What is wrong with a system of laissez-faire economics?

| 11th April 2018

Was Adam Smith - the author of The Wealth of Nations - a systems theorist?

Adam Smith, the author of The Wealth of Nations, is sometimes credited as the first political economist and many of his followers today advocate free market, laissez-faire, policy. Here Dr ROBERT BIEL argues that Smith was also an early systems theorist - but also sets out why Smith's theory and the system he described are a threat to our ecology

And from a social angle, laissez-faire typifies a dangerous manifestation of the principle of feedback. Wealth is an entitlement to accumulate more wealth, leading ultimately to its concentration in fewer and fewer hands.

The official world order is now in an impasse: in one corner, a stale and bankrupt neoliberalism; in the other, a reactionary nationalism which offers no solutions.  

A major theme of this series will be to explore ways out of this impasse. What is salutary is that mainstream economics is coming to be met with increased scepticism, while even establishment organs flirt with leftwing ideas.  But let’s consider what systems theory can contribute.

I would say that Adam Smith, the late-18th century founder of liberalism, was indeed a systems thinker. Prior to him, the only way to organise an economy seemed to be from the centre/top: he understood that a system can organise itself, without being directed.  Hence the doctrine of laissez-faire (‘let it happen’).  

Laissez-faire

But this raises an important question: is there a bad use of systems theory? In principle, I would argue for self-organisation. In my practice as food-grower, I’m inspired by Japanese sage Masanobu Fukuoka, and his notion of ‘do-nothing gardening’, whereby we let the system work for us and don’t intervene too much.  

So the question is: why is laissez-faire okay in gardening and not in economics?! I’d answer this is as follows. The problem with liberalism was what it encourages to ‘happen’. Although capitalism is indeed a true system, it only ‘happens’ (i.e. develops, grows) through an ongoing biophysical and societal depletion.  

From an biophysical angle - as Georgescu-Roegen pointed out - mainstream economics fails to understand the flow of energy/matter.  In nature, although each individual entity is sustained by a flow - whereby energy/matter is absorbed and then excreted in a degraded form (as entropy) - the entropy is always recycled. As in the role of dung beetles.

In contrast, the capitalist economy - as Alf Hornborg says - encourages entropy at a whole-system level: industrial processes – through which high-quality materials are turned into obsolescent products and eventually waste – is falsely rewarded as an increase in quality.

And from a social angle, laissez-faire typifies a dangerous manifestation of the principle of feedback. Wealth is an entitlement to accumulate more wealth, leading ultimately to its concentration in fewer and fewer hands.

Environmental economics

This explains the escalating polarisation and social inequality identified by recent studies of the US - and a tendency to dump the poor as mere garbage, which I would see as a kind of ‘social entropy’.

The reason mainstream economics can treat people as garbage is because it defines ‘demand’ in a way unconnected with need: demand presupposes the wealth to buy things.

Thus, in housing markets – as anti-gentrification activists rightly point out – it’s false to assume that need for housing can be answered by increasing supply (building more). If the demand springs from speculators and oligarchs, prices will never reach equilibrium at affordable levels.  

Economics has nevertheless tried to find a way to deal with the side-effects of laissez-faire (environmental or social), which are dubbed ‘externalities’.  

Though I don’t really like the term (because the evils are intrinsic), the externalities argument did give rise to environmental economics.

Free-market ultras

Here, you could use taxes or subsidies to penalise bad effects and incentivise good ones. Moreover, you could add in the systems of nature, e.g. climate regulation, as Herman Daly attempted, even where conventional ‘externalities’ arguments neglect such systems.

In fact, in a mixed ecological-social definition, benefits could be ‘cascaded’ in a benign chain reaction. This is actually much closer to the way a complex natural system really works, where the ensemble generates emergent properties which exceed the sum of the parts. This sets it apart from the reductionist market-obsessed self-organisation of liberal economics.

Let's illustrate this with a real case. Subsidised urban housing projects for essential workers can be required to incorporate the most advanced energy-saving features. Accommodation is then cheaper if energy-bills are negligible. So you allow health/education workers an affordable living which is close to the communities they serve - while at the same time cutting emissions!

Undoubtedly, environmental economics remains an essential tool - so long as capitalism is still in place. Nevertheless, the mainstream externalities argument harbours a fatal flaw. Its core metaphor is of a world where environmental damage consists of one proprietor harming another: e.g. a factory-owner who dumps pollutants in a river, harming the fishing rights of a downstream country squire.  

The weakness of this reasoning rendered environmental economics tragically unable to defend itself from the free-market ultras of neoliberalism. 

Self-organisation

The latter – who triumphed as world orthodoxy from about 1980 onwards – simply took the metaphor of factory-owner and squire to its logical, absurd conclusion: if everything is privatised – and therefore subject to property rights – externalities will be resolved.

We would not need regulation, but simply a gentlemen’s agreements between owners. It’s a bit like the argument that you’ll solve mass shootings by having more guns.

The result has been a ruling orthodoxy which encourages the further privatisation of commons - water, for example - resulting in both an increased spoliation of natural resources, and their transfer into the hands of an ever-shrinking elite.

This is, moreover, a global elite. This in turn links with another major theme which we’ll explore in a later article: the globalised international economy, which spread since the 1980s.

By confronting a common enemy in neoliberalism, environment and society are united in a common cause.  The principle of self-organisation must be salvaged from the laissez-faire perversion, and restored in a more authentic form: reversing the erosion of commons, and instead expanding them, in their role as stewards of nature.

This Author

Dr Robert Biel teaches political ecology at University College London and is the author of The New Imperialism and The Entropy of Capitalism. He specialises in international political economy, systems theory, sustainable development and urban agriculture.

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