Laissez-faire

What is Laissez-faire?

Laissez-faire is a French phrase that translates to “allow to do.” It refers to a political ideology that rejects the practice of government intervention in an economy. Further, the state is seen as an obstacle to economic growth and development.

The term originated in the 18^th century during the Industrial Revolution. French industrialists used the term in response to the French government’s voluntary aid to promote business. The phrase is traditionally attributed to French businessman M. Le Gendre from when he responded to a Mercantilist minister, Jean-Baptiste Colbert.

The laissez-faire theory mainly advocates government non-intervention. Economic theorist Adam Smith believed that the optimal functioning of markets needed minimal government intervention. However, Smith did raise concerns about the drawbacks of the theory, particularly in relation to the possibility of creating an indolent, lazy, but financially powerful feudal class.

Basic Principles of a Laissez-faire Economy

• The individual is the basic unit in society, i.e., the standard of measurement in social calculus.
• The individual enjoys a natural right to freedom.
• The physical order of nature is a harmonious and self-regulating system.

The basic purpose of the laissez-faire economy is to promote a free and competitive market that demands the restoration of the order and natural state of liberty that humans emerged from. A laissez-faire economy is thus characterized by the free movement of forces of supply and demand, free from any form of intervention by a government, a price-setting monopoly, or any other authority.

Forms of Government Intervention

Government intervention can occur through the following:

1. Protectionism

Protectionism refers to any government regulation or policy that limits international trade. Protectionist policies foster domestic production and help the working class, but are detrimental to the overall growth rate of the economy, as they hinder competition.

2. Antitrust laws

Antitrust laws oppose monopolies, trusts, and other organizations or practices that don’t allow higher participation from potential entrepreneurs. While such laws seem to add to the concept of laissez-faire, they go against the Darwinist idea of survival of the fittest that laissez-faire prescribes.

Laissez-faire policies serve as a motivation for the producer to hone its products in response to the standards set by the market. The price system is such that the output and consumption levels are solely determined by the varied decisions made by households and firms through transactions in the marketplace.

Advantages of Laissez-faire

Laissez-faire offers the following benefits:

1. Autonomy

A laissez-faire economy gives businesses more space and autonomy from government rules and regulations that would make business activities harder and more difficult to proceed. Such an environment makes it more viable for companies to take risks and invest in the economy. Moreover, it provides companies with a greater incentive to try and maximize profits.

2. Innovation

Driven by the need to provide their products with market advantage, companies are compelled to be more creative and innovative in their approach. The practice leads to technological advancement in addition to economic growth.

3. Absence of taxes

Lastly, the absence of taxes leaves companies and employees alike with greater spending power. It also discourages corruption that can arise as a result of bureaucrats with limited knowledge but immense regulatory power.

Disadvantages of Laissez-faire

Along with its advantages, a laissez-faire economy comes with a few drawbacks:

1. Income inequality

According to Thomas Hobbes, the presence of absolute autonomy in a state-of-nature economy creates a situation of chaos for both producers and consumers. Such an economy can lead to inequality of income and wealth that may contribute to a vicious cycle wherein inheritance plays a key role in financial placement within society. As put forward by Adam Smith, monopolies can emerge wherein they control supply, charge higher prices, and pay lower wages to workers.

2. Failure to represent the interests of the entire society

A laissez-faire economy fails to be representative of the interests of all sections of a society; it may cater only to the majority or the affluent class. Thereby, public goods with positive externalities such as education and healthcare may not be equally distributed in society, whereas goods with negative externalities may be over-consumed.

Laissez-faire is now more an adjective to denote the prevalence of its associated features. In isolation, the economic theory can lead to huge gaps in wealth, injustices, and in some cases, recession. In the late 19^th century, most economies in the West were dominated by liberal policies encouraged by laissez-faire.

Final Word

Laissez-faire alone is not enough to guide an economy, but with a proper balance between the power given to the government and freedom of market forces, economies can flourish with minimized risks.

More Resources

Thank you for reading CFI’s guide to Laissez-faire. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

• Free Economics for Capital Markets Course
• Expansionary Monetary Policy
• Market Economy
• Neoliberalism
• Trade Efficiency Rule
• See all economics resources