Economics

What Is Laissez-Fare Economics?

Laissez-Faire is an economic system in which private entities are virtually free from governmental regulatory bounds.

Laissez-Faire Economics Defined

Laissez-Faire economics is an economic theory and practice. It suggests that economic systems should operate with minimal government interference. Under this system, private businesses are allowed to act and operate as dictated by market forces.

Some of the generally accepted principles of laissez-faire economics are:

  1. The world naturally self-regulates and self-regulation is the most effective and efficient process.
  2. People, the basis of society, have a natural right to freedom from control.
  3. Corporations, as state entities, should be managed by the people of a society.
  4. In a competitive market, unregulated competition will result in a natural balance between supply and demand.

Origins of Laissez-Faire Economics

The debate surrounding government involvement in economics has been ongoing since ancient times. The practice of laissez-faire economics was first introduced in Europe during the 18th Century. A French economist, Francois Quesnay, convinced King Louis XV to attempt the theory in practice. In 1754, the King eliminated government regulations on the production and distribution of grain and the move was successful for around 10 years. However, a poor grain harvest caused prices to skyrocket. Grain producers, concerned for their profit margin, exported the product to countries that were able to pay the prices. With no product and no means to purchase, the public suffered from widespread famine. By 1770, the government of France removed the free trade system.

Despite this unsuccessful attempt, proponents for laissez-faire economics continued to tout its benefits throughout the 19th Century. The idea was particularly popular with European liberalists who believed government should only passively be involved in private lives. During the same time, government officials in the US determined it was not an appropriate approach to economics, instead, favoring government protectionism and regulation. It was revisited, however, in the 1970’s when the US government focused on a market economy, deregulating businesses and eliminating trade barriers.

Benefits

Although widely criticized, laissez-faire economics does result in certain benefits for societies and economies. Its most essential piece, perhaps, is its support of free trade. Free trade allows for maximum economic return for both partners. In other words, it allows for mutual profits. By removing government from economic processes, private businesses are able to operate more efficiently. In some countries, it helps to prevent government corruption. Additionally, economists will often point out that laissez-faire practices create market incentives. These incentives ensure that private companies will work diligently to provide consumer demands. Those companies that do not work efficiently will go out of business.

Disadvantages

One of the biggest disadvantages of this economic approach is that it can result in increased disparities of quality of life, wealth, and income. Wealth created under this system is often inherited, leaving those with limited opportunities to fight against well-established businesses. It allows powerful companies to dominate. One example of this is with monopolies. Under laissez-faire economics, monopolies are able to emerge by restricting supply, charging high prices, and paying low wages.

Influence of Laissez-Faire Economics

Today, most countries work under a mixed-approach to economics. However, the theory of laissez-faire economics continues to influence private business and government interactions throughout the world. This influence can be seen in neo-liberalist movements which often result in selling off inefficient and underfunded public services to private companies. This has happened across the world in healthcare, electricity production, and water supplies. It is also seen in “trickle down economics”. This is the idea that when businesses are allowed to maximize their profits with little government intervention, the increased profits will eventually trickle down to non-business owners, thereby benefiting everyone.

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