Corollary: Sometimes government research expedites the process. That is, results from government supported research projects can be  borrowed intact and made into successful new businesses, as has happened with the Internet and simultaneously the computer industry itself. This was also true concerning railroads in the 19th century. Corollary:  The economic purpose of governance is to create fair markets. This does not always require action by the government per se but often it does because no other system can protect those without access to establishments which hold dominant economic power. Also, government, at least in theory, has a neutral referee function and can act  as an impartial adjudicator. While this may sometimes not be the case, the ideal of  fair judgement is important in maintaining some semblance of fair play.
( 2 )  In mature industries / businesses, laissez faire has an overwhelming tendency toward monopoly formation and the rise of super-corporations that make it impossible for smaller firms to compete. Hence the dozens of car manufacturers of the early 20th century eventually became just 3, and hundreds of TV enterprises have become just 9 giant businesses today. This happens in every mature industry except businesses that are strictly focused on local markets like restaurants and beauty salons.

( 3 )  A mythology of laissez faire distorts the reality of this system. Proponents of laissez faire tell us , for example,  that the Free Market is always fair to all businesses and always self regulates for the common good.

Note: But such opinions are only true under special circumstances and
often are false and deceptive. Corollary:  According to this mythology,  regulations always  –maybe a few exceptions are allowed–  are harmful to the economy and almost always  are motivated by ideology-driven politics that serve the interests of special interest groups, especially labor unions.

Note: However, other interest groups may also deserve criticism, such as business cartels. Critique: The Free Market is approximately as much a fiction as it is a reality. This is because of several factors, starting with the enormous power of finance capital, a phenomenon that makes a mockery of fair competition and any notion of real world market efficiency as a universal norm. A business may be efficient but maybe not, which ought to be obvious in considering finance capital itself, which gave us most of the mess that erupted in 2007 and really decked the economy in 2008. For sure, a good part of the blame can be laid on the doorstep of Fannie and Freddie, but there was so much else going on, like the creation of irrational derivatives for which the government had no responsibility, that it is clear beyond all reasonable doubt, that ideals like honesty and efficiency were not factors at all, because what mattered just about universally on Wall Street were get rich quick schemes, or get ultra rich schemes, and damn the torpedoes……..

As well, because of corporate size differentials, and economies of scale, any market in any established industry, is like going to a butcher shop where the butcher has his thumb on the scale. Small size businesses simply cannot compete  –in terms of rates for shipping of lower volume goods, available legal counsel, and many other things.

( 4 )  Laissez faire, because it is over-lionized by many people, tends to be regarded as almost a God unto itself. Consequently, the market in an advanced Capitalist society tends ( overwhelmingly ) to become outright amoral or even immoral.  This harms society generally since all ethical principles are thrown to the winds whenever some unethical “product” is perceived as offering large profits. Hence, marketing of inappropriate goods and services to children,  and so forth. Corollary:  We can see the effects of immoral market forces in exaggerated form in the functioning of illegal businesses like recreational drugs, “businesses” that indulge in a myriad of criminal activities for the sake of maintaining profit margins.

Corollary:  Because of worship of the bottom line intrinsic to the laissez faire system even national security may be sacrificed for the sake of quarterly earnings. Hence massive technology transfer to America’s detriment. Hence willingness to agree to business contracts with nations like Saudi Arabia and China which, different as these particular states may be, are alike is seeking advantage in obtaining sensitive military hardware, as in the case of the Saudis, or such things as commercial jet basic assemblies, on the part of the Chinese. Laissez faire economic policy, in other words, can easily result in national disadvantage,  which we can now see more clearly than before in the case of auto parts shortages etc, that were the result of the tsunami some months ago. It may be that there is much money to be made through usual laissez faire practices but when this results in national military security or national economic security vulnerabilities, then laissez faire can be seen for what it is, excellent in some ways, terrible in others.
( 4 )  The market simply cannot or will not do some things that are very useful to society. In such cases government may decide to act. Hence, the Interstate highway system, the Intercoastal waterway –the canal system used by Atlantic seaboard states– and Boulder Dam and other hydroelectric projects.

Corollary:  Private businesses are very skilled at making maximum use of such projects and using new leverage from them to help build the overall economy. This is a prime example of the value of government / private sector co-operation for common good. Corollary:  Demonization of government is dysfunctional and stupid. Moreover, anti-government ideology is disrespectful toward James Madison and other Founding Fathers and toward the many thousands of Americans who took part in the ratifying conventions that brought the Constitution into being, the document which established our  government. To pretend that the Constitution promotes bare bones minimal government is a misreading of history since it was intended to remedy the extreme weaknesses of the system in place under the actually minimalist system of the Articles of Confederation However, honest criticism of government failings is always a positive good and serves a valuable social and economic purpose. Reform of government sometimes is necessary and when it is, we should make sure it happens.

( 5 )  Because a functional market with laissez faire characteristics is an economic good, the Government has the responsibility to see to it that sufficient regulations are in place at all times such that some approximation of a “pure” laissez faire system operates for the national interest. This policy of necessary regulations  is essential because of the built-in limitations and flaws in the laissez faire system itself. However, this also means all necessary regulations only, and the fewer the better. But enforcement of such regulations must be rigorous and the penalties should be such that no investor would even think about violating the rules.

Corollary:  Regulation is a two-edged sword, both  due to regulatory capture by industry, and also because regulation can create barriers to entry which prevents innovation. The cost isn’t infinite –sometimes it is worth it–  but it isn’t zero either. Therefore it is vitally important to limit the number of regulations as much as possible, consistent with legitimate social or other needs. We also need some reliable, non-partisan means to evaluate the effects of regulation such that any problems with rules can be remedied with minimum delay and to good effect without significant burden to industry.

We need to give laissez faire full credit where it is deserved, it can deliver wealth to multitudes and create economic growth that benefits the entire nation. However, his is not all it does and sometimes this system is responsible for serious problems that demand redress.

Above all, we need to think about laissez faire in objective terms and never attribute virtues to it that are false to the facts.

Billy Rojas

December 12, 2011