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Difference between capitalism and laissez faire

Difference between capitalism and laissez faire

Disentangling the complex net of economic theories can be rather complicated. For decades, the terms “capitalism”, “socialism”, “Marxism”, “free market”, “laissez faire” etc. have been used with a degree of superficiality and a lack of fundamental historical context, necessary to understand the deepest meaning and the slightest nuances of each word. To be fair, talking about the word “capitalism”, or the term “socialism” is reductive: such terms embody pivotal concepts that have shaped our world, our way of being, and our economic and political systems for years. Economics, politics, and social behaviors are rarely neatly separated: they all influence each other and mutually contribute to the emergence of complex and multilayered social structures.

In fact, even if we rarely think about the impact of socialism, capitalism or laissez faire on our every-day lives, we should never forget that what we have, who we are, and the world and societies we live in are the results of the shifts and balances between such economic models, which have also become political and social theories.

In addition, some of these concepts are so thickly intertwined, and so close in meaning and implications, that it may be complicated to clearly differentiate between one and the other. For instance, we often think of capitalism as the theory of free market and laissez faire; yet, laissez faire is an economic/political theory of its own.

In order to identify the subtle differences between the two, it is necessary to outline their specific features, and to dust off their historical connotations.

Capitalism[1]:

  • Such economic system is mainly organized around corporate or private ownership of goods and means of production
  • Competition in a free market determines prices and production
  • Almost all wealth is privately owned
  • There is little (if none) State involvement in market exchanges, productions and transactions
  • Production, distribution, and management of wealth are controlled by corporations (mostly big corporations) or privates
  • Such social and economic system is based on the acknowledgement and primacy of individual rights and private property
  • The purest form of capitalism is free market
  • Emphasis is put on individual achievements rather than on the quality of production
  • Politically, it is considered to be the system of laissez faire

Capitalism firstly originated at the end of the 18th century; during the 19th century, then, it became the dominant economic and social thinking of the Western world. Capitalism has pervaded every aspect of our lives, has given life to the well-known phenomenon of globalization, and has drastically reshaped the structure of our societies.

With the promise of democratization, economic liberalism, increased wealth and welfare, and strong emphasis on the individual, capitalism has spread contagiously across the Western world, and has soon influenced the Eastern part as well.

In some instances, the little governmental involvement has allowed capitalism to take over political values, and economics and politics have blended in a unique, complex, and dangerous unity (not far from the reality of laissez faire).

Laissez faire[2]:

  • The individual (the “self”) is the basic unit of society, and has primacy over the community
  • The “self” has a natural and inalienable right to freedom
  • Government involvement is completely absent:
  1. No regulation
  2. No minimum wage
  3. No taxation
  4. No oversight of any type
  • Taxations and State involvement hinder productivity, and penalize corporations
  • The Government should only intervene in the economic market (and in the sphere of individuals’ freedoms and rights) to preserve property, life, and individual freedom

Laissez faire was discussed and outlined for the first time during a meeting between the French finance minister Colbert and the businessman Le Gendre at the end of 17th century. History tells that Colbert asked Le Gendre how the government could help commerce and foster economy. The businessman, without hesitations, replied “Laissez faire” (“Let us do what we want”).

The effectiveness of laissez faire was tested during the American industrial revolutions: despite the big increase in wealth occurred, the approach showed its grave backlashes and provoked an unprecedented level of social and economic inequality.

The degree of freedom is the key

The features of capitalism and laissez faire are very similar.

  1. They both strive for free market
  2. They both emphasize on the individual rather than on the community
  3. They both call for private property and corporate responsibility
  4. They both require little (if none) State intervention

Despite the similarities, there is one fundamental differing detail: the degree of State involvement, or else, the degree of freedom.

  • Capitalism: the government does not set or control prices, demand, or supply
  • Laissez faire: no government subsidies, no enforced monopolies, no taxation, no minimum wage, no regulations whatsoever

We can see, now, how laissez faire economy requires even less governmental involvement than the one proposed by the capitalist paradigm. According to this theory, an invisible hand adjusts prices, wages and regulations following the shits of the market. State intervention would only hinder the ability of corporations and privates to create wealth, produce supplies, and respond the public demands. The only task governments should have would be the protection of life, property, and individual freedoms – meaning that any type of economic involvement should be off the table.

What is the current model?

Opening a debate on the current economic model would mean opening a Pandora’s box. We can surely affirm that capitalism has been the dominating paradigm in Western (but let us be honest, also Eastern) economies. However, capitalism can exist in different degrees.

In general, most countries do have national and international economic regulations, which should limit, monitor, and control the activities of private entrepreneurs and of national and multinational corporations. In many instances, governments:

  • Set minimum wages standards
  • Regulate taxations for privates and companies
  • Hold corporations accountable for breaches in national and international laws
  • Provide an institutionalized framework within which companies can operate
  • Intervene to protect individuals’ rights from corporate abuses

In most countries, then, governments intervene to protect individuals/workers from the crushing weigh of economic demands and requirements.

However…

When it comes to international regulations, the hand of the government is less visible and powerful. Outsourcing is one of the favorite strategies of multinational corporations, which circumvent national regulations by opening branches abroad, or by entrusting foreign companies with part of the work.

Outsourcing is also one of the main features of globalization, and is one of the primary factors leading to social and economic inequality.

Forcing international corporations to comply with either national or international legislations, norms, or regulations is quite complex:

  • There is no international legally binding instrument that forces corporations to comply
  • National legislations can be circumvented by outsourcing
  • National governments of the parent company have no jurisdiction in the country of destination
  • Corporations are often so big, rich and powerful that national governments (in particulars those of the countries of destination) accept any condition in order to bring jobs in and foster the national economy
  • International law is not as binding as national legislations: at the international level, states decide whether to comply or not, and whether to give up part of their sovereignty to abide by international standards
  • The protection of workers’ rights is much more complex at the international level:

*for a worker (or a company) is particularly complicate to seek reparation against the actions of multinational companies because of a lack of clear legal standards and because the powerful influence companies have over the judicial system

Regulating international trade is particularly complex, and despite the existence of international regulations and attempted governmental interferences, laissez faire has been the dominating principle followed in such instances.

Even at the national level, sometimes, it can be difficult to clearly separate economics from politics. In fact, cases in which governments take the side of companies rather than fulfilling their mandate of protecting citizens’ rights.

In sum

The two theories are very similar, and rather than representing two conflicting paradigms, they are two elements part of the same continuum. They share most of the core principles, and they propose a very similar approach to production and wealth management.

The main difference between capitalism and laissez faire lies in:

  • The degree of governmental involvement
  • The degree of freedom of individuals and corporations

Laissez faire is one of the driving principles of the capitalist thinking, but can also be applied and implemented as independent theory.

  1. At the national level, in most countries the governmental apparatus protects the interests and the rights of workers against the superpower of big corporations (not in all cases, and much more rarely in developing or underdeveloped countries)

At the international level, it is much more complex for national governments to intervene and interfere with the actions of multinational corporations (there is no internationally recognized legally binding agreements that forces corporations to abide by the same set of rules)


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References :


[0][1] What is capitalism? Capitalism.org, available at http://capitalism.org/capitalism/what-is-capitalism/

[1][2] Laissez faire, Investopedia, available at http://www.investopedia.com/terms/l/laissezfaire.asp

[2]https://commons.wikimedia.org/wiki/File:Capitalism_(video_game)_logo.svg

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