Laissez-Faire refers to an economic doctrine advocating minimum or no interference from the government in business and economic affairs. It views state intervention as a barrier to the growth and development of an economy. In short, it encourages free-market capitalism based on supply and demand.
Economic interventionism of market forces through regulations, taxes, tariffs, subsidies weaken an economy. Laissez-Faire, which is French for “allow to do,” suggests letting businesses operate free from such government policies. It, thus, enables capitalists to work in the desired way. As a result, they increase working hours while paying workers less to earn more profits.
- Laissez-Faire economics advocates for the government to intervene as little as possible in commercial and economic matters, leading to the growth and development of an economy.
- This economic principle gained popularity during the 18th century’s Industrial Revolution due to increasing government regulations, trade restrictions, corporate taxes, tariffs, and subsidies.
- The doctrine encourages free-market capitalism, giving businesses the freedom to decide on hourly wages, number of working hours, working conditions, child labor, etc.
- This economic system reduces ineffective bureaucracy, stimulates corporate innovation, supports business autonomy, etc. But it faces criticism for causing income inequalityIncome InequalityIncome Inequality is defined as an unequal distribution of income between the masses or a situation when a large proportion of total income is held by the small percentage of the population. It happens due to variation in sources of income, number of dependents, easier availability of resources, etc., creating monopolies, representing interests of the affluent section of society, etc.
How Does Laissez-Faire In Economics Work?
Laissez-Faire is a political and economic theory that gained popularity during the 18th century’s Industrial Revolution. It was the period when businesses were facing heavy import tariffs from the government. Furthermore, government involvement in the economy has had a significant impact on market forces. Sellers had to suffer from minimum wages, trade restrictions, duties, and corporate taxesCorporate TaxesCorporate tax is a tax levied by the government on the profits earned by a company at a fixed rate each year and is calculated in accordance with specific tax regulations..
Its origin dates back to the period between 1756 and 1778 when French lawmaker Boisguilbert, merchant François Legendre, and other physiocrats argued for anti-mercantilist policies. They also advocated the natural order of economic competition with minimal governmental interference in business, industrial, and economic affairs.
The proponents of this theory, including Adam Smith, the Father of EconomicsEconomicsEconomics is an area of social science that studies the production, distribution, and consumption of limited resources within a society., believed that this economic systemEconomic SystemThere are four prominent types of economic systems in the world based on their characteristics. It includes traditional economy, command economy, market economy and mixed economy. is the fairest policy to guide and encourage a free marketFree MarketA free market refers to an economic system free from government interventions and controlled by privately owned businesses.. Smith believed that markets function optimally if the government intervenes as little as possible.
The Laissez-Faire doctrine makes it easier for businesses to operate independently. It lets firms and traders conduct business activities in the best way possible to reap maximum profits. Also, it allows them to decide on the number of working hours, hourly wages, working conditions, child labor, etc. They can also maintain supply and demand without the need for price-setting monopoly interference.
In short, they are free to function in the market without any interference from the government or authority. Little or no government participation in the economy means an improved business environment and economic prosperity. Eventually, it leads to free-market capitalism. In Laissez -Faire leadership, employees are free to make decisions under the guidance of leaders to whom they report.
This economic philosophy also influenced the British political movement, leading to the repeal of the Corn Laws in 1846. It, thus, encouraged free trade in the United Kingdom. Though the policy advocates believed traders should define market rules, they felt some governmental intervention was necessary.
This economic and political ideology worked effectively in the United States in the 1920s. However, the non-interference of the government led to an under-regulated stock market. In 1929, Wall Street crashed, affecting the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price. adversely. The Laissez-Faire setup, therefore, allows government intervention in two ways:
- Establishing regulatory frameworks to limit international tradeInternational TradeThe trading or exchange of products and/or services across international borders is referred to as international trade. It frequently includes other risk factors such as exchange rate, government policies, economy, laws of the other nation, judicial system, and financial markets that impact trade between the two.
- Enacting legislation that encourages entrepreneurship
The first way secures domestic production and ensures that the working class has enough job opportunities in their country. Though Laissez-Faire is a crucial policy for advancing an economy’s overall growth, it reduces market competition.
The second form of government intervention is enacting antitrust legislation to address organizational practices such as monopolies that prevent new players from entering the market.
Besides promoting a free and competitive market driven by the natural order of supply and demand, this economic doctrine offers many other advantages:
- Free trade allows countries to gain from each other’s business
- Encourages corporate innovation and creativity, leading to business expansion
- Minimizes ineffective bureaucracy and discourages corruption
- Incentivizes entrepreneurs to work harder and produce more to maximize profits
- Gives businesses autonomy and freedom to take risks
- No taxation increases the spending power of businesses
Despite many benefits offered by this economic system, there are obvious concerns raised by critics regarding it, such as:
- Causes disparities in wealth and income, resulting in poverty and economic inequity
- Makes it difficult for start-ups to compete
- Creates monopolies due to fewer or no government rules, resulting in lower wages, higher product pricing, and limited supply
- Represents interests of the rich people or the majority rather than the entire society
- Leads to overconsumption of commodities with negative externalities
Laissez-Faire policies require no government regulation of business, industrial, and economic affairs, but individual rights only. These policies make it easier for traders and governments to identify participants operating in the free market. This system typically consists of capitalism, the free-market economy, and rational market theory.
- Capitalism: In this economic framework, private businesses own and control the factors of productionFactors Of ProductionFactors of production define resources used to produce or create finished goods and services, the sale and purchase of which keeps the market economy afloat..
- Free Market Economy: Private enterprises determine the price for products and services depending on supply and demand under this economic system. They also have the freedom to manufacture, purchase, and sell in a competitive market.
- Rational Market Theory: It is a situation in which buyers and sellers make investments decisions based on logic, facts, and publicly available information about a particular product. There is no place for human emotions in this principle.
Some other policies of the doctrine are as follows:
- It favors a business structure with no interference from the government in matters concerning the economy.
- The concept believes that businesses should operate in a natural order and self-regulate themselves.
- In social calculus, the individual – the basic unit of society, is the fundamental unit of measurement.
- Businesses have the freedom to decide what they think would be productive and profitable under a Laissez-Faire capitalism setting.
- Production of goods is done based on the increase or decrease in the demand and supply. Natural resources, capital, and labor are supply components, while consumer, company, and government purchases create demand. Prices become an indicator of the same.
- The state of equilibrium occurs as soon as the market meets the demand and supply. Achieving market stability may be challenging when the government interferes in business processes.
Let us consider the following Laissez-Faire examples to understand the concept better:
Shelly decided to use recyclable paper bags to dispose of household wastes. She wanted to begin an online campaign to convince every individual to do the same to reduce the usage of environmentally hazardous plastic bags. Meanwhile, one of her friends told her that she might need a higher authority to permit her to run the national campaign.
So, she started with her own house and worked her way up to persuading her neighbors without launching a campaign. It made the whole system self-regulatory, and she was eventually able to do what she wanted without needing to seek permission from higher authorities.
Pediatric infectious disease specialist Michael Joseph Smith recently raised concerns over the poor pace of the U.S. pediatric immunization effort. He blamed the Laissez-Faire attitude of parents towards child vaccination against COVID-19. Smith further added that “Allowing to do” as desired could boost the number of cases among children. It will ultimately lead to the loss of more lives.
It is worth noting that the Laissez-Faire policy makes a system self-regulating. Thus, it might not be effective in many cases, thereby compelling the government to intervene. That is why the public support for implementing mandates requiring COVID-19 vaccinations is growing.
Frequently Asked Questions (FAQs)
Laissez-Faire theory favors the self-regulation of enterprises and other activities over government intervention. It promotes a free and competitive market guided by supply and demand. Businesses under this framework remain free from trade restrictions, corporate taxes, tariffs, subsidies, etc.
Laissez-Faire is a beneficial economic system because it allows firms to operate as they see fit, making them more productive and profitable. On the other hand, it appears to be a flawed policy in which capitalists exploit the working class by forcing them to work longer hours without paying them a sufficient wage.
The government intervention in a Laissez-Faire setup is allowed in two forms:
1. Putting in place regulatory frameworks to regulate foreign trade
2. Passing laws that promote entrepreneurship
This has been a guide to Laissez-Faire and its meaning. Here we discuss how laissez-faire in economics works along with examples, policies, benefits, and criticism. You may also have a look at the following article to learn more –