Laissez-Faire Definition: Laissez-Faire Capitalism Explained

Laissez-faire capitalism is an economic theory of a free market economy. Laissez-faire theory rejects government intervention and calls for hands-off economic policies. Laissez-faire advocates for market forces to drive fair economic systems. Within macroeconomics, laissez-faire is the most uninhibited form of a free enterprise system.

The concept of laissez-faire traces its roots back to eighteenth-century French economists and continues to impact the global economy today.

• The development of the concept: The doctrine of laissez-faire in the field of political economy stems from the theories of a group of eighteenth-century French economists called the Physiocrats. This group argued for individualism and free trade in economic affairs. They claimed that governments should only involve themselves in economic activity when life, liberty, and private property are at risk.
• The term “laissez-faire”: These French economists employed the term “laissez-faire,” meaning “let it be” to express their vision of a non-interference approach from the government when it came to the economy.
• The spread of laissez-faire: Laissez-faire theory spread from France and became popularized in Great Britain by the Scottish economist Adam Smith. His book The Wealth of Nations (1776) introduced the phrase “invisible hand” to describe what he saw as the governing natural laws of free-market capitalism that negate the need for government regulation.
• Laissez-faire in the modern world: After the industrial revolution, laissez-faire theories grew in popularity in the Western world. During the Great Depression, they were largely replaced by English economist John Maynard Keynes’s theories about government spending stimulating economic growth. During the presidency of Ronald Reagan, laissez-faire policies regained popularity in the United States during the 1980s.

Consider some of the basic characteristics of a laissez-faire economy.

1. 1. Self-regulating market forces: In a laissez-faire free market economy, there is no government interference or involvement. Instead, proponents of laissez-faire economics believe the market self-regulates through supply and demand.
2. 2. Individuals driven by self-interest: Individuals operating within a laissez-faire economy seek to satisfy their own needs. Laissez-faire theory assumes that individual desires lead to social benefits for the public good in the end.
3. 3. Free trade: Laissez-faire advocates believe that the economy is best served with no taxes, tariffs, or regulations on imports and exports.
4. 4. Absence of regulation: As large corporations gained more control under laissez-faire policies during the industrial revolution, the working class experienced unregulated working conditions and extreme wealth gaps. Without regulation, companies have more freedom to exploit employees since there are no requirements to provide a minimum wage or healthcare.

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