Laissez-faire Economics Business Definition
What is Laissez-Faire?
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Definition:
Laissez-faire (in French, "let do") is the belief that the government shouldn't regulate the markets and should instead let the economy run by itself, driven by the natural forces of supply and demand.
🤔 Understanding laissez faire
Laissez-faire is the belief that the government shouldn't interfere in the market. People make choices depending on their tastes, needs, and rational self-interest. The government shouldn't regulate this productive chaos –- The market should instead be allowed to regulate itself through the 'invisible hand' of supply and demand. Under this theory, producers will supply enough products to match the consumers' needs the consumers will then buy them voluntarily. The delicate balance of demand and supply keeps the market in check. Any intervention by the government or any other authority becomes an obstacle to economic growth and development. The only role the government should play in such an economy would be to protect the individual's rights.
Example
Let's say you wanted to start a farm in your backyard. Under a laissez-faire system, a homeowner could plant anything they wanted in their backyard without asking for permission from local officials. People who worked at your farm could accept any wages and hours they wished to work for (and that you wished to pay). The government would only become involved if your plants grew into your neighbor's yard — Or if you had a contract to pay workers a certain amount, but you tried to go back on it and defraud them of agreed wages.
Takeaway
Laissez-faire is kind of like cycling without using your hands…
You just pedal to keep moving and only take the reins to maintain balance. In this sense, the government just keeps pedaling by making sure all the conditions necessary to sustain a free market are in place — Such as infrastructure, courts, and police. It does not interfere with the natural order of the markets unless individual rights are in jeopardy.
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Tell me more…
- What is Laissez-Faire?
- What is the history of laissez-faire?
- Is the United States a laissez-faire economy?
- What is laissez-faire policy?
- Is laissez-faire good?
- What are the criticisms of laissez-faire?
What is Laissez-Faire?
Laissez-faire is a French term that can be roughly translated to 'leave alone,' or more literally "let do." It's a capitalist concept originating from the 18th century that is against any government intervention in market affairs. In a laissez-faire economy, prosperity can be achieved if the government lets businesses and consumers make decisions for themselves. It lets the market do its own thing, where the laws of supply and demand help maintain the natural order of the market.
What is the history of laissez-faire?
The earliest usage of laissez-faire in an economic context can be traced to a meeting between Jean Baptiste Colbert (the French minister of finance at the time), and a businessman named Le Gendre in 1681. When asked how the French government could help improve commerce, Le Gendre replied, "Laissez-nous-faire" or 'let it be.'
This theory was later expounded by Adam Smith (a Scottish economist) in his book, The Wealth of Nations. Smith believed that the forces of supply and demand keep the markets in check. As such, price levels, wages, and employment are automatically adjusted by an "invisible hand" depending on the consumers' and producers' individual choices. Therefore, the government doesn't need to interfere by imposing tariffs to control the market or to come up with policies that ensure employee welfare. It should just tax business enough to fund the public well being since any other constraints only hinder production.
Is the United States a laissez-faire economy?
In a purely laissez-faire economy, government intervention is non-existent. This is not the case in the United States, though it has had one of the freer economies in the world throughout its existence. The United States government has always had some hand in the economic affairs of the nation. What has changed throughout history is the extent to which it interferes with the markets.
Early on, it was closer to a laissez-faire economy. A good case in point would be President Herbert Hoover's term, from 1929 to 1933. As a proponent of laissez-faire, Hoover believed in self-regulating markets and thought any economic assistance would make people lazy.
After Hoover assumed office, a drop in the value of the stock market made the economy take a turn for the worse. Banks and businesses failed, and the rate of unemployment increased from 3% in 1929 to 23% in 1932. All this signaled the start of the Great Depression. Yet Hoover stuck to his belief in non-interference. He didn't intervene and vetoed any bills proposed to correct the situation. The Depression worsened during his tenure, and critics increasingly portrayed him as a person who didn't care about the suffering of the American people.
Critics of laissez-faire use this period of our history as an example to show that economic crises are likely to happen when markets are left unregulated.
In the modern U.S economy, the government regulates different sectors of the economy, from agriculture, energy, and finance to utility firms. It may tax some items heavily to discourage their consumption or provide subsidies for particular industries such as agriculture to support local producers. The government also sets a minimum wage to ensure workers are not exploited. In this sense, the United States economy doesn't qualify as fully laissez-faire — though it remains closer to the laissez-faire end of the spectrum than most other governments in the world.
What is laissez-faire policy?
Laissez-faire policy rests on three assumptions: capitalism, a free-market economy, and efficient market theory.
- Capitalism: In capitalist economies, individuals or private entities own the factors of production. These are the building blocks of the economy, namely: land, labor, and capital. They use these resources to create products for their target markets. For laissez-faire to work, the government should let capitalism run its course.
- Free market economy: In an ideal world, market performance is regulated by the natural forces of supply and demand. Businesses try to maximize their utility by creating products that attract more consumers, hence earning more profits. The consumers then buy these items voluntarily. In such an economy, workers bid their services to those who pay the highest wages. The employers then strive to get the best employees and pay them a salary that ensures more productivity. Such a market encourages innovation since producers keep looking for ways to do better than their competitors. The market then regulates itself by setting the prices of goods and services to match demand and supply. However, this free market model is rarely found in the real world. Therefore, the economy as a whole requires government intervention at various levels.
- Efficient market theory: In laissez-faire economics, the price can only be dictated by natural market forces. It's assumed that the market is efficient because investors base their decisions on logic rather than emotion, assuming that all buyers and sellers have access to the same information for decision making. However, this theory ignores the emotions that influence humans' decision-making processes.
Is laissez-faire good?
As much as a self-regulating market is ideal for trade, many believe that capitalism still needs some rules. Though laissez-faire advocates for allowing private entities to pursue their self-interest, it also creates room for manipulation and unhealthy competition. This behavior can eventually lead to market failure.
What are the criticisms of laissez-faire?
Laissez-faire relies on what many consider to be a false premise: That every participant in the economy is equally empowered and able to pursue their self-interests. The true situation is typically quite different. Some people have more resources than others. If individuals get to serve their interests, then those in advantageous positions will do better. Laissez-faire has often been criticized for causing economic imbalance since it does not protect the weak in society.
Here are some problems typically cited as the core flaws of laissez-faire:
- Poor working conditions: Due to an imbalance of power, unregulated marketplaces may exploit their workers by crippling their freedom of choice. For instance, those with a higher income can reject a bad employment contract or afford better healthcare. Those at the lower end of the economic spectrum may not be in a position to enjoy such freedoms. It would be hard for them to reject bad employment contracts since they need the money. If there are few well-paying jobs, workers may have little power to choose where to work. This goes against what laissez-faire advocates for – The underlying belief that individuals should be allowed to follow their self-interest.
- Anti-competitive behavior: In the early 19th century, American capitalists figured out that they could make higher profits by limiting consumer choice. Under laissez-faire, they could do this freely through cartels or consolidating markets into monopolies. Choice driven competition no longer determined the rate of demand and supply. As a result, the natural order of the market was destabilized. Laissez-faire does little to contain such anti-competitive behavior.
In this light, the idea of a self-regulating market without any government intervention is generally not considered feasible in all areas — though economies that give businesses the most freedom (with minimal necessary restraints) tend to see the greatest prosperity.
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Certain limitations apply
The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program's inventory. Securities trading is offered through Robinhood Financial LLC.
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Laissez-faire Economics Business Definition
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