The Short-Comings of Laissez-Faire Doctrine in General the Reality of Commodity
Introduction
Appeal to the history of the national economic liberalism allows us to speak about the special place that takes the history of liberal ideas, consider it as one of Europe’s leading centers of economic thought and social reform.
Economists greatly enriched the content of liberal ideas with new ideas about the role of the state in economic development and social issues, on how to achieve socio-economic welfare and national reconciliation, the relationship between the general and the particular in the economic development of countries and peoples. They were among the first, if not the first to come to understand the immutable for modern economics fact that the market is not only self-sustaining and self-regulating, and self-destroying system, thereby requiring a certain adjustments and a delay from the outside.
Familiarity with the history of formation and development of the liberal trend in economic science of XIX century gives reason to believe that domestic scientists and economists not only actively perceived advanced economic, social and philosophical ideas of his time, but also made a lot of value to the world treasury of social thought.
National school of liberal economists was the vanguard of liberal-democratic movement, an objective which is based on the development of industrial and agrarian capitalism, changes in the economic and social structure of the country.
Deprived of cold academic impartiality, they lived in the interests of his age and country, were clearly the place and role of international division of labor have seen the prospects for its economic and cultural growth, persistently tried to emancipate the creative energy of the people. They awaken him from centuries of feudal lethargy, argued in the public mind the principles of freedom and democracy.
Major objectives of the liberal movement were early elimination of the vestiges, accelerated development of forms of modern economic life, the elimination of outdated principles of the political system, civil freedom of choice. Theoretically justifying the need for liberal reforms caused needs of capitalist development; they sought more opportunities for creative initiative and entrepreneurship (Bartels, 2009).
Chivalrous defense of the principles of economic liberalism, our scientists and journalists waged a stubborn ideological struggle on two fronts: against the conservatives, and against the supporters of the socialist transformation of society, implemented in the public mind the destructive ideas of equality.
Liberal economists considered “monstrous” attempt to replace the natural market order system formed in the minds of supporters of socialist doctrines and focused on measures of violent overthrow of the state system. They are opposed to these measures, the path of social and economic reformation aimed at achieving material well-being of all classes and strata of society.
Laissez-Faire Doctrine
In the progress of economic history, the confrontation between the two opposing schools of liberalism and mercantilism plays an integral role in theoretical understanding of an economic and political interaction. Economic liberalism, which focuses on private enterprise and free markets, nowadays become the dominant doctrine.
The principle of complete non-interference of the state in the economy “laissez faire” – is a strategy of state regulation is necessary in the event of threats to the common good. Scientists advocate of free trade between countries, showing that the mutual benefit of international trade on the basis of different levels of production costs in different countries (Whalen, 2008).
Theoretical understanding of the laws of trade begins with the study of mercantilism – the theory that enabled us to go beyond the feudal claims of self-justification and launched a product role in the new economic system and economic expansion among other countries. Representatives of economic thought (Acemoglu, 2009) followed the view that the world has a limited amount of wealth.
Therefore, the welfare of a country can be enhanced only by the impoverishment of another.
The wealth of the nation mercantilists determined amount of precious metals that it had before. Therefore, each country must accumulate gold, silver and other jewelry. Meanwhile recommended to reduce imports to prevent the outflow of the country with the so-called full of money. So mercantilists regarded international trade as zero-sum game, in which the gain of one country inevitably means losing its trading partner (Stiglitz, 2006).
Among mercantilist’ views the main role plays the model of economic system (the manufacturing sector, rural sector and foreign colonies). Merchants regarded as the most important group, and work – as a major factor of production. Mercantilists first described that in the modern economy is called the balance of payments, stressing the need to implement such foreign economic policies that contributed to a positive trade balance. Limited mercantilist was the inability to understand that enrich the nation is due not only to the impoverishment of other countries, and increasing wealth.
The first scientist, who formulated and systematized mercantilist views on international trade, was Adam Smith. He proved that the welfare of nations depends not only on accumulated wealth, but on the ability to produce final goods and services. It is therefore necessary to develop a production-based division of labor and its cooperation. The best condition for this is the absolute economic freedom, which was named Lassie enzyme (laissez-faire francs. “Let do”) (Smith, 1759). The doctrine of laissez-faire in modern theory could be interpreted as a policy of state interference in the economy, so that the performance and the distribution of wealth depended only on market forces and efforts of individuals (Issing, 2009).
Smith developed a model in which a reasonable policy laissez fair system of international relations. It is based on the idea of specialization in producing states of goods, production of which they have an absolute advantage in comparison with other subjects of international economic cooperation. Conclusion of international trade theory of absolute advantage (absolute advantage theory) is that the country should export goods, such that it produces a lower cost (in the production of which has an absolute advantage, that production is completely effective in the sense that unit of product use less labor compared to other countries – a potential trading partner), and import those goods that other countries produce at lower cost (in production which the absolute benefits belong to their trading partners) (Greenspan, 2008).
In contrast to the mercantilist, Adam Smith failed to prove that trade can be mutually beneficial for both trading partners. In other words, it should not be a zero-sum game, a zero-sum game. Known for his statement that the main rule every reasonable head of the family – not to try to produce such items whose production costs at home is more expensive than buying them from the side.
According to Machiavelli, state power can be gained from using weapons or mercy of fate. Statism principle was adopted by Kemal Ataturk and included (in 1931) in the program Republican People’s Party, and (in 1937) of the Constitution of the Republic of Turkey as the official economic doctrine. Statism allowed Turkey to achieve rapid development of the national economy. In bourgeois society, with its first dominated views “minimal state” (ie its limited role in life) Statism acted primarily as anti-democratic and anti-liberal doctrine, as strong demand from government positions reactionary social and political forces (an extreme form of Statism – Nazi theory and the practice of “total state”).
According to Protectionism conception, economic policies aimed at restricting international trade. Lowers life and slows economic growth in a country that implements this policy. In economic theory, one of the main arguments of protectionism is a criticism of the theory of foreign trade from the standpoint of protecting sovereign wealth arising directly from the analysis of gains and losses (Block, 2009).
Liberalism is an ideology-that goes on the assumption that individual freedoms are the legal basis of society and economic system.
The fundamental principles of liberalism include individual rights (to life, liberty and property); equal rights and universal equality before the law; free-market economy; government, elected in fair elections; transparency of the government. The function of the government in this case is reduced to the minimum necessary to ensure these principles. Economic liberalism argues that the value of goods and services should be determined by the free choice of individuals, that is, market forces.
Preference capitalism based on the principle of non-interference in the economy (laissez-faire), meaning abolition of state subsidies and legal barriers to trade. Economic liberals believe that the market does not need regulation. In the nineteenth century becomes the definition of liberal theory “night watchman state”, according to which the state must protect the peace of the citizens, to ensure the functioning of civil society, and order it. Any government interference in private life except for tax collection, it was considered not admissible regarded as an attack on the freedom of individuals.
Politics Statism allowed Turkey to achieve rapid development of the national economy. In bourgeois society, with its first dominated views “minimal state” (ie its limited role in life) Statism acted primarily as anti-democratic and anti-liberal doctrine, as strong demand from government positions reactionary social and political forces discovered algorithms make it possible to predict the trends of as a European state and state development. Liberals advocated free market economy. However, liberals believed that market regulation mechanism can not function freely and requires constant government intervention in order to create optimal conditions for competition. The political pendulum ensures stability in a society that using high potential of self-regulation and reform increased its economic strength. Liberals consider creating appropriate conditions for private initiative to support the development of free market and the protection of private property (Stiglitz, 2002).
Failure to state include the following: 1. Limited required for decision-making information. Just as the market possible existence of asymmetric information such governmental decisions can often be made in the absence of reliable statistics, data which would take a right decision. 2. Gaps in the political process. Manipulation of votes due to imperfect regulation, lobbying, bureaucracy, political rents. 3. The limited control over the bureaucracy. The rapid growth of the state apparatus creates more and more problems in this area. 4. Failure to provide state and effectively control the immediate and long-term consequences of its decisions. Economic agents often react not as called for government action is changing their content and direction of actions initiated by the government (or laws approved by the legislative assembly).
The emergence of market failure is usually allocated as follows: externalities: economic entity does not reimburse yourself consequent costs or receives the benefit of a third party without appropriate reimbursement. For example, foreign cars and trucks using Ukrainian roads without compensating with the costs associated with pollution emissions and amortization of roads; indivisibility effect resulting from the existence of products which are highly budgeted and capacity changes only big jumps, such as power stations, tracks, gas and telephone infrastructure; asymmetric information: Before signing the agreement (a priori) there is a different state of awareness – sellers are well informed, poorly informed purchase.
The problem of “adverse selection” leads to destruction of the market for quality goods, because the buyer, not being able to realistically assess the value of the goods, pay only the average price, and so the market can only defective goods. After an agreement (a posteriori) may be the so-called problem of “moral hazard” if you can not check the agreement counteragents.
The solution of one of these problems of asymmetric information gives rise to transaction costs, so use market ceases to be free. adaptive disadvantages arise when the process of achieving equilibrium in the market is a long or impossible at all, and when it turns unstable equilibrium is reached; irrational behavior of market participants, the actions of market participants do not bring them benefits, such as a lottery game in which the expected payoff (probability x amount of winnings) is less than the cost of a lottery ticket; Classical economic theory of altruism is also seen as irrational behavior.
Nowadays, mercantilism loses its positions because of archaic and obviously erroneous judgments about economic policy. Indeed, the mercantilists often defended some very outdated ideas, chief among which was the opinion that the control center of national policy should be the accumulation of precious metals – gold and silver. Adam Smith’s treatise in 1776, “The Wealth of Nations” denied many of these ideas. In particular, Smith has shown that money does not necessarily have to be associated with the concept of “wealth”. According to him, “the country’s wealth consists not only of gold and silver, but also of its lands, houses and consumer goods of every kind.”
However, it would be more correctly to judge the mercantilism as on some other form of organization of relations between the state and the economy – today, this view is not less important than it was in the XVIII century. Theorists such as Thomas Mann mercantilism were actually advocates of capitalism; they just put forward a model that is different from liberalism.
Liberal model considers the state in terms of its predatory practices, and the private sector in terms of economic activities not related to the creation of wealth. Thus, it requires strict separation of state and private business. Mercantilism, by contrast, offers a corporatist approach in which the government and private businesses are allies and cooperate to achieve common goals, such as: economic growth and power of the state (Stiglitz, 2006).
When this model works, which is often observed in Asia, while the “public-private cooperation” that it brings with it, quickly gets accolades. Lagging economy could not help but notice that mercantilism can be their friend. Even in the UK classical liberalism appeared only in the middle of the XIX century, that is, after the country became the world’s largest industrial power.
Another difference between the two models lies in the question of privilege, whether they should be for consumers or producers. For liberals, consumers are kings. One of the objectives of economic policy is to increase the capacity of consumer households, which requires the provision of unhindered access to the cheapest goods and services.
Mercantilists, on the contrary, emphasize the production aspect of the economy. They believe that the stability of the economy requires a stable production system. In this case, consumption should be supported by a high level of employment with adequate wages.
These different models have predictable consequences for international economic policy. The logic of the liberal approach is that the root of the economic benefits of trade is in imports: the import of cheaper the better, even if the result is a trade deficit. The mercantilists, however, see trade as a means of supporting national production and employment, and prefer to stimulate exports and not imports.
China is by far the leading disciple of mercantilism, although China’s leaders never admit it: too much condemnation attached to the term. China’s economic miracle is largely the result of activist government that supports, encourages and subsidizes open industrial producers – both domestic and foreign (Chicago Mercantile Exchange, 2008).
Although China has abandoned many of its export subsidies as a condition of membership in the World Trade Organization (which he joined in 2001), mercantilist support systems are still working. In particular, the government regulates the exchange rate to maintain the profitability of producers, resulting in observed significant trade surplus (which decreased slightly recently, but mostly because of the economic slowdown). In addition, export-oriented companies continue to take advantage of tax benefits (World Bank 2002).
From the point of view of liberalism, these export subsidies impoverish Chinese consumers, benefiting consumers in the rest of the world. A recent study by economists Farbiche De Fever (Fabrice DeFever) and Alejandro Riano (Alejandro Riaño) from the University of Nottingham, shows that China’s “loss” account for about 3% of revenue in China, and the benefits to the rest of the world reach about 1% of the world income. However, from the point of view of mercantilism is simply the cost of creating a modern economy and the conditions for long-term prosperity.
Example of export subsidies shows that the two models can coexist successfully in the global economy. Liberals should be happy that their consumption is subsidized by the mercantilists.
In fact, in general, is the story of the last six decades: many Asian countries were able to achieve economic growth by leaps and bounds, using different versions of mercantilism. Rich country governments, for the most part, looked the other way, while Japan, South Korea, Taiwan and China defended their domestic markets, appropriated “intellectual property”, subsidize their producers and adjusted their exchange rates.
Conclusion
Liberal model was seriously tarnished due to the growth of inequality and the plight of the middle class in the West, along with the financial crisis generated by decentralization. Medium-term growth prospects of the American and European economies range from moderate to darkest. Unemployment remains a major headache and concern for policy makers. Thus it is likely that mercantilist pressure likely to rise in developed countries.
Therefore, in the new economy will be more counter than fit between the two countries, conducting a liberal and mercantilist policy.
Can also be reborn long debate about the type of capitalism that ensures the greatest prosperity.
