Laissez-faire Versus Government Intervention

Historically, the U.S. government policy toward business was summed up by the French term laissez-faire -- "leave it alone." The concept came from the economic theories of Adam Smith, the 18th-century Scot whose writings greatly influenced the growth of American capitalism. Smith believed that private interests should have a free rein. As long as markets were free and competitive, he said, the actions of private individuals, motivated by self-interest, would work together for the greater good of society. Smith did favor some forms of government intervention, mainly to establish the ground rules for free enterprise. But it was his advocacy of laissez-faire practices that earned him favor in America, a country built on faith in the individual and distrust of authority.

Laissez-faire practices have not prevented private interests from turning to the government for help on numerous occasions, however. Railroad companies accepted grants of land and public subsidies in the 19th century. Industries facing strong competition from abroad have long appealed for protections through trade policy. American agriculture, almost totally in private hands, has benefited from government assistance. Many other industries also have sought and received aid ranging from tax breaks to outright subsidies from the government.

Government regulation of private industry can be divided into two categories -- economic regulation and social regulation. Economic regulation seeks, primarily, to control prices. Designed in theory to protect consumers and certain companies (usually small businesses) from more powerful companies, it often is justified on the grounds that fully competitive market conditions do not exist and therefore cannot provide such protections themselves. In many cases, however, economic regulations were developed to protect companies from what they described as destructive competition with each other. Social regulation, on the other hand, promotes objectives that are not economic -- such as safer workplaces or a cleaner environment. Social regulations seek to discourage or prohibit harmful corporate behavior or to encourage behavior deemed socially desirable. The government controls smokestack emissions from factories, for instance, and it provides tax breaks to companies that offer their employees health and retirement benefits that meet certain standards.

American history has seen the pendulum swing repeatedly between laissez-faire principles and demands for government regulation of both types. For the last 25 years, liberals and conservatives alike have sought to reduce or eliminate some categories of economic regulation, agreeing that the regulations wrongly protected companies from competition at the expense of consumers. Political leaders have had much sharper differences over social regulation, however. Liberals have been much more likely to favor government intervention that promotes a variety of non-economic objectives, while conservatives have been more likely to see it as an intrusion that makes businesses less competitive and less efficient.

---

Next Article: Growth of Government Intervention in the Economy

This article is adapted from the book "Outline of the U.S. Economy" by Conte and Carr and has been adapted with permission from the U.S. Department of State.