Laissez-faire

Laissez-faire is an economic philosophy advocating limited government involvement in an economy. Advocates of “free enterprise economics” and “free market systems” often invoke the term laissez-faire in their criticism of government. Translated as “let them do” or “leave it alone,” laissez-faire originated in the protests of 18th-century French businessmen against government regulation of trade and industry. Laissez-faire economic ideas were first advocated by 18th-century French economists known as physiocrats. Led by François Quesnay, physiocrats challenged the dominant economic doctrine of the time, MERCANTILISM, by which increasing exports and collecting precious metals in return maximized the WEALTH and power of a nation. Physiocrats argued that nature was the true source of an economy’s wealth and saw government laws, TARIFFs, and privileges granted to individuals as interfering with the natural flow of commerce, hindering economic and social prosperity. The Scottish philosopher Adam Smith (1723–90), author of The Wealth of Nations and considered the father of modern economic thought, incorporated the ideas of laissez-faire CAPITALISM in his work. Smith emphasized the role of self-interest in the functioning of markets—that is, self-interest would guide individuals to use their resources wisely. Consumers would attempt to maximize their wellbeing with their limited INCOMEs, purchasing products at the lowest possible price and offering their resources to the highest bidder. Producers would attempt to purchase RESOURCES at the lowest possible price and sell their products to the highest bidders. Smith theorized that in markets, buyers and sellers would benefit society by efficiently allocating resources and goods as if guided by an “invisible hand.” COMPETITION would lead to efficiency without government oversight or control. In the 19th century, classical economic theory argued that laissez-faire markets would keep economies at close to the natural level of real output. Flexible prices and wages would adjust market prices, eliminating shortages and surpluses. Since markets would be self-correcting, there would be no need for government intervention during ups and downs in economic activity. Classical economic theory dominated macroeconomic thought into the 20th century but could not explain the GREAT DEPRESSION. Keynesian economic theory, challenging the assumption of flexible wages and prices and advocating government spending during periods of reduced private-sector spending, replaced classical theory for most of the second half of the 20th century. During the 1970s and 1980s, there was a resurgence of the laissez-faire philosophy in the United States. Articulated by the Nobel Prize-winning economist Milton Friedman in his classic film series Free to Choose and adopted by the Reagan administration, laissez-faire supporters called for reduction in the size of government and government rules and regulations. Libertarian Party members had long advocated similar measures. Recent pressure for the PRIVATIZATION of public goods and SERVICES, including SOCIAL SECURITY, are based on laissez-faire ideas.
See also CLASSICAL ECONOMICS; KEYNESIAN ECONOMICS; MACROECONOMICS.