What is laissez faire capitalism?
Laissez faire capitalism is the economic system that allows businesses to operate without government intervention. Advocates of laissez faire capitalism argue that it allows for an increase in innovation and productivity, as businesses are free to compete with one another. Critics of laissez faire capitalism argue that it can lead to exploitation of workers and excessive profits for business owners.
Laissez faire capitalism is characterized by the absence of government intervention in the economy ( even government subsidies are not allowed by this economic system); it is also known as unregulated capitalism. The invisible hand of the market (demand and supply) should be allowed to determine how to run the economy. It is a good example of free-market capitalism (or pure capitalism).
Laissez faire capitalism was first used in the 18th century and it refers to the policy of letting businesses operate free from government regulation; there was a free flow of goods, services, and money. This system allows businesses to operate without restrictions as long as they don’t violate the rights of others.
Laissez faire theory is an economic theory that advocates for minimal government interference in the marketplace. Proponents of laissez-faire theory argue that government intervention stifles innovation, enterprise, and economic growth. Laissez-faire capitalism is often contrasted with interventionism, which advocates for greater government intervention in the economy to promote social welfare objectives.
Laissez faire capitalism and the industrial revolution
The Industrial Revolution was a time of great change in the world. It was a time when businesses were able to grow and prosper thanks to the free market; this was a period of laissez-faire capitalism and it led to increased production and innovation, which in turn helped to improve the quality of life for everyone.
Features of laissez faire capitalism
- Laissez faire capitalism refers to a business model where the government does not intervene in the economy, that is, the government does not play a role in economic decisions. No restriction to how much you would sell your goods or services, no need for approval by a government agency before your start a business, no entry fee or registration fee for you to start a business, nothing like authorized stocks needed by companies or that a business must have a board of directors, etc. There is virtually no government interference. Everything is left to the market forces of demand and supply. If the customers need more of a certain good or service, it makes the businesses produce more of it. When the supply becomes too much, the price of such a good or service would fall; the same applies to scarcity of goods, and the prices would increase. That means, the government cannot give you a price for your own goods, like forcing petrol marketers and restricting them not to sell above a certain price.
- Under this system, businesses are free to compete and grow without restrictions. This allows businesses to improve their products and services, which ultimately leads to higher wages and more prosperous communities. The laissez-faire system causes stiff competition among businesses because every firm aims to bring the best quality of goods or services to the customers; it means that if you don’t produce better products, your competitors would take over the market and the customers. This brings about innovations and advancement as every business strives to create better products.
- One of laissez faire capitalism characteristics is that the government should only be involved in protecting the country, people’s rights, and property (through the police force and the court system), and carrying out duties that serve society such as the construction of parks, roads, libraries, dams, etc.
- Advocates of laissez faire capitalism also believe in the libertarian theory and therefore are against taxes, imposition of minimum wages on businesses, and any restriction that impedes maximizing profits in business. In fact, the proponents of laissez faire capitalism see government taxes, levies, regulations, and interventions as punishment for trying to be productive.
Laissez faire capitalism allows businesses to grow and thrive based on their own merits, rather than being held back by government regulations or other restrictions. Let us take a look at some examples in terms of the benefits and demerits of applying this system of running the economy.
The success of laissez faire capitalism is demonstrated by the fact that it has led to tremendous economic growth across some countries of the world, especially the ones that are believed to be more capitalist economies.
This system has allowed these capitalist countries such as America, France, Japan, etc. to become some of the wealthiest in the world. Even though the capitalist countries are not purely laissez faire, because of their little government interference in businesses, it has allowed such businesses to drive innovations, create wealth and Jobs and also grow the economy.
The evidence of the benefits of partially adopting some elements of laissez faire capitalism in these economies can be seen in the world’s wealthiest individuals and companies; most of the richest companies and people, advancements in technology, and innovations come from these countries.
In terms of disadvantages, some laissez faire capitalism examples such as the dot-com bubble, the great depression, and the 2008 financial crisis show the effects of this system.
During the Great Depression, laissez-faire policies caused banks to fail and caused great numbers of people to lose their homes. Another example is the 2008 financial crisis. Because laissez faire capitalism doesn’t regulate banks, they were able to gamble with other people’s money and cause the recession. All these show what happens when a market is unregulated; there will always be a crash and it affects so many people and countries.
This goes to show that laissez faire capitalism with some elements of government interventions and regulations can be more productive and beneficial than using a single form of economic system.
Pros and Cons
Laissez faire capitalism has pros and cons. Some critics have argued that it creates unfair competition and dangerous business practices. However, proponents of laissez-faire theory advocate that this system is better than government-controlled economies because it is more efficient and allows for greater innovation. We will look at the advantages and disadvantages of laissez-faire economics.
- It allows for innovation and creativity.
- Allows for businesses to be successful without government intervention.
- Allows people to make their own decisions and be self-reliant.
Problems with laissez faire capitalism
- It may lead to exploitation and oppression of the less fortunate. Companies can employ and pay any amount of money as wages; if you are not willing to work for a fixed price, others would be willing. Employees’ welfare is not considered, no pension plan, no hazard allowance – that means if you die in the process of carrying out your duty to a company (like dying in a mining pit), it is left to the discretion of the company to pay compensation or not. If you lose a leg caused by a machine, you may not be compensated.
- This can lead to a concentration of wealth and power in the hands of a few.
- It can cause negative externalities.
- Some argue that laissez-faire capitalism is harmful because it leads to monopolies and excessive production.
- It creates dangerous business practices whereby businesses do everything possible to be better than others even if such practices may be harmful to society. Take, for example, drilling of petroleum leading to oil spillage that makes the affected communities lack good water or the spillage killing fishes or living things; furniture companies can cause deforestation without government intervention because they just want the wood from the trees; mining companies may extract mineral resources and may cause the washing of harmful metals such as lead (leading to lead poisoning) around the nearby communities without government interference.
- It causes unfair competition where larger businesses do not allow smaller businesses to grow; in the long run, only a few businesses exist and therefore a monopoly is formed. Monopolies stifle innovation because whatever is produced is what the customer gets and cannot get it anywhere else; in the end, the customer does not gain much from laissez-faire capitalism.
Why would business leaders favor laissez-faire capitalism and social Darwinism?
Business leaders might favor laissez-faire capitalism and social Darwinism because they believed that these systems are the best way to allocate resources, produce the most wealth for society as a whole, and creates more jobs. They argue that companies will be forced to grow if they want to stay competitive, and this will result in more jobs. Social Darwinism also encourages companies to cut costs in order to remain competitive, which is likely to create more jobs.
Is laissez-faire capitalism good?
Laissez-faire capitalism is good for promoting innovation and driving the growth of businesses but it is criticized for creating inequality and undermining the welfare of the population.
Is the United States laissez-faire capitalism?
The United States is more like a hybrid system that combines some elements of capitalism and socialism. Some people believe that the country is more closely aligned with laissez faire capitalism than with other types of capitalism. There is less government intervention in the economy which allows for businesses to thrive unchecked. However, there are also elements of socialism present in the United States – things like social welfare programs, financial incentives to businesses to encourage them to expand, regulated prices, and certain aspects of the market to protect consumers and ensure fair competition. As a result, the United States is not purely a laissez-faire market system.
Nansel is a serial entrepreneur and financial expert with 7+ years as a business analyst. He has a liking for marketing which he regards as an important part of business success.
He lives in Plateau State, Nigeria with his wife, Joyce, and daughter, Anael.