Meaning and Examples of Laissez faire

Laissez faire refers to the economic policy of letting owners of industry and business set working conditions without interference. This policy favours a free market unregulated by the government. The term comes from a French phrase that means “let do”.

The theory stemmed from French economic philosophers of the 18th-century Enlightenment. They criticized the idea that nations grow wealthy by placing heavy tariffs on foreign goods. Instead they argued that the government regulations only interfered with the production of wealth. They believed that if the government allowed free trade the economy would prosper.

This theory of Free Market or Free economy was defended by Adam Smith, a professor at the University of Glasgow in his 1776 book The Wealth of Nations. He argued that the economic liberty guaranteed economic progress.  He claimed that government need not interfere in the economy. His famous “The Invisible Hand” metaphor supported this idea.

The basic ideas of Adam Smith were supported by Thomas Malthus and David Ricardo. They also believed that natural laws governed economic life. Their important ideas were the foundation of laissez-faire capitalism. In Capitalism, money is invested in business ventures with the goal of making a profit. The ideas of Malthus and Ricardo helped bring about the Industrial Revolution.

The Invisible Hand

The invisible hand was conceived by Adam Smith to describe the self-regulating behaviour of the marketplace. The invisible hand is the market. The most important variable in market is the Price. There are two functions of price. One is that it provides information to both buyers and sellers. Second is that it provides incentives to act on that information.  Adam Smith said that the people act in the own self-interest.  Buyers would act to maximize the satisfaction they get from the products they buy, given the limitations of their incomes.  Sellers would act to maximize profits.  Workers would act to maximize the wages.  In pursuing their own self-interest, the sellers and workers ultimately do that which is best for society as a whole (consumers), even though doing so is not their intent and even though they may not know they are doing so.  This is the magic of the market and thus called “The Invisible Hand”.

Principle of Population – Malthus

In An Essay on the Principle of Population, 1798, Malthus argued that population tended to increase more rapidly than the food supply. Sooner or later population will be checked by famine and disease. However, without wars and epidemics, most were destined to be poor and miserable. The predictions of Malthus seemed to be coming true in the 1840s.

David Ricardo

In his Principles of Political Economy and Taxation (1817), Ricardo believed that a permanent underclass would always be poor. In a market system, if there are many workers and abundant resources, then labour and resources are cheap. If there are few workers and scarce resources, then they are expensive. Ricardo believed that wages would be forced down as population increased.

The laissez-faire philosophers advised the governments to leave the business alone. Another bunch of theorists believed that government must interfere and take action to improve people’s lives.