Contents

Research Question....................................................................................................... 3
Research objective...................................................................................................... 3
Research Methodology................................................................................................. 3
Scope & Limitation of Research...................................................................................... 4
Laissez Faire Policy..................................................................................................... 4
Milton Friedman......................................................................................................... 5
Modern Economic Policy.............................................................................................. 6
Objectives for Government Intervention.........................................................................6
Maximize social welfare............................................................................................ 6
Macro-economic objectives........................................................................................ 6
Socio-economic objectives......................................................................................... 7
Other objectives...................................................................................................... 7
Rationales for Economic Regulation............................................................................. 7
Consumer Protection................................................................................................. 8
Infant Industry........................................................................................................ 8
Cut-throat Competition.............................................................................................. 8
Evolution of economic thought....................................................................................... 9
Criticism of Lassies Fare............................................................................................. 10
Conclusion.............................................................................................................. 11
Review of Literature.................................................................................................. 11
Reference............................................................................................................ 12
Book.................................................................................................................. 12
Article............................................................................................................... 12
Web Source.......................................................................................................... 12
Introduction

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our
dinner, but from their regard to their own interest.- Adam Smith.

"An Inquiry Into the Nature and Causes of the Wealth of Nations," also shortened as "The
Wealth of Nations," documented industrial development in Europe. As a result, he is
responsible for popularizing many of the ideas that underpin the school of thought that
became known as classical economics. Laissez-faire philosophies, such as minimizing the
role of government intervention and taxation in the free markets, and the idea that an
"invisible hand" guides supply and demand are among the key ideas Smith's writing is
responsible for promoting. These ideas reflect the concept that each person, by looking out
for him or herself, inadvertently helps to create the best outcome for all.

When people are given the freedom to be the best they can be, the result is the rich and the
poor have a better economic situation. Yes the poor are the ones who win in the free trade
capitalism of Adam Smith. The purpose of government is not to make everyone equal. It can
not happen, but rather give everyone the freedom to make choices on their own enlightened
self-interest.

The philosophers of the enlightenment believed that the role of government was to protect the
rights of the individual so people and society as a whole would be happier. After all happiness
is the goal of life.

The word capitalism is now quite commonly used to describe the social system in which we
now live. It is also often assumed that it has existed, if not forever, then for most of human
history. In fact, capitalism is a relatively new social system.

Capitalism is the social system which now exists in all countries of the world. Under this
system, the means for producing and distributing goods (the land, factories, technology,
transport system etc) are owned by a small minority of people. We refer to this group of
people as the capitalist class. The majority of people must sell their ability to work in return
for a wage or salary (who we refer to as the working class.)
The working class are paid to produce goods and services which are then sold for a profit.
The profit is gained by the capitalist class because they can make more money selling what
we have produced than we cost to buy on the labour market. In this sense, the working class
is exploited by the capitalist class. The capitalists live off the profits they obtain from
exploiting the working class whilst reinvesting some of their profits for the further
accumulation of wealth.

This is what we mean when we say there are two classes in society. It is a claim based upon
simple facts about the society we live in today. This class division is the essential feature of
capitalism. It may be popular to talk (usually vaguely) about various other 'classes' existing
such as the 'middle class', but it is the two classes defined here that are the key to
understanding capitalism.

Research Question

1. Whether the role of government varies in Adam Smiths theory and modern
capitalism?

2. Whether modern capitalism was an eventual transformation from Adam Smiths

theory?

3. Whether the world economic policy is turning towards laissez faire policy with recent
crisis?

Research objective
The primary objective of this research is to know the influence of Adam Smiths laissez
faire principle in modern economics, for this the researcher will do a comparative analysis on
both the classical economic theory and modern capitalism. And try to study the evolution of
modern capitalistic theory. Finally, the researcher will also try to study how judiciary has had
an effect on these theories.

Research Methodology
The researcher has used Primary and Secondary resources such as Cases, journals, books,
websites etc., and aims to evaluate, interpret and suggest solution to the illustrative problems
through Doctrinal Method.
Scope & Limitation of Research
The scope of this study is a comparative analysis between Adam Smiths laissez faire
principle and modern capitalism.My research work is limited to books on economics related
to topic unorganised sectors, articles and web. No other resource has been used in this
research work.

Laissez Faire Policy

Traditionally, laissez faire is coined from a French phrase meaning, allow to do. It is known
to represent a strain of economic and political thought that calls for minimal government
intervention in the private sector, characterized by a hands off approach by the government,
in hopes of having private sector solutions for private sector problems.

Adam Smith1. Having been an important thinker, and the writer of the Declaration of
Independence itself, Smith makes a good starting point in our exploration of laissez faire.
Perhaps Jefferson best exemplifies the goal of laissez faire in the statement It is not from the
benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their
regard to their own interest.

The tradition of Adam Smiths policy is grounded in the idea of sacred individualism, or the
importance of preserving the individual as having precedence over government. This
involved the establishment of individual rights, individual responsibility, and civic
participation. This liberal individual-focus is perhaps where we can best draw Jeffersons
connection with laissez faire. Free markets themselves cannot function with a weighted
understanding of the importance of the individual.

The ideals of a hands off economic approached it rooted upon the principle that men are
equal in their ability to work, create, and compete. A general air of freedom scents the ideas
of laissez faire, as it necessitates a freedom from government interference, and freedom of the
individual to work.

Although laissez faire saw a serious low-point in the form of the interventionalist policies
surrounding the Great Depression, as well as the Keynesian critique of Laissez Faire and the

1 Smith, Adam (1776) [1937]. An Inquiry into the Nature and Causes of the
Wealth of Nations. N
resulting developments that turned the state into a mixed economy, there was no shortage of
its support. Perhaps the greatest 20 th century economist that idealized defence of laissez
faire and free markets was found in Milton Friedman2.

Milton Friedman
A leader of the popular Chicago school of politics, Friedman advocated a minimized role for
the government in the economy, putting emphasis on private sector solutions for private
sector problems.

He rejected the Keynesian blame of laissez faire policies for causing the Great Depression,
and although formerly a Keynesian himself, Friedman argued that it was actually too much
government that caused and prolonged the market meltdown. Friedman developed the
macroeconomic policy of monetarism, which focused on the connection between the supply
of money and inflation.

Friedman denounced the role of the government in micromanaging the private market,
arguing that the private sector would respond to the governments efforts, thus nullifying any
intended response. In addition, he argued for a natural rate of employment, and theorized that
Keynesian policies would lead to stagnation (which they did). One cannot underestimate the
importance Friedman has had on bringing a justification to laissez faire on economist
grounds; bringing successful economic theory attached to the ideas of free market capitalism.
His ideas have been popular amongst conservatives and libertarians, and have idealized an
intellectual movement that has reshaped the study of economics, as well as having influenced
leaders from Ronald Reagan to Margaret Thatcher, and such free-market success stories as
the Chilean Economic miracle. For these reasons, it is no wonder that even such critiques as
Princeton University economist Paul Krugman claims he is the best spokesman for the
virtues of free markets since Adam Smith,

With the start of the 21st century, it is interesting to guess where laissez faire will go, and how
future generations will interpret it. Given its rise and fall between the 19 th and 20th century, it
begs the question, given the current political climate, whether the 20 th to 21st century will
have similar experiences.

2 Keynes, J.M. The End of Laissez Faire.

Modern Economic Policy

Objectives for Government Intervention

There are many different objectives that governments might pursue by way of intervention in
private markets. These objectives fall under a few broad categories that characterize many of
the efforts at government regulation. The following are some of the more commonly
observed regulatory objectives3.

Maximize social welfare

Among the most common set of objectives for government regulatory policy is the
maximization of social welfare through the remediation of various types of market failure.
For example, agents can gain market power through the creation of monopolies, cartels, or
other forms of organization4 that limit the benefits from competitive markets and trade.
Natural monopolies are one such type of market failure that has been prevalent throughout
the historical development of transportation networks, often due to the high fixed costs of
developing infrastructure.
Externalities are another common type of market failure that can justify regulatory
intervention. Regulatory efforts toward externalities often focus on negative externalities. For
example, in the context of transportation many modesexperience congestion where prices as a
means of rationing capacity are absent. Likewise, the consumption of energy
often leads to emission of pollutants which, when unpriced, can lead to undesirable outcomes.
Positive types ofexternalities are also possible and can in some situations justify government
intervention. For example, in systems where Network effects are present, government may be
able to increase social welfare by speeding up the growth of the network so that it serves a
large number of users.
Other types of market failure justifications for intervention involve the provision of certain
public goods (a classic example being national defense) and the remediation of some types of
information asymmetry.

3 http:/ / www. cnn. com/ 2009/ POLITICS/ 03/ 13/ biden. amtrak/ index. html

4 Stigler, George J. (1971). "The theory of economic regulation"

Macro-economic objectives
A second set of objectives that are pursued primarily by national governments revolve around
macroeconomic performance. Macroeconomic objectives include efforts to control inflation,
for example through the adoption of monetary policy. They also include efforts to counteract
the effects of economic cycles, for example by adopting policies to maintain employment
during periods of recession5. Some governments may also seek to actively control their
country's balance of payments through the use of policies aimed at promoting or discouraging
exports or imports (e.g. through tariffs and subsidies).

Socio-economic objectives
Government may also intervene in order to promote a range of socio-economic objectives.
Many of these objectives may be motivated by concerns over fairness, such as efforts to
achieve a desired income distribution, or a desire to provide a basic standard of service to all
citizens, such as programs that offer mobility to people with mental or physical disabilities.
Other interventions may be designed to promote safety where it is thought that market
participants are unable to account for certain types of risk 6. An example of this in the United
States is the Consumer Product Safety Commission (CPSC), an agency that has the authority
to regulate the sale and manufacture of thousands of consumer products. Still other socio-
economic objectives may include things like industrial policy, where governments intervene
to promote certain sectors of the economy, or even to promote individual industries or
firms.

Other objectives
Apart from the three categories of objectives for intervention listed above, governments may
intervene for other reasons broadly related to national interests. Some interventions are
undertaken to promote national unity, such as the construction of the Transcontinental
Railroad in the US during the Civil War. The provision of national defense which, as noted
above is an important type of public good, is almost universally seen as grounds for
government intervention. Finally, some interventions are undertaken in order to promote
national prestige. Efforts in many world cities and their respective countries to attract the
summer or winter Olympic Games, which may often involve the development of expensive
new infrastructure projects, might fall into this category.

5 Yandle, Bruce (May/June 1983). "Viewpoint: bootleggers and baptists -- the education of a regulatory economist"

6 Evans, Andrew W. (1991). "Are urban bus services natural monopolies?"

Rationales for Economic Regulation
Economic regulation is an attempt by government to deliberately alter the allocation of
resources and distribution of incomes away from that which would have occurred in the
absence of such regulation. It is thus a means by which government can attempt to substitute
its judgement of what constitutes a 'proper' allocation of resources and distribution of income
for the outcome yielded by the market. There are two major opposing theories on why
economic regulations exist, consumer protection and industry protection, which are discussed
below. Some other rationales for regulation are also described which don't fit neatly into these
two categories.

Consumer Protection
The traditional and ideal view is that regulation is a device for protecting the public against
the adverse effects of monopoly. This view, as described by Posner[4] , is commonly referred
to as the public interest theory of regulation.
Nominally, the main objective is to maximize social welfare by correcting market failure,
which may occur in several forms. For example, governments may choose to regulate
monopolies in order to force them to produce the level of output that maximizes social
welfare. Monopolies may arise for a couple of reasons.

Infant Industry
Economic regulation has also historically been employed in some cases where a government
sought to promote the growth of an infant industry. The infant industry argument for
regulation is typically invoked in cases where a nation sees the existence of potentially large
external benefits from the growth of an industry, or the potential for other important non-
economic benefits7.

Cut-throat Competition

Governments have sometimes intervened in markets in order to prevent what is know as

destructive or cut-throat competition. Cut-throat competition is one example of anti-
competitive business practices, that is, practices that reduce or prevent competition in a
market, and is characterized by competitive situations where prices do not cover production
costs over extended periods. Several types of outcomes may emerge from such competitive

7 Morrison, Steven A.; Clifford Winston (1996). "Causes and consequences of airline fare wars"
environments which could provide a theoretical justification for some form of regulatory
intervention:

Instability in supply prices -- governments may regulate to smooth out output prices

Uneconomic rate levels;

Predatory pricing, where firms set artificially low prices in order to deter competition
from potential market
entrants, or to drive existing competitors out of business.

Immature pricing behavior -- oligopolists may overreact to a competitive event, as

when airlines engage in price
wars

High fixed cost with slow adjustment - short run pricing falls below average total
costs, especially in recessionwhen there are a lot of excess capacity
When dealing with instability in supply prices in certain industries, as for example with
electric power, regulation is used to smooth output prices. In other cases, as with road
networks, the infrastructure tends more often to be publicly owned 8. In the case of road
networks, especially in urban areas, congestion can create instability in supply prices,since
the "supply" function for a road link is a function of traffic volumes. To achieve efficiency in
this case,governments (or even private owners) can set prices equal to marginal cost in order
to eliminate the congestion externality and smooth output prices.

Evolution of economic thought

In Adam Smiths day, economics was part of a much broader social science inquiry that
included and drew heavily upon sister disciplines such as history, politics, philosophy, and
sociology. This is the top of the hourglass, which is wide, representing the interdisciplinary
nature of economic study and the big picture-type questions that this study asked, most

8 Hilton, George W. (October 1966). "The consistency of the Interstate Commerce Act"
famously, why are some nations rich while others are poor? Nowhere is this broad approach
more evident than in the work of Smith himself.
Like his fellow Scottish moral philosophers, Smith was fundamentally concerned with the
connections and relationships between morality and the market. Even in his Wealth of
Nations, which endeavoured to answer a specifically economic question, Smith could not
explore this question without thoroughly understanding the foundational animating forces of
human beings, historically and in his own time.
A discipline of sterile rational choice, in which ends and constraints are taken as given, and
perfectly informed (or even boundedly rational) agents respond deterministically to relative
price changes to optimize consumption or production decisions, had not yet taken form.
Instead of economics, there was political economy, in which history, morality, and
psychologyin a word, humanitywas at the centre of analysis. Unlike economics,
political economy cannot do without these essential, if often intractable, features of the
world. To go along with imperfect and socially-embedded man, classical political economy
emphasized the importance of institutions, coping mechanisms that emerge to facilitate the
ability of imperfect actors to coordinate their activities.
In creating the rules of the game that govern interaction, institutions were central for those
studying political economy because they not only shaped social outcomes, but also because
they reflectedi.e., were shaped bysocial outcomes. The classical political economists
were thus first and foremost concerned with these institutions and the features of mans
reality that give rise to them.

Criticism of Lassies Fare

F. A. Hayek provides perhaps the best summary of this tradition and its motivations. As he
put it: Smiths chief concern was not so much with what man might occasionally achieve
when he was at his best but that he should have as little opportunity as possible to do harm
when he was at his worst. It would scarcely be too much to claim that the main merit of the
individualism which he and his contemporaries advocated is that it is a system under which
bad men can do least harm.
Their aim was a system under which it should be possible to grant freedom to all, instead of
restricting it, as their French contemporaries wished, to the good and the wise. The chief
concern of the great individualist writers was indeed to find a set of institutions by which men
could be induced, by their own choice and from motives which determined his ordinary
conduct, to contribute as much as possible to the need of all others; and their discovery was
that the system of private property did provide such inducements to a much greater extent
than had yet been understood9.
Modern economics has followed an hourglass-shaped path over the past century. Originally a
branch of moral philosophy, political economy up through the 19th century was a broad-
ranging discipline that touched upon issues in history, politics, sociology, and philosophy.
Political economy asked big questions, and many political economists offered big
answers in response. But during the 20th century, the penchant for big questions was
replaced with a striving for formal rigor and precision.

Conclusion
Laissez faire principles have been nearly trampled on, One is thus left with the impression
that laissez faire is again experiencing a renewed debate on its existence in the economy.
Having analyzed laissez faire within the 18th, 19th, 20th, and 21st centuries, and having
explored such instrumental thinkers as Adam Smith, Milton Friedman, F.A Hayek and others,
we are left curiously looking for the free markets future. Will the torch finally be
extinguished by these modern economic problems and governments interventionalist
bailouts? Will Or will the environment bring about renewed discussion, and a possible
rediscovery of laissez faire as the answer to the economys problems? Or perhaps the torch
has finally met its match.

Review of Literature

The Wealth of Nations (published in 1776), was the first comprehensive analysis of
economic systems in the manner that we currently understand them. He was a proponent of
freer markets and more trade (as opposed to monopolies, aristocracies and government
control) as a way of improving society.

He coined the famous term "invisible hand" to refer to the interaction between supply and
demand pushing markets to (temporary) equilibrium, along with discussing the division of

9 Hayek, F. A. (1948). Individualism and Economic Order. Chicago: University of

Chicago Press.
labour, the use and origins of money, the theories of value and scarcity, and many other
concepts that we take for granted today as common knowledge.
Smiths thesis, which still resonates today, is that setting people free to pursue their own self-
interest produces a collective result far superior to what you get if you try to impose political
or religious diktats. Free people allowed to make free choices in free markets will satisfy their
needs (and societys) far better than any government can. Finally, Smith believed passionately
in free trade, both within countries and between them. He felt that allowing people and
countries to specialize and to trade freely would produce enormous wealth, because freeing
people and nations to do what they do best will produce vastly more wealth than if everyone
strives for self-sufficiency.

Transportation of Economics is an article that was referred to collect data on modern

economic policies, for this project. It states many different objectives and moral reasons that
governments might pursue by way of intervention in private markets. These objectives and
reasons are then distinguished under a few broad categories that characterize many of the
efforts at government regulation.

On The Wealth of Nations by P.J. O'Rourke O' Rourke's book actually not only
summarized all 5 books of "The Wealth of Nations," but provided a complete guide to
understanding both Adam Smith's "Wealth of Nations," as well as his "Theory of Moral
Sentiments." O' Rourke is a humorist by trade, and he does a decent job of making the reader
laugh while picking up the finer points of Adam Smith's works, though some of the jokes
seem dated. Humorously, he also dedicated a chapter on why the "Wealth of Nations" is so
long. O' Rourke also has a strong libertarian slant, and it makes me suspicious of whether he
might have romanticized Smith a bit as to make his book appeal to libertarian ideals.
However, it is an entertaining summary, and probably better than merely taking your econ
teacher's word on what "Wealth of Nations" actually says.
BIBLIOGRAPHY

Book

The Wealth Of Nations by Adam Smith

Macroeconomics by Samishth Arthshastra

On The Wealth of Nations by P.J. O'Rourke
Industrial and labour law2013 ; Avtarsingh;ISBN
Gopal Ghosh (2005) Indian Trade Union Movement. The Peoples History Publication

Article

American Political Thought. Washington D.C.: CQ Press, 2004.

Krugman, Paul. The New York Review of Books, Volumn 54, Number

Web Source
http://nybooks.com/articles/19857>.

http://ww.panarchy.org/keynes/laissezfaire.1926.html>.