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Laissez Faire Economics

Laissez Faire is French for “hands off” or “hands free.”

It is an economic doctrine that opposes governmental regulation of or interference in commerce beyond the minimum necessary for a free-enterprise system to operate according to its own economic laws.

In laissez faire economics, prices are set by supply and demand and the government can’t play a role in the economy at all. In other words, there are no minimum wage laws, no child labor laws, and no government regulation in any way whatsoever.

Cap·i·tal·ism an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.

In the US, we have always had a capitalist economic system. People frown upon government intervention or government regulation because the more the government has to do with business, the closer our system is to communism, where the government owns all businesses and factories.

Over time, the United States has become less of a capitalist system and more of a mixed economic system. This is because without government regulation, business owners often paid workers unfair wages, created unfair working hours and conditions, or discriminated against hiring some workers. Although our country was founded upon capitalist principles, we have modified the capitalist system by allowing government intervention in certain aspects of the economy.

One important aspect of the capitalist system is competition. Businesses compete against one another to gain customer loyalty and make more money. Competition is good because, as businesses compete, consumers get better products and lower prices. When there is no competition in a certain market, it is known as a monopoly. Monopolies are dangerous to consumers because businesses can charge whatever price they would like and can make inferior products and consumers have no option but to buy it anyway.

En·tre·pre·neur a person who organizes and operates a business or businesses, taking on greater than normal financial risks in order to do so.

Entrepreneurs are vital to the capitalist system. Without people willing to start and operate their own business, capitalism doesn’t work. Often, entrepreneurs are very successful and accumulate large amounts of wealth. Other times, they go broke when their businesses fail or when they are out-done by their competition.

Station 2 so·cial Dar·win·ism – a 19th-century doctrine that the social order is a product of natural selection of those persons best suited to existing living conditions.

Laissez Faire Economics and Darwinism

The Darwinian worldview was critical, not only in influencing the development of Nazism and communism, but also in the rise of the ruthless capitalists that flourished in the late 1800s and early 1900s . A key aspect of this brand of capitalism was its extreme individualism which indicated that other persons count for little, and that it is both natural and proper to exploit “weaker” companies. The so-called robber barons often concluded that their behavior was justified by natural law and was the inevitable outcome of history. Many were raised as Christians, but rejected their Christianity or modified it to include their socialist/Darwinian ideas. Gertrude Himmelfarb noted that Darwinism may have been accepted in England in part because it justified the greed of certain people.

Rachels noted that “the survival of the fittest” theory in biology was quickly interpreted by capitalists as “an ethical precept that sanctioned cutthroat economic competition”. Julian Huxley and H. B. D. Kittlewell even concluded that social Darwinism “led to the glorification of free enterprise, laissez- faire economics and war, to an unscientific eugenics and racism, and eventually to Hitler and Nazi ideology”.

Darwinism helped to justify not only the ruthless exploits of the communists, but also the ruthless practices of capitalist monopolists such as Andrew Carnegie and John D. Rockefeller

Carnegie’s conclusions were best summarized when he said: the law of competition, be it benign or not, is here; we cannot evade it; no substitutes for it have been found; and while the law may be sometimes hard for the individual, it is best for the race, because it ensures the survival of the fittest in every department.

John D. Rockefeller reportedly once said that the “growth of a large business is merely a survival of the fittest . . . the working out of a law of nature . . .”

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Overview of the Gilded Age

Mark Twain called the late 19th century the "Gilded Age." By this, he meant that the period was glittering on the surface but corrupt underneath. In the popular view, the late 19th century was a period of greed and guile: of rapacious Robber Barons, unscrupulous speculators, and corporate buccaneers, of shady business practices, scandal-plagued politics, and vulgar display.

It is easy to caricature the Gilded Age as an era of corruption, conspicuous consumption, and unfettered capitalism. But it is more useful to think of this as modern America's formative period, when an agrarian society of small producers were transformed into an urban society dominated by industrial corporations.

The late 19th century saw the creation of a modern industrial economy. A national transportation and communication network was created, the corporation became the dominant form of business organization, and a managerial revolution transformed business operations.

Between the Civil War and World War I, the modern American economy emerged. A national transportation and communication network was created, the corporation became the dominant form of business organization, and a managerial revolution transformed business operations. By the beginning of the 20th century, per capita income and industrial production in the United States exceeded that of any other country except Britain.

Unlike the pre-Civil War economy, this new one was dependent on raw materials from around the world and it sold goods in global markets. Business organization expanded in size and scale. There was an unparalleled increase in factory production, mechanization, and business consolidation. By the beginning of the 20th century, the major sectors of the nation's economy--banking, manufacturing, meat packing, oil refining, railroads, and steel--were dominated by a small number of giant corporations.

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Definition of a Trust

In general, a trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another.

As business expanded natural predatory instincts took over as companies sought to eliminate competition. It was survival of the fittest in an economy which did not regulate business - laissez faire, social Darwinism, rugged individualism where the themes of the day.

Clearly the natural conclusion of laissez faire capitalism, or pure competition, is the end of competition itself. It is the natural goal of any business to make as much profit as it can and to eliminate its competition. When a corporation eliminates its competition it becomes what is known as a "monopoly."

Monopolies took several organization forms including what were known as trusts.

Trust

Stockholders of several competing corporations turn in their stock to trustees in exchange for a trust certificate entitling them to a dividend. Trustees ran the companies as if they were one.

To the public all monopolies were known simply as "trusts." These trusts has an enormous impact on the American economy. They became huge economic and political forces. They were able to manipulate price and quality without regard for the laws of supply and demand. Basic economic principles no longer applied They also had great political power. Trusts were extremely influential in Congress and in the Senate. Some even accused the trusts of "buying" votes. Although many Americans still regarded men like John D. Rockefeller as "Captains of Industry," more and more people began to publicly question the tactics of the "Robber Barons." As trusts grew ever more powerful and wealth became concentrated in fewer and fewer hands, animosity towards the new businessmen and the new methods of doing business increased tremendously.

Station 5 Sears, Roebuck and Co. and its Effect on Retailing in America

America in the late 1800s consisted of thirty-eight states, and a population of nearly sixty million people. Approximately 65 percent of the population lived in rural areas. These are the conditions in which Richard Sears, the founding father of Sears, Roebuck and Co., began his company. In 1886 Richard Sears was an agent of the Minneapolis and St. Louis Railway Station in Redwood Falls, Minnesota. His status at the railroad station left him plenty of time to do other things to earn extra money, and one such chance came when he was twenty-two years old. Sears received a shipment of watches unwanted by a Redwood Falls jeweler. Sears took advantage of the opportunity, purchased them from the jeweler, and sold them to other station agents along the railroad for a bargain price of $14 each. The same watch was sold by stores for $25 each. He sold all the watches and ordered more for resale. After selling watches for only six months, he had earned more than five thousand dollars, enough money to get him out of the railway business. Sears then began the R.W. Sears Company in 1886 in Minneapolis, Minnesota. The next few years were prosperous, but Sears decided that if he moved to a larger city he could reach more customers, and more customers would equal better profits. Sears moved his company to Chicago, and published an advertisement in the Chicago Daily News on April 1, 1887, that read: "Wanted Watchmaker with reference who can furnish tools. State age, experience, and salary required. Address T39. Daily News." A young Indiana lad named Alvah Roebuck answered Sears's ad. Roebuck told Sears that he knew watches and even brought him a sample of his work to prove it. Sears hired him. On September 16, 1893, the company became formally known as Sears, Roebuck and Co.

From 1887 to 1892, Sears and Roebuck repaired and sold watches in the small building that was their headquarters. In 1893 Sears decided to start producing a catalog that would contain only watches and jewelry. In 1895 Alvah Roebuck retired from Sears because of illness. His successor, Julius Rosenwald became vice-president of Sears and became very involved with the catalog. However, even though Roebuck resigned, the company retained his name. In 1896 the first Sears, Roebuck and Co. general catalog was produced, and it guaranteed low prices, money-back guarantees, and free rural delivery, which appealed to farmers. Also that year, Sears moved his business to a new six-story building in Chicago, vacating the five-story building he had rented on Dearborn Street. Due to the introduction of new merchandise, the catalog was enlarged from 322 pages to 507 pages in 1898, a move that appealed to a larger number of customers. The catalog usually was sold for fifty cents, but it was sometimes given away. During the early 1900s, people began purchasing from companies who offered not only fair prices, but those who sold quality goods.

Around the turn of the century, Sears customers were mainly from rural areas. Since Sears did a large amount of business in rural areas, the company began calling the catalog the "farmer's friend." Country storekeepers were very opposed to the catalogs, because when Sears first published its catalog people were delighted that a company could actually deliver merchandise to people's homes. Country storekeepers lost sales as a result of Sears's policy. Because of these problems, storekeepers began taunting Sears and Roebuck with the nicknames of "Rears and Soreback" Rural newspapers refused to print Searsis ads, and children were even given ten cents or a movie admission pass for every catalog that they turned in. The catalogs were then sometimes publicly burned. In response to this problem, Sears began mailing orders without the name of the buyer on the package, and even reprimanded storekeepers in one of their catalogs: "As a rule, the merchant from whom you buy, adds little profit to the cost of goods as he can possibly afford to add. For example, a certain article in our catalog is quoted at $1.00, while your hardware merchant asks for $1.50 for that same article...."

Station 6

The Financial Panic of 1907 What was the Panic of 1907, and what caused it? The Panic of 1907 was a six-week stretch of runs on banks in New York City and other American cities in October and early November of 1907. It was triggered by a failed speculation that caused the bankruptcy of two brokerage firms. But the shock that set in motion the events to create the Panic was the earthquake in San Francisco in 1906. The devastation of that city drew gold out of the world's major money centers. This created a liquidity crunch that created a recession starting in June of 1907.

How Morgan saved the Country

J.P. Morgan was 70 years old at the time of the Panic. He was in the twilight of his extraordinarily successful career as a financier of the boom era, the Gilded Age of American expansion from 1865 to roughly 1900. He had engineered the mergers of firms that we would recognize today as still dominant—U.S. Steel, American Telephone and Telegraph, General Electric and the like. He was widely respected. In fact, the popular press personified him as the very image of the American capitalist. The little fellow on the Monopoly box with the striped pants and the balding head looks vaguely like J.P. Morgan.

He was a remarkable person. He had deep and extensive relations throughout the financial and business communities, and this is one of the keys to the leadership he exercised in the panic. He was a man of action; he galvanized people.

You quell panics by organizing collective action to rescue institutions and generally convey confidence back into the market. Morgan was called back from Richmond, Va. by his partners when the panic hit. He took the equivalent of a red-eye flight, attaching his private Pullman car to a steam engine and hurtling back to New York City overnight. He arrived on Sunday, October 20th and immediately convened a meeting of the leading financiers at his mansion on 34th Street. He chartered working groups to get the facts and then over the next several weeks deployed the information to organize successive rescues of the major institutions. He did allow some institutions to fail, because he judged that they were insolvent already. But of the institutions that he declared he would save, every one survived.

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The New Immigrants

Most immigrant groups that had formerly come to America by choice seemed distinct, but in fact had many similarities. Most had come from Northern and Western Europe. Most had some experience with representative democracy. With the exception of the Irish, most were Protestant. Many were literate, and some possessed a fair degree of wealth.

The new groups arriving by the boatload in the Gilded Age were characterized by few of these traits. Their nationalities included Greek, Italian, Polish, Slovak, Serb, Russian, Croat, and others. Until cut off by federal decree, Japanese and Chinese settlers relocated to the American West Coast. None of these groups were predominantly Protestant.

The vast majority were Roman Catholic or Eastern Orthodox. However, due to increased persecution of Jews in Eastern Europe, many Jewish immigrants sought freedom from torment. Very few newcomers spoke any English, and large numbers were illiterate in their native tongues. None of these groups hailed from democratic regimes. The American form of government was as foreign as its culture.

The new American cities became the destination of many of the most destitute. Once the trend was established, letters from America from friends and family beckoned new immigrants to ethnic enclaves such as Chinatown, Greektown, or Little Italy. This led to an urban ethnic patchwork, with little integration. The dumbbell tenement and all of its woes became the reality for most newcomers until enough could be saved for an upward move.

Despite the horrors of tenement housing and factory work, many agreed that the wages they could earn and the food they could eat surpassed their former realities. Still, as many as 25% of the European immigrants of this time never intended to become American citizens. These so-called "birds of passage" simply earned enough income to send to their families and returned to their former lives.

Station 8

Vertical and Horizontal Integration

► As developed by Andrew Carnegie