What is Laissez-Faire?

Among the various economic theories out there, one that is a popular topic of discussion is ‘laissez-faire’. It has its supporters and detractors, but everyone can agree that it has a huge presence in the world of finance.

What does it mean?

Laissez-faire is an economic theory whose origins date back to the 18th century. The term itself is part of a larger French phrase and it translates to “let [it/them] do.” However, in this context, the phrase typically means to “let it be” and, in expression, “laid back.” Its purpose is to impede government intervention in the economy. It also states that the economy is at its strongest when the government protects individuals’ rights and nothing else. 

Put simply, the phrase means let the market do its own thing. If left to its own devices, the laws of supply and demand will inevitably manage the production of goods and services. Supply will often include capital, natural resources, and labour. Demand usually refers to purchases by businesses, consumers, and the government. The government’s only role in this type of economy is to hinder any coercion attempts against individuals. Fraud, theft, and monopolies prevent the operation of rational market forces.

The fundamental beliefs that make laissez-faire economics include a core idea. That being economic competition establishes a “natural order” that dominates the world. This natural self-regulation is the best regulation form, so laissez-faire economists have a solid argument. They claim that there is no reason for government intervention to convolute business and industrial affairs.

Therefore, they oppose any type of federal involvement in the economy, including legislation or oversight. They are against minimum wages, trade restrictions, duties, and corporate taxes. In fact, laissez-faire economists view these taxes as being a production penalty.

Term origins

Made popular in the mid-1700s, the attitude of laissez-faire is among the first coherent economic theories. Its origins come from a specific group: the Physiocrats. They prospered in France from roughly 1756 to 1778.

With a physician at the helm, the group set out to apply scientific principles and methodology to wealth examination. These “économistes” made the argument that a free market and free economic competition were crucial to a free society’s well-being. The government should only interject in the economy to preserve life, property, and of course, individual freedom. Other than that, the natural laws governing market forces and economic processes should proceed freely.

The origins of the phrase in an economic context supposedly came about during a meeting in 1681. Attendees were the French finance minister, Jean-Baptise Colbert, and businessman, Le Gendre. Legend has it, Colbert inquired about how well the government could help commerce. Le Gendre’s reply was, “Laissez-nous faire.” In other words, “Let it be.” The Physiocrats would go on to popularize the phrase and use it as the title of their economic doctrine.

Basic principles

There are three principles of a laissez-faire economy:

  1. The individual is the fundamental societal unit (i.e. the measurement standard in social calculus).
  2. The individual relishes in a right to freedom.
  3. Nature’s physical order is an amicable and self-regulating system.

The laissez-faire economy’s primary purpose is to advocate for a free and competitive market. One that pushes for the restoration of the natural state of liberty. Therefore, a laissez-faire economy is defined by the free movement of forces of supply and demand. It would be completely void of any intervention by any type of authority. These include governments and price-setting monopolies.

Advantages

Laissez-faire offers a few notable benefits:

  • Independence: A laissez-faire economy provides more space for businesses and autonomy from government regulations. Specifically, rules that would make it difficult to conduct business activities and hard to proceed. An environment such as this makes it possible for companies to invest in the economy and take risks. Furthermore, it offers companies a greater incentive to try and boost profits.
  • Absence of taxes: The lack of taxes gives employees and companies greater spending power. It also dissuades corruption that could potentially arise thanks to bureaucrats with minimal knowledge, as well as tremendous regulatory power.
  • Modernization: Out of a desire to give market advantage to their products, companies need to get creative and be more innovative. The practice results in technological advancement along with economic expansion.

Disadvantages

For all the pros, there are some cons to laissez-faire:

  • Does not represent an entire society’s interests: A laissez-faire economy typically falls short of properly representing the interests of all sections of society. In fact, it may end up only catering to the majority or the upscale class. This leads to public goods with positive externalities like education and healthcare not undergoing equal distribution. Goods with negative externalities, on the other hand, may be subject to overconsumption.
  • Income inequality: According to English philosopher, Thomas Hobbes, the presence of total independence in a state-of-nature economy generates chaos for producers and consumers. This economy can prompt inequality of income and wealth that could likely contribute to a nasty cycle. One where inheritance plays a huge part in societal financial placement. As stated by Adam Smith, monopolies appear when they control the supply, charge excessive prices, and pay workers lower wages.

Criticism of the theory

Laissez-faire is not without its fair share of criticisms. One of them being that capitalism, as a system, is ambiguous with its morals. For the most part, it does not provide protection for the “weakest” groups in society. Laissez-faire supporters argue that if individuals put their interests first, then societal advantages will follow. Detractors, on the other hand, feel laissez-faire plays a part in economic inequalities and poverty. According to them, letting an economic system operate without regulations ignores – or worse, further victimizes – those in need.

British economist, John Maynard Keynes, was a popular critic of laissez-faire economics. He states that the market solution versus government interference debate is best to be settled on a case-by-case basis.

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