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Laissez Faire

Guide to Understanding Laissez Faire in Economics

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Laissez Faire

Laissez Faire Definition in Economics

The term “laissez faire” traces its origins to eighteenth-century economists in France, and translates to “left alone” (or “let it be”).

The laissez faire doctrine rejects the practice of government intervention in a country’s economic affairs. In fact, governmental interference is viewed as an impediment to a country’s economic growth, prosperity, and development.

But contrary to common misconception, laissez faire does not mean the government should have no involvement at all in the lives of the people it represents. Instead, the belief system is that there should be no interference beyond the necessary scope, such as the maintenance of peace, safety, and property rights.

The government’s involvement in the economy and the lives of its people should be constrained to circumstances where their life and private property are at risk, rather than at all times.

Characteristics of Laissez-Faire Policies

An economic system built upon laissez-faire is a free market, wherein the role of the government is limited.

Economist Adam Smith – the author of The Wealth of Nations – wrote about the “invisible hand” in the markets, which describes the natural forces at play in free markets and capitalism.

In theory, societies thrive in free markets if the economy is left in the hands of those who compete without any interference from the government. Proponents of laissez-faire policies state that the market is most functional when it is allowed to self-regulate through supply and demand.

Suppose the government does attempt to control the marketplace by establishing laws and rules. The natural forces within the economy are obstructed, and the economic growth from increased production and consumption will decline.

The most notable characteristics of countries governed under laissez-faire policies are as follows.

  • Free Market (i.e. “Self-Regulating”)
  • Limited Government Interference in Marketplace
  • Individuals Act in Self-Interest (and Self-Interest → Societal Benefits)
  • Unrestricted Trade (i.e. No Taxes, Few Regulations)

Laissez Faire and Free Market Capitalism

The laissez faire doctrine is the underpinning of the economic system frequently called free market capitalism. The concept of individualism and free trade in the markets is closely tied to laissez faire.

When individuals act in their self-interest with limited governmental intervention, individuals are provided with the incentive to create wealth, which creates a virtuous cycle beneficial to society.

Economic growth stems from individuals acting in their self-interest, as opposed to the government controlling the economy and preventing the natural market forces from panning out.

The government’s only role is to protect the rights and safety of the individual, not regulate and control the market and meddle in their business affairs.

Pitfalls of Laissez Faire Economics

The most prominent criticism of laissez faire economics is that such policies contribute toward wealth disparities and further expand the income inequality within a country.

Over time, the country’s wealth becomes concentrated among select societal groups, and the lack of regulation facilitates the creation of monopolies, resulting in higher prices for consumers and less supply from the limited competition.

Economic disparities can cause the separation of people into distinct groups (and internal conflict) because the interests of all participants in society are not represented.

Therefore, most developed economies in the real-word blend the principles of laissez faire with government intervention, such as taxes, to reduce income inequality and fund the country’s necessary social services.

Laissez Faire Leadership Style

The laissez-faire leadership style is fairly straightforward to understand because the underlying belief is virtually identical to the attitude toward economics and political policies.

Organizations such as companies that run under laissez-faire leadership are characterized by a “hands-off” approach, where the leaders trust their employees enough to rely on them to make the right decisions, learn from their mistakes, and deliver the desired outcomes.

The trust placed on the employees by the leadership team can encourage personal growth, which can cause many of them to adopt an ownership mindset.

In the best-case scenario, the “hands-off” environment can facilitate the development of employees into leaders that take responsibility for their performance (and the entire organization).

On the other hand, the lack of oversight, limited feedback, and absence of structure within the organization can result in employees becoming less productive.

The laissez-faire leadership style can be the type of workplace setting where certain employees thrive and become more creative when given more autonomy, whereas others can easily lose motivation and become detached from their work performance.

For the latter type of employees, more direction and instructions are necessary for their work quality to manifest at its highest potential.

Guidance and constant feedback can be perceived as “micro-managing” to some – most often those that prefer to work independently – while helpful to others.

A lack of structure can be particularly challenging for new employees that require support in the onboarding stage.

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