How is laissez-faire bad?

Answer 1

There are two arguments to the issue. One claims the following:

The disadvantage of laissez-faire capitalism is that it leads to an economy run by greed, which can be very destructive; the recent sub-prime mortgage crisis is a perfect example. If you let people do whatever they want (and the phrase "laissez-faire" is French for let do) people may do terrible things, and often do.

The other side responds thus:

Greed is an inherent element of human nature. One almost always prefers more to less. This being said, we should examine whether this leads to bad outcomes.

Many point to the Guilded Age as one which was laissez-faire. The truth is that it was far from being laissez-faire. Government actively helped companies and took sides in the free market. This resulted in government-supported monopolies. In fact, government regulations on utility companies limited choice and stifled competition. Companies wanted regulations placed on the market, because in this way small start ups would be slowed down and the big companies could maintain market share.

A government monopoly on the sale of lands also gave large advantages to bigger firms acquiring large tracts of land.

Unions were actually a capitalistic construct in their beginning. Given the first appearance of big corporations around the 1860s, the quick creation of unions shows the speed of the free market in correcting itself.

Furthermore, the government actively busted unions and strikes. This is a regulation of the free market. Government actively hurt consumer interests.

About greed causing the sub-prime mortgage crisis:

This is an extremely shallow interpretation. Let's start with the basics:

Banks loan out deposited money. Banks only have a certain amount of money to loan out, so they set interest rates reflecting the savings in the banks. The Federal Reserve, however, is able to create money and inject it into the banking system. This gives banks money that was created from thin air and allows them to lower the interest rates. This means that now they have extra money to give out. The initial money they had (the real savings) were given to high-confidence borrowers (as in the banks knew that it was a sound investment and it would pay back). However, with extra cash, banks now had money to give away to lower-confidence borrowers. This means that they now made more risky investments because of the easy money the government gave to them. Furthermore, in order to promote home ownership, the government forced Fannie Mae and Freddie Mac to lower their lending requirements specifically for high risk investments.

The market responded to the situation - more money to loan out, lower interest rate, more risk. Wouldn't you take a free stack of money if given to you? The problem is that government created the environment where this would be allowed to happen. In the free market, the risk would have been contained by the banks' desire to get their money back. Government insured the profits of the bankers, which removed any incentive for them to act responsibly with the money. It took away the free-market idea of "loss," and when you can invest without a fear of a loss, you can take much higher risks.

Whenever you delve deeper into "free market is bad" allegations, you see that over and over the problems over the years have been caused by the government and blamed on a mythical free market.