Degrees of Laissez Faire

Certain Austrians wish to reserve the phrase “laissez faire” for their fantasy vision of capitalism called Rothbardian anarcho-capitalism.

That is deeply mistaken, and in fact the idea that Rothbardian anarcho-capitalism is some “pure” form of laissez faire capitalism is also deeply flawed.

Many different types of economic theories support various forms of “laissez faire.”

Essentially, one might list economic theorists who advocate degrees of “laissez faire” policy prescriptions as follows:

(1) Rothbardian anarcho-capitalists;

(2) followers of David D. Friedman’s anarcho-capitalism.

(3) Misesian minimal state capitalists;

(4) Hayekian minimal state capitalists;

(5) advocates of economies envisaged by Classical Political Economists (or Classical economics), e.g., Adam Smith, Ricardo, James Mill.

(6) free bankers;

(7) followers of Robert Nozick’s libertarianism;

(8) other non-Austrian libertarians (e.g., Tom Palmer, Bryan Caplan and Tyler Cowen);

(9) advocates of New Classical economics;

(10) monetarists, whether Old Monetarists, Friedmanite monetarists, or market monetarists;

(11) “conservative” New Keynesians;

(12) mainstream neoclassical supporters of the New Consensus, New Neoclassical Synthesis, or New Consensus macroeconomics.

It is true enough that the degree of intervention increases as one goes down that list, e.g., Misesian capitalists support a minimal state and (like Mises) could use utilitarian ethics to justify certain interventions if these were deemed morally justifiable.

Towards the end, we have monetarists and conservative New Keynesians, who support the existence of a central bank to expand the money supply, but even they strongly oppose most other government interventions. Monetarism is certainly less “laissez faire” than, say, Misesian minimal state capitalism, but it still has a strong belief in the self-correcting power of free markets.

I put “Rothbardian anarcho-capitalism” as the first on my list, but in reality its position there is questionable. Why? The reason is that Rothbardianism opposes even private capitalist fractional reserve banking, but its arguments for doing so are utterly flawed, wrong or just plain ignorant. In its opposition to fractional reserve banking, Rothbardianism is actually profoundly anti-capitalist and (on its own principles!) would require coercive violations of private property rights and free contract.

A “laissez faire” economy is obviously a form of capitalism, but capitalism is itself a broader term that includes more economic systems than just “laissez faire” ones. If capitalism is defined as a system where all or most commodities are produced privately, with mostly privately owned capital goods, private profit and loss, but with some varying degrees of government interventions, then even an economy run with Post Keynesian economics would be “capitalist.”

I would place the dividing line between “laissez faire” capitalism and “interventionist” capitalism with “left” New Keynesianism, though others might dispute this, given New Keynesianism’s general and deep neoclassical foundations and assumptions. The highly neoclassical (or what might be called “conservative”) New Keynesianism of N. Gregory Mankiw and others that doubted even the effectiveness of fiscal policy is probably to be regarded as a type of laissez faire monetarism.

Hence “interventionist” capitalists can be conceived as follows.

(1) left New Keynesians;

(2) old neoclassical synthesis Keynesians (Old Keynesians);

(3) Post-Walrasians

(4) some old American Institutionalists (such as John Kenneth Galbraith);

(5) Post Keynesians (including modern Sraffians, Kaleckians, post-WWII Cambridge Post Keynesians, etc.);

(6) Modern Monetary Theorists.

Once we get to economists who advocate central planning of most or all goods and services and government ownership of most or all capital goods, we have crossed over from capitalism into command economy socialism. These economists include the various types of Marxists.

The problem with mainstream economics since the mid-1970s has been that it shifted from old neoclassical synthesis Keynesianism back towards more “laissez faire” neoclassical theory such as Friedmanite monetarism, New Classical economics, “conservative” New Keynesianism and the strange neoclassical hybrid that emerged in the 1990s we call the “New Consensus,” “New Neoclassical Synthesis,” or “New Consensus macroeconomics.”

This consensus neoclassical theory has gone by the name of “globalization,” “neoliberalism,” or the “Washington consensus.” Its spectacular failure has been seen in the financial crisis of 2008, the resulting global great recession and continuing economic malaise. Long before this, however, it was wreaking havoc in the Third World, with the exception of China and East Asia, which has generally (though not completely) rejected the strong form of neoliberalism.