# Laissez-Faire Economy Explained: Definition, Principles, and Criticism

## What Is Laissez-Faire?

Laissez-faire, an 18th-century economic theory, firmly rejects [government](https://www.investopedia.com/government-and-policy-4689793) intervention in business. Rooted in the belief that minimal government involvement benefits both business and society, this theory underpins [free-market](https://www.investopedia.com/terms/f/freemarket.asp) capitalism. The term, French for "leave alone" or "let you do," encapsulates the idea that industries and markets should operate without governmental constraints. Laissez-faire champions the notion that a naturally self-regulated market fosters greater efficiency and prosperity.

### Key Takeaways

*   Laissez-faire is an economic theory advocating for minimal government intervention in business affairs, suggesting that economies thrive best when left alone.  
*   Originating in 18th-century France with the Physiocrats, laissez-faire economics became fundamental to free-market capitalism, emphasizing a natural economic order without regulation.  
*   While the theory champions free market and competition, critics argue it can lead to economic imbalance and leaves the vulnerable unprotected.  
*   The philosophy was notably implemented during the Industrial Revolution, although it faced criticism for resulting in unsafe working conditions and wealth inequality.  
*   Despite its theoretical appeal, pure laissez-faire economies do not exist today, as most countries practice some degree of government intervention to prevent market failures. 

![Laissez Faire](https://www.investopedia.com/thmb/wI8vOxEcdoLxzH-7PFlbckbVrWA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/laissezfaire_final_definition_0819-4f663c090df6434790a765496c544a8d.jpg)

*— Sydney Saporito / Investopedia*

## How Laissez-Faire Economics Operate

The underlying beliefs that make up the fundamentals of laissez-faire economics include the idea that economic competition constitutes a “natural order” that rules the world. Because this natural self-regulation is the best type of regulation, laissez-faire [economists](https://www.investopedia.com/terms/e/economist.asp) argue that there is no need for business and industrial affairs to be complicated by [government intervention](https://www.investopedia.com/financial-edge/0710/4-government-interventions-did-they-work.aspx).

They oppose any federal involvement in the economy, such as legislation, [minimum wages](https://www.investopedia.com/terms/m/minimum_wage.asp), duties, trade restrictions, and [corporate taxes](https://www.investopedia.com/terms/c/corporatetax.asp). Laissez-faire economists view these taxes as penalties for production.

> **Important**
>
> Laissez-faire is often associated with libertarian views on the economy, where government plays an extremely limited role. In fact, one of the key characteristics of laissez-faire economics is that the government should only be involved with the following three functions:Protecting the national borders via a standing armyProtecting private property rights and personal freedom via a police force and judiciaryProducing public goods that serve society, such as parks and libraries, that the market would not be incentivized to produce on its own

## The Origins and Evolution of Laissez-Faire Economics

Popularized in the mid-1700s, the doctrine of laissez-faire is one of the first articulated economic theories. It originated with a group known as the Physiocrats, who flourished in France from about 1756 to 1778. They applied scientific methods to study wealth and economic production.

They argued that free markets and [competition](https://www.investopedia.com/terms/p/perfectcompetition.asp) are vital for a healthy society. They believed the government should only intervene in the economy to preserve property, life, and individual freedom; otherwise, the natural, unchanging laws that govern market forces and economic processes—what later British economist [Adam Smith](https://www.investopedia.com/updates/adam-smith-economics/) dubbed the “[invisible hand](https://www.investopedia.com/terms/i/invisiblehand.asp)”—should be allowed to proceed unhindered.

An early attempt to apply laissez-faire theories failed. As an experiment in 1774, Turgot, Louis XVI’s Controller-General of Finances, abolished all restraints on the heavily controlled grain industry, allowing imports and exports between provinces to operate as a free trade system. But when poor harvests caused scarcities, prices shot through the roof; merchants ended up hoarding supplies or selling grain in strategic areas, even outside the country for better profit, while thousands of French citizens starved. Riots ensued for several months. In the middle of 1775, order was restored, and with it, government controls over the grain market.

Despite the rough start, laissez-faire practices grew in influence during the Industrial Revolution, thanks in part to British economists like Adam Smith and [David Ricardo](https://www.investopedia.com/terms/d/david-ricardo.asp). And, as its detractors noted, it resulted in unsafe working conditions and large wealth gaps.

> **Fast Fact**
>
> Developed nations like the United States began applying more government controls and regulations in the early 20th century to protect workers and consumers. These policies were not meant to limit business practices and competition.

## Debating Laissez-Faire: Criticisms and Counterarguments

Laissez-faire supporters believe that when people pursue their self-interests, society benefits. Critics say laissez-faire [capitalism](https://www.investopedia.com/terms/c/capitalism.asp) has moral ambiguities and doesn't protect society's weakest members.

As such, detractors feel laissez-faire actually leads to poverty and economic imbalances. They argue that unregulated economic systems neglect or harm those who need help the most.

Economist [John Maynard Keynes](https://www.investopedia.com/terms/j/john_maynard_keynes.asp), a major 20th-century critic of laissez-faire, argued that market solutions versus government intervention should be judged case-by-case.

### Advantages and Disadvantages of Laissez-Faire Economics

Pros

*   Reduces government involvement in business, which is thought to be inefficient and stifling
    
*   Encourages self-responsibility and innovation
    
*   Promotes free markets and competition
    

Cons

*   Lack of regulations can harm consumers and the environment
    
*   Can generate negative externalities
    
*   Competition naturally leads to wealth inequality
    
*   May incentivize bad actors
    

## What Does "Laissez-Faire" Mean Literally?

Laissez-faire, in French, literally means “let you do.” Legend has it that the origins of the phrase “laissez-faire” in an economic context came from a 1681 meeting between the French finance minister Jean-Baptise Colbert and a businessman named Le Gendre. The story says Colbert asked Le Gendre how the government could help commerce, and Le Gendre replied, "Laissez-nous faire," meaning "let us do." The Physiocrats popularized the phrase, using it to name their core economic doctrine.

## What Is an Example of Laissez-Faire?

An economy would follow the principles of laissez-faire if it followed an approach where the government was not at all involved in the workings of the economy, business, or markets. Instead, the free market would not only regulate prices but also discipline producers to remain good actors. In reality, such an economy does not exist. All economies, even in countries with highly libertarian values, have some degree of government regulation and intervention.

## What Is Laissez-Faire Capitalism?

In laissez-faire capitalism, companies could operate with a pure profit motive and not have to worry about government regulation or taxation. This, of course, could create negative externalities and information asymmetries that can allow producers to behave as bad actors and get away with it. Proponents of laissez-faire say that costly and exhaustive regulation is not needed since the market would weed out such bad actors. In reality, however, bad actors may continue operating for a long while.

## The Bottom Line

Laissez-faire refers to an economic theory opposed to government intervention in the market. A central element of free-market capitalism, laissez-faire posits that businesses and society as a whole are significantly better off without government involvement. The idea dates back to 18th century France, and is popular in countries with libertarian values in the present.

> **Article Sources**
>
> 1.  Ivar Jonsson. “[The Political Economy of Innovation and Entrepreneurship: From Theories to Practice](https://www.routledge.com/The-Political-Economy-of-Innovation-and-Entrepreneurship-From-Theories-to-Practice/Jonsson/p/book/9780367598327),” Page 10. Routledge, 2016.
>     
> 2.  Mises Institute. “[Physiocracy and Free Trade in 18th-Century France](https://mises.org/library/physiocracy-and-free-trade-18th-century-france).”
>     
> 3.  Foundation for Economic Education. “[Turgot: The Man Who First Put Laissez-Faire into Action](https://fee.org/articles/turgot-the-man-who-first-put-laissez-faire-into-action/).”
>     
> 4.  Panarchy. “[John Maynard Keynes: The End of Laissez-Faire](https://www.panarchy.org/keynes/laissezfaire.1926.html).”
>     
> 5.  Foundation for Economic Education. “[What Is Laissez-Faire?](https://fee.org/articles/what-is-laissez-faire/)”