History News Service are clearly credited.

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RJ Sestack - 7/26/2008

Contrary to the comment of Randll Reese Besch, there is plenty wrong with this piece. John McCain is not and has never been a supporter of the free and unfettered market. Cutting some tax rates, repealing the Alternative Minimum Tax, reducing Congressional earmarks and the like does not make one an advocate of laissez-faire. The same is true of George W. Bush. He is definitely not and definitely has never been a “Free-Marketer.” “Republican economic orthodoxy” is not laissez-faire economics. It is difficult to believe that anyone who has even a slight grasp of laissez-faire would believe such claims. It is true that some Republicans, including Reagan, sometimes used and still use laissez-faire rhetoric. But rhetoric is not reality.

Part of McCain’s platform is to “eliminate regulation”? The use of the singular term “regulation” implies an extensive reduction. That is hardly the case. Perhaps he wants to eliminate some small number of regulations, but I am not aware of any. Can anyone name a statute, agency standard, or administrative rule that McCain plans to abolish (and not replace with something else)?

Laissez-faire was not fashioned most thoroughly by Milton Friedman. Ludwig von Mises was more thorough and more laissez-faire.

It is true, as Professor Conn points out, that there never really was any golden age of laissez-faire in the late 19th Century. The government did intervene in the railroad industry, and the courts, favoring management, often issued injunctions against strikes, even when person or property were not at risk. Nevertheless, knowledgeable advocates of laissez-faire know this and don’t want a return to some mythical age. They simply support a truly free market.

Professor Conn is mistaken that those who have called for laissez-faire never really wanted government to stay out of the economy. Perhaps that is true for some. Not everyone who uses free-market rhetoric understands laissez-faire. This is particularly true today. Moreover, genuine supporters of an unhampered market sometimes disagree as to the proper role of government. Nonetheless, they do not use “laissez-faire” as a “code word” and do not want the state to “promote business interests.” If they want the state to do anything at all, they want it to protect the right of private property, including transfers of property via contract. This does not necessarily promote the interests of business. Indeed, most businessmen oppose laissez-faire because unfettered competition makes their success uncertain. Hence, their support from the Progressive Era through today for a large amount of regulation, for patents, anti-trust statutes, tariffs, subsidies and other economic intervention by the state.

Raul A Garcia - 7/24/2008

Good points about the latter half of the 19th century- the concentration of wealth continues, the "market" has some "savvy" players, but most of us are excluded and just finance the casino. It is true that the "blame" is bipartisan- bailouts and subsidies don't seem just to the middle class. I just spent my "tax relief" on home maintenance- I am hoping the insurance company will pick up some of the tab. In the 19th century I doubt that many people had insurance. I belong to a union and need to. I think labor unions were historically needed regardless of today's "I paid for my lunch" attitude. Government is mostly inefficient but we need it. Companies come and most go and fewer are surviving. The internet and web just won't provide enough "democratic" revenue. The carriers for the web need oil and gas too, and there all have failed abysmally.

Robert Lee Gaston - 7/23/2008

It seems that about every ten years, or so, the banking insurance and brokerage industries are invaded and held captive by a new group of Wunderkind. They usually create a bubble and within a year or two the bubble bursts. At which time those who came to the bubble party late take the real bath.

When the bubble breaks the press/media (popular or otherwise) announce the end of the republic, pundits punt and politicians pol (unless they are in congress then they hold hearings and pass out money as the punishment to private companies for their failure).

It all goes under the general heading of crisis. Crisis, crisis, all is crisis. The way that word is used these days indicates the war in Iraq, gas prices and unsound lending practices have roughly the same importance as Ms. Spears showing her tail to the boys as she gets out of the car.

The inference taken from the word crisis indicates that somebody has to manage the crisis, and do something to make it all better. We want it to be all better. Government will always step in and make it all better. Government does this by paying off constituencies, or at least spokesmen for constituencies. This quells the crisis, but it never works.

By the way, being a spokesman for a constituency is a damned good job. Their titles range from community organizer to lobbyist. You could even get to be president.

Be warned however, that once government assumes authority over an aspect of our lives, it seldom gives it back. So crisis (contrived or real) leads to diminished freedom of action in our business or civil lives (i.e., liberty). Also be aware that when government takes over some aspect of our civil or economic lives it usually pretty much makes a mess of the attempt. Let’s look at some examples.

Bear Sterns failed because of their lending practices. This was discovered by a group of very smart people who kept their mouths shut until they had a line on a lot of Bear Sterns stock, and sold it short. So Congress and the SEC tighten the rules on shorting the market. In this case (just as in the Enron case) the short sellers were just the canaries in the mine, and Congress, of course, shot the messenger. The guys in charge of Bear Sterns probably need to do a little time in jail. Instead they are likely to get golden parachutes, and will serve their time in Palm Beach.

Countrywide is on your side. No one from Countrywide will be barked at too loudly. It seems as if the company is holding 4.5% paper on just about everybody who is anybody in the Democratic Party, Including Chris Dodd, chairman of the Senate Banking Committee. It is odd that the individual chairing the organization providing oversight to the U.S. banking system did not know he was getting a really, really good deal from is buddy, and Countrywide CEO Angelo Mozilo?

Freddie Mac and Fannie Mae. These two government sponsored organizations are going to raise a lot of money they need due to mismanagement. This will be underwritten by the government (your tax dollars at work). By the way if you look at the behavior of Freddie Mac and Fannie Mae, and compare it to Enron you find more than a few parallels.

The irony of all problems with the mortgage lenders is that the seeds of their current woes can be found inside the U.S. Government. The sub-prime mortgage problem was kicked off by government’s desire for low income households to be able to buy homes. While this was a noble aim, it resulted in a mountain very high risk paper secured by over priced properties. In addition, the initial private lenders did not place adequate controls on the transactions because they intended to bundle and sell this paper as soon as they could. The larger lenders knew that in the end they would be bailed out by the government. The result was the sudden appearance of fly-by-night mortgage brokerage houses. These guys hawked loans like barkers standing in front of strip joints. Once closed, the worthless paper was bundled and sold to the big banks, at home and in off shore markets.

The target markets were largely urban, black and low income, and the political establishment (read Democratic) in these areas had to be fully aware of what was going on in their areas, and likely were part of the food chain. Every now and then a story crops up about a bank being pressured by the administration and legislators to make these high risk loans. I guess the road to hell really is paved with good intentions.

For those of you under age 50, I have some news. If you are over 50, and these things are news to you, you probably work in academia or in government. But, here goes.

When a bubble breaks the smart money is all gone, and has been gone for some time. This is because some very smart people are set to make a lot of money on a bursting bubble. These guys usually have pins.

Demand is normally only Inelastic at the point of sale. There is nearly always a better deal to be had.

When you get it for nothing you get what you pay for.

Never be afraid to walk away from a bad deal.

If you think you can’t afford it, you are probably right.

If you are not sure if you need it, you don’t.

Government action in an economy will normally be ill timed and counter productive. You must remember their objective is to placate and pay off specific constituencies, and to give the appearance of action. They are not there to help you.

Randll Reese Besch - 7/22/2008

I do wish those who criticize know it will bolster their arguments greatly if they actually use examples in them. Otherwise you come off as just a flack. I found nothing wrong with the piece and its arguments neatly put in a row that even a 5th grader could understand.

Kirsten Brownrigg - 7/21/2008

Mr. Davis, your partisan bickering is tiresome. Come up with a better argument than that which deflects all blame from what must clearly be your political party and slants it toward the opposing one. As soon as you bring party politics into the mix, you can be sure half your audience has understandably tuned you out.

Michael Davis - 7/21/2008

How can you say the people of Arlington haven't been paid back yet?? Everytime 40,000 fans come to see games 82 times per season, Arlington gets a boost. Now the Dallas Cowboys are building a humongous football stadium right across the way. Municipalities helping to build stadias have been extremely common the past 18 years. Just picking out the Texas Rangers because GWB was an investor is ludicrous and obviously shows your bias.
Speaking of free markets and spending, there is another branch of government that has been spending us into oblivion the past 28 years: the legislative branch, with members from both parties. I think you would do well to find many more legislators than McCain who have harmed our system. Your ire should be pointed at those people (read: Democrats) who continuously propose new spending.
When China and Japan stop buying our T-bills, then the equation will be simple. I hope Mr. Conn, you have moved your 401k to off-shore securities. Unless of course you are relying on the Ohio State university to give you a pension, in which case you are in real trouble, as are most of the rest of us.