Wednesday, January 14, 2009

The Real Laissez Faire!

Adam Smith is generally recognized as the father of Laissez Faire capitalism. Yet many who call for free trade and other non-regulatory measures fail to recognize--as Smith did--the most basic form of intervention within modern capitalism; the public issuance of joint-stock ownership in a company.

"To establish a joint stock company... for any undertaking merely because such a company might be capable of managing it successfully; or to exempt a particular set of dealers from some of the general laws which take place with regard to all their neighbours, merely because they might be capableof thriving if they had such an exemption, would certainly not be reasonable. To render such an establishment perfectly reasonable, with the circumstance of being reducible to strict rule and method, two other circumstances ought to concur. First it ought to appear with the clearest evidence, that the undertaking is of the greater and more general utility than the greater part of common trades. and secondly that it requires a greater capital than can easily be collected into a private copartnery."

Smith accepts that such conditions may be met by the banking trade or large projects such as canal building. One might add in modern times, perhaps aerospace manufacture and certain capital intensive technologies, but as far as those smaller manufactured items and durable goods Smith makes clear his beliefs:

"The joint stock companies, which are established for the public spirited purpose of promoting some particular manufacture, over and above managing their own affairs ill, to the dimunition of the general stock of the society, can in other respects scarce ever fail to do more harm than good. Notwithstanding the most upright intentions, the unavoidable partiality of their directors to particular branches of the manufacture of which the undertakers mislead and impose upon them is a real discouragement to the rest, and necessarily breaks, more or less, that natural proportion which would otherwise establish itself between judicious industry and profit, and which, to the general industry of the country, is of all encouragements the greatest and the most effectual."

So there you have it a compelling statement for non intervention when it would hinder entreprenuership--and a call for reducing to "strict rule and method" those sectors such as banking for which joint stock ownership is justified. Sounds like a sustainable recipe for crash-free capitalism to me. Laisser Passer Laisser Faire indeed!

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