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What Is a Laissez-Faire Economy?

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  • Written By: K.C. Bruning
  • Edited By: John Allen
  • Last Modified Date: 20 November 2016
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A laissez-faire economy is driven by the market. In theory, it is free of all government intervention, though in reality there has not been a long-lasting, purely laissez-faire system. It is based on the belief that the pattern of supply and demand is sufficient to promote a strong economy. Laissez-faire is a French term which means to “leave alone” or “let do.”

Capitalist nations tend to come closest to a pure laissez-faire economy. For the most part, there is separation between business and government. When government does intervene, it most often does so through taxes and regulations. In some cases, businesses have welcomed government intervention in the form of financial aid or tax breaks. These actions are typically intended to give the economy a boost.

The theory of laissez-faire economy includes the belief that competition will provide sufficient price controls. It is thought that letting the market decide prices enables companies to operate to peak benefit. When this has not proven to be the case, the government has often stepped in to protect companies and customers by regulating prices and taking other actions to impede inflation and excessive competition.

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While the theory of laissez-faire economy depends on a belief in the goodness of human beings, it does make allowances for government intervention where there is injustice. This is particularly true of social issues such as worker safety. In essence, the theory separates issues such as clean workplaces and protection of the environment from the economy, even if these things often directly affect businesses.

In many capitalist nations the theory of laissez-faire economy is strong, but always under scrutiny. There continues to be debate about how much regulation is appropriate and which interventions are truly necessary. Changes have been and continue to be made in order to strengthen or loosen government control of business. There is still strong support for the essential concept of laissez-faire, though very few who believe the system would work with no government intervention at all.

It is believed that a French minister of finance introduced the concept of a laissez-faire economy in 1650. In 1751 the term appeared in print for the first time in a magazine article. When the system was first attempted, it was approached with no government intervention. As the theory was put into practice, it was quickly realized that at least some regulation was needed. It was then that a moderate amount of taxes, tariffs, and the like were instituted.

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fBoyle
Post 3

@burcinc-- I agree with you but do you feel that all interventions in the economy are necessary?

Look at subsidies, for example. In a true laissez-faire economy, if a firm is going bankrupt, then it will. That's best for the economy. What do we do? We subsidize a bankrupt firm to keep it standing. Isn't that unfair competition for the other firms? The beauty of the laissez-faire system is that it doesn't need regulation. The market regulates itself.

burcinc
Post 2

@donasmrs-- A laissez-faire economy is not really possible. What most people refer to when they say laissez-faire, free or open economy is a mixed economy. There is always some kind of regulation in an economy because without regulation, competition will be unfair and monopolies will form.

The US is a laissez-faire economy because the prices are set by the market, according to the law of supply and demand. This does not mean that the government can never intervene. Sometimes intervention and regulation become necessary, especially if firms start breaking rules and if market competition becomes unfair leading to monopolies.

donasmrs
Post 1

I don't think that the American economy is as "laissez-faire" as it should be. There is too much government regulation and intervention. It's kind of disappointing considering that we're one of the biggest capitalist economies in the world. Our market needs to be completely free.

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