Laissez Faire
Laissez-faire is the 18th century economic theory according to which the government shouldn’t intervene in business affairs. In French this term means “to leave alone”. In other words, according to this theory it is better for business to function without the government’s intervention. Laissez-faire economics is the main part of free-market capitalism.
Main ideas
Laissez-faire theory was developed by French Physiocrats in the 18th century. This theory advocates that a country's economic success is impossible if the government can influence business and markets. According to Laissez-faire theory, government intervention will negatively affect markets and society as well.
Afterwards, Laissez-faire theory was viewed by many economists as a pathway to economic prosperity. However, this theory had its critics among economists. These critics pointed to the fact that laissez-faire promotes inequality. Some critics state that markets truly need government regulation, although, to a certain extent.
Understanding laissez-faire
One of the laissez-faire core beliefs is the idea that competition in a free market economy provides a “natural order”. According to the economists that support the laissez-faire theory, this “natural order” rules the entire world. In their opinion, the best type of regulation for markets is self-regulation. They claim that federal involvement only makes business running more complicated.
Consequently, they argue against any form of government’s involvement in market and business affairs, including any type of oversight. They also oppose corporate taxes, minimum wages and restrictions on trade and consider these taxes as a production penalty.
The main argument of Laissez-Faire supporters is the statement that the economy is a self-regulating system. The government is considered to be an establishment that can only monitor the work process of economic agents.
Sometimes, Laissez-Faire is associated with Liberetarian views on the economy. Libertarians state that the government should play an extremely limited role in markets. According to their beliefs, there are only three functions that need government’s involvement:
- Protection of the national borders
- Protection of individual liberty and private property rights
- Production of public goods
History of laissez-faire
Laissez-Faire was popularised during the 18th century. Back then it was one of the first articulated theories in economics. It was developed by the Physiocrats, who were the representatives of classical bourgeois political economy that arose in France in the middle of the 18thy century. Some of the prominent representatives of laissez-faire are Anne-Robert-Jacques Turgot, Pierre-Paul Le Mercier de La Rivière and Honoré-Gabriel Mirabeau. Physiocracy was created during the economic decline of pre-revolutionary France.
According to laissez-faire theory, the unchanging laws that govern economic processes and markets should be allowed to function ungovernable. The government should only get involved in the economy in order to preserve life, property and personal freedom.
Unfortunately, the economists’ early efforts to test laissez-faire theory were unsuccessful. In 1774 it was decided to conduct an experiment. Within the experiment Turgot, Louis XVI's Controller-General of Finances, abolished all of the possible rules and restrictions on the grain industry that was previously closely regulated. During the experiment free import and export between provinces was allowed. The grain industry functioned as a free trade system. The problems arose when the grain price skyrocketed, harvesters caused scarcity and merchants ended up either selling the supplies in strategic areas (sometimes even to other countries) to increase profits, or hoarding said supplies. Meanwhile, thousands of French citizens were starving. After several months of constant riots, it was finally possible to restore the order.
Although laissez-faire practices weren’t successful in the beginning, later during the 18th and 19 century these practices were further developed by famous British economists Adam Smith and David Ricardo. However the laissez-faire still had its detractors, and according to them laissez-faire practices resulted in huge wealth gaps and unhealthful working conditions.
At the beginning of the 20th century developed industrialised nations, for example the United States, finally started to implement government controls and regulations in order to protect consumers from unfair business practices and workers from unsafe working conditions. However, implemented policies were not intended to restrict competition and business practices.
Criticism of laissez-faire
Main criticism of Laissez-Faire is that capitalism has moral ambiguities: it doesn’t protect the weakest in society.
Critics of Laissez-Faire think that this theory could result in economic imbalance and poverty. If the economic system could run without any regulation and control it’d further victimise those who are in need of assistance.
Some economists in the 20th century, for instance, John Maynard Keynes argued that the question of market solution versus government intervention needed to be decided on a case-by-case basis.
Advantages and disadvantages of laissez-faire
Advantages of laissez-faire:
- Inefficient involvement of government in business
- Laissez-Faire encourages innovation and personal responsibility
- Laissez-Faire promotes free markets as well as competition
Disadvantages of laissez-faire:
- Lack of regulations can harm everybody involved in the working process and the environment
- Competition leads to wealth inequality
- Laissez-Faire may incentivize bad actors
Example of laissez-faire
Theoretically speaking, a certain economy would need a government that is not involved in the markets or businesses in order to follow the principles of Laissez-Faire. In this case the free market would discipline producers to regulate the actors, and it’d also regulate the prices. This kind of economy doesn’t exist. Economies in all modern countries require government intervention.
