Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Laissez Faire

What it is:

Laissez faire is a capitalist precept that states that market economies function at optimal efficiency in the absence of government regulation.

How it works (Example):

The term laissez faire is French for "leave to do," or more accurately, "leave to be." It was first coined by French economic theorists Dr. Francois Quesnay and the Marquis de Mirabeau. 

The philosophy behind laissez faire economics was first expressed by Scottish economist Adam Smith in his 1776 classic The Wealth of Nations. Smith posited that the forces of supply and demand allow a market economy to self-regulate and that price levels, wages and employment are automatically adjusted by an "invisible hand." Consequently, governments have no reason to and should not interfere by imposing tariffs and minimum-wage restrictions. Beyond the taxes necessary for ensuring public well-being, such constraints foster only inefficiency and unnecessarily inhibit production.

Why it Matters:

The laissez faire philosophy heavily impacted economic policy during the industrial revolution of the 1800s. In the wake of widespread poverty resulting from exploitatively low wages combined with dangerous, unhygienic work environments, it became evident that exclusively laissez-faire economic attitudes can result in the very phenomena that governments must stop -- namely, the exploitation and poor treatment of their citizens. Following the economic collapse of 1929, governments began to institute economic policies designed not to control production or inhibit efficiency, but to protect workers and consumers.