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Basic Principles of a Laissez-faire Economy

 The individual is the basic unit in society, i.e., the standard of


measurement in social calculus.
 The individual enjoys a natural right to freedom.
 The physical order of nature is a harmonious and self- regulating
system.

The basic purpose of the laissez-faire economy is to promote a free and


competitive market that demands the restoration of the order and natural
state of liberty that humans emerged from. A laissez-faire economy is thus
characterized by the free movement of laws and forces of supply and
demand from any form of intervention by a government, a price-setting
monopoly, or any other authority.

Forms of Government Intervention

Government intervention can occur through the following:

1. Protectionism

Protectionism refers to any government regulation or policy that limits


international trade. Protectionist policies foster domestic production and help
the working class, but are detrimental to the overall growth rate of the
economy as they hinder competition.

2. Antitrust laws

Antitrust laws oppose monopolies, trusts, and other organizations or practices


that don’t allow higher participation from potential entrepreneurs. While such
laws seem to add to the concept of laissez-faire, they go against the Darwinist
idea of survival of the fittest that laissez-faire prescribes.

Laissez-faire policies serve as a motivation for the producer to hone its


products in response to the standards set by the market. The price system is
such that the output and consumption levels are determined solely
determined by the varied decisions made by households and firms through
transactions in the marketplace.

Advantages of Laissez-faire

Laissez-faire offers the following benefits:

1. Autonomy

A laissez-faire economy gives businesses more space and autonomy from


government rules and regulations that would make business activities harder
and more difficult to proceed. Such an environment makes it more viable to
take risks and invest in the economy. Moreover, it provides companies with a
greater incentive to try and maximize profits.

2. Innovation

Driven by the need to provide their products with market advantage,


companies are compelled to be more creative and innovative in their
approach. The practice leads to technological advancement in addition to
economic growth.

3. Absence of taxes
Lastly, the absence of taxes leaves companies and employees alike with
greater spending power. It also discourages corruption that can arise as a
result of bureaucrats with limited knowledge but immense decisive power.

Disadvantages of Laissez-faire

Along with its advantages, a laissez-faire economy comes with a few


drawbacks:

1. Income inequality

According to Thomas Hobbes, the presence of absolute autonomy in a state-


of-nature economy creates a situation of chaos for both producers and
consumers. Such a type of economy can lead to inequality of income and
wealth that may contribute to a vicious cycle wherein inheritance plays a key
role in financial placement within society. As put forward by Adam Smith,
monopolies can emerge wherein they control supply, charge higher prices,
and pay lower wages to workers.

2. Failure to represent the interests of the entire society

A laissez-faire economy fails to be representative of the interests of all


sections of the society; it may cater only to the majority or the affluent class.
Thereby, public goods with positive externalities such as education and
healthcare may not be equally distributed in society, whereas goods with
negative externalities may be over-consumed.

Laissez-faire is now more an adjective to denote the prevalence of its


associated features. In isolation, the economic theory can lead to huge gaps in
wealth, injustices, and in some cases, recession. In the late 19thcentury, most
economies in the West were dominated by liberal policies encouraged by
laissez-faire, but the government played a key role in channeling the ideals
appropriately.

Final Word

Laissez-faire alone is not enough to guide an economy, but with a proper


balance between the power given to the government and freedom of market
forces, economies can flourish with minimized risks.