October 2011 issue of Freedom's Phoenix magazine - fr33aid

The Myth that Laissez Faire Is Responsible
for Our Financial Crisis
by George Reisman
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October 28, 2008
THE news media are in
the process of creating
a great new historical
myth. This is the myth
that our present financial
crisis is the result of
economic freedom and
laissez-faire capitalism.
The attempt to place the blame on laissez faire is
readily confirmed by a Google search under the
terms “crisis + laissez faire.” On the first page
of the results that come up, or in the web entries
to which those results refer, statements of the
following kind appear:
“The mortgage crisis is laissez-faire gone
wrong.”
“Sarkozy [Nicolas Sarkozy, the President of
France] said 'laissez-faire' economics, 'self-regulation'
and the view that 'the all-powerful market'
always knows best are finished.”
“'America's laissez-faire ideology, as practiced
during the subprime crisis, was as simplistic as
it was dangerous,' chipped in Peer Steinbrück,
the German finance minister.”
“Paulson brings laissez-faire approach on financial
crisis….”
“It's au revoir to the days of laissez faire.” 1
Recent articles in The New York Times provide
further confirmation. Thus one article declares,
“The United States has a culture that celebrates
laissez-faire capitalism as the economic ideal…
.” 2 Another article tells us, “For 30 years, the nation's
political system has been tilted in favor of
business deregulation and against new rules.” 3
In a third article, a pair of reporters assert, “Since
1997, Mr. Brown [the British Prime Minister]
has been a powerful voice behind the Labor
Party's embrace of an American-style economic
philosophy that was light on regulation. The
laissez-faire approach encouraged the country's
banks to expand internationally and chase returns
in areas far afield of their core mission of
attracting deposits.” 4 Thus even Great Britain is
described as having a “laissez-faire approach.”
The mentality displayed in these statements is
so completely and utterly at odds with the actual
meaning of laissez faire that it would be capable
of describing the economic policy of the old Soviet
Union as one of laissez faire in its last decades.
By its logic, that is how it would have to
describe the policy of Brezhnev and his successors
of allowing workers on collective farms to
cultivate plots of land of up to one acre in size on
their own account and sell the produce in farmers'
markets in Soviet cities. According to the
logic of the media, that too would be “laissez
faire” — at least compared to the time of Stalin.
1 See http://www.volunteertv.com/international/headlines/29762874.html.
2 Steve Lohr, “Intervention Is Bold, but Has a Basis in History,”
October 14, 2008, p. A14.
3 Jackie Calmes, “Both Sides of the Aisle See More Regulation,”
October 14, 2008, p. A15.
4 Landon Thomas Jr. and Julia Werdigier, “Britain Takes a Different
Route to Rescue Its Banks,” October 9, 2007, p. B7.
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Laissez-faire capitalism has a definite meaning,
which is totally ignored, contradicted, and
downright defiled by such statements as those
quoted above. Laissez-faire capitalism is a politico-economic
system based on private ownership
of the means of production and in which
the powers of the state are limited to the protection
of the individual's rights against the initiation
of physical force. This protection applies to
the initiation of physical force by other private
individuals, by foreign governments, and, most
importantly, by the individual's own government.
This last is accomplished by such means
as a written constitution, a system of division of
powers and checks and balances, an explicit bill
of rights, and eternal vigilance on the part of a
citizenry with the right to keep and bear arms.
Under laissez-faire capitalism, the state consists
essentially just of a police force, law courts, and
a national defense establishment, which deter
and combat those who initiate the use of physical
force. And nothing more.
The utter absurdity of statements claiming that
the present political-economic environment of
the United States in some sense represents laissez-faire
capitalism becomes as glaringly obvious
as anything can be when one keeps in mind
the extremely limited role of government under
laissez-faire and then considers the following
facts about the present-day United States.
1) Government spending in the United States
currently equals more than forty percent of national
income, i.e., the sum of all wages and
salaries and profits and interest earned in the
country. This is without counting any of the
massive off-budget spending such as that on account
of the government enterprises Fannie Mae
and Freddie Mac. Nor does it count any of the
recent spending on assorted “bailouts.” What
this means is that substantially more than forty
dollars of every one hundred dollars of output
are appropriated by the government against the
will of the individual citizens who produce that
output. The money and the goods involved are
turned over to the government only because the
individual citizens wish to stay out of jail. Their
freedom to dispose of their own incomes and
output is thus violated on a colossal scale. In
contrast, under laissez-faire capitalism, government
spending would be on such a modest scale
that a mere revenue tariff might be sufficient to
support it. The corporate and individual income
taxes, inheritance and capital gains taxes, and
social security and Medicare taxes would not
exist.
2) There are presently fifteen federal cabinet departments,
nine of which exist for the very purpose
of respectively interfering with housing,
transportation, healthcare, education, energy,
mining, agriculture, labor, and commerce, and
virtually all of which nowadays routinely ride
roughshod over one or more important aspects
of the economic freedom of the individual. Under
laissez faire capitalism, eleven of the fifteen
cabinet departments would cease to exist and
only the departments of justice, defense, state,
and treasury would remain. Within those departments,
moreover, further reductions would
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