The doctrine of laissez-faire was first systematically developed by the physiocrats in France. It was at first primarily considered a moral doctrine that sanctified the freedom of the individual and had implications for economic life, not just an economic policy doctrine. Later laissez-faire came to be understood mainly as an economic policy doctrine.
Folklore has it that during the reign of Louis XIV (1638–1715), the finance minister, Jean-Baptiste Colbert (1619–1683), asked a group of French businessmen what the government could do to aid the cause of commerce, and the response was laissez-faire, or let the people do as they freely choose. The social-philosophic doctrine that emerged opposed government interference in economic affairs beyond providing the minimum functions of ensuring peace, administering justice, and providing basic public goods. In the English-speaking world, the laissez-faire doctrine came to be identified with Adam Smith (1723–1790) and in particular the argument for free trade associated with An Inquiry into the Nature and Causes of the Wealth of Nations (1776).
The moral theory aspects of the doctrine of laissez-faire remained in classical political economy, but the economic policy implications came to dominate the debates around the doctrine. The idea of economic freedom and limited government would be developed in the century after Adam Smith by Jeremy Bentham (1748–1832), J. B. Say (1767–1832), Frédéric Bastiat (1801–1850), and John Stuart Mill (1806–1873). Even as Mill made an explicit case for exceptions to the laissez-faire principle in economic life, he argued that “laisser-faire, in short, should be the general practice: every departure from it, unless required by some great good, is a certain evil” (Mill  1976, p. 950).
From the beginning, however, critics of laissez-faire attempted to paint a picture of extremism and lack of concern for the least advantaged in society. This characterization of the position was immortalized by Charles Dickens’s (1812–1870) portrayal of Scrooge (a thinly veiled depiction of Herbert Spencer [1820–1903]) and the claim that rather than give aid to the poor we should allow the surplus population to decline naturally. But as Jacob Viner (1892–1970) pointed out in his “The Intellectual History of Laissez Faire,” only “unscrupulous or ignorant opponents of it and never its exponents” used the term laissez-faire to mean a position of “philosophical anarchism, or opposition to any governmental power or activity whatsoever” ( 1991, p. 200). Instead, the term laissez-faire as used by its systematic exponents meant freedom of choice and trade and a limitation on the scope of governmental activities to defense against foreign powers, establishment of a system of justice to prevent members of the society from oppressing others in that society, and the maintenance of essential public works and institutions. Laissez-faire, Frank Knight (1885–1972) declared, “simply means freedom, in the particular case of economic policy: freedom of economic conduct from dictation by government” ( 1999, p. 435).
The nonsubtle reading of laissez-faire argues that the position is claiming that the individual pursuit of self-interest is enough to realize a benevolent social order irrespective of the social rules of interaction that are in place. In fact, the critics read the doctrine as insisting that there is an absence of governance, rather than just limits on the scope of government. In this regard, advocates of the doctrine of laissez-faire are accused of being unreasonable and doctrinaire. F. A. Hayek (1899–1992), in fact, argues that nothing has done more harm to the cause of economic liberalism than a “wooden insistence” on the principle of laissez-faire (1945, p. 17). A more nuanced and appropriate reading of laissez-faire would emphasize the essential role of institutions of governance (though not necessarily provided only by government) in explaining how a benevolent social order can result from individuals freely choosing.
Critical to understanding the defense of the doctrine of laissez-faire are two subsidiary arguments. First, the defender of laissez-faire must present a demonstration through the logic of economic analysis of the “invisible hand” proposition (see, e.g., Nozick 1974, pp. 18–22). Second, the defender of laissez-faire will proceed to conduct a comparative analysis (both theoretical and empirical) of market versus governmental decision-making within the sphere of economic affairs (see, e.g., Buchanan and Tullock 1962). The combination of these two subsidiary arguments, often alongside a moral stance derived from natural law theory, can be found in almost any presentation of the laissez-faire position from Smith to Hayek, from Bastiat to Milton Friedman (1912–2006).
As Viner pointed out in his essay “Adam Smith and Laissez Faire,” even when Smith “was prepared to admit the system of natural liberty would not serve the public welfare with optimum effectiveness, he did not feel driven necessarily to the conclusion that government intervention was preferable to laissez faire. The evils of unrestrained selfishness might be better than the evils of incompetent and corrupt government” (Viner  1991, p. 104). In order to justify intervention, Smith argued, one would have to demonstrate not only that individuals freely choosing would not advance the public welfare, but also that government officials would be in a position to know better what was in a man’s interest than he would be himself. This was a position that Smith vehemently refused to concede in the realm of economic affairs. As Smith put it:
The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would no-where be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. (Smith  1976, bk. IV, chap. 2, p. 478)
On the other hand, the individual from the vantage point of his local situation is in a better position to judge what is the best course of action for himself. Smith, it is important to stress, did not presume that acting self-inter-estedly was enough to ensure a benevolent social order. Self-interest is what guides the statesman to overburden himself; it is also what leads to Oxford dons not satisfying the educational demands of their students (Smith  1976, bk. V, chap. 1, p. 284) and to teachers of religious doctrine being less zealous and hardworking in the state-supported religious sects as compared to those sects that rely solely on voluntary contributions (bk. V, chap. 1, p. 309). Self-interest also leads the businessman to conspire with his competitors to set prices (bk. I, chap. 10, p. 144) and to seek out protection from foreign competitors (e.g., bk. IV, chap. 2, pp. 489–490). It is self-interest that is behind the sophistry of the merchants and the manufacturers in the quest for monopolistic status, just as it is self-interest among professors and preachers when they seek secure incomes and protection from competitors in the instruction of philosophy and religious doctrine.
Self-interest is also what drives the refinements in the division of labor, the coordinative activities of an economy guided by relative price movements, and the innovations of the entrepreneur. Self-interest is not unique to laissez-faire, but a regime of laissez-faire (within the specified institutions of natural liberty) will channel self-interest in a direction that will maximize the likelihood of a social order of peace and prosperity. When the institutions of natural liberty are absent, or government attempts to thwart their development, Smith’s claim was that tyranny and poverty would result. As he put it in the notebooks that preceded the Wealth of Nations :
Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel or which endeavor to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical. (Smith  1976, p. xl)
The laissez-faire doctrine would latter become identified with the harmony of interest doctrine, a doctrine that claimed that the competing interests of individuals could be reconciled through the market mechanism. The proposition is actually older than Smith, and can be traced back to Voltaire (1694–1778). In the sixth of his Letters Concerning the English Nation, Voltaire discusses how even passionate warring factions can be reconciled through commerce:
Take a view of the Royal Exchange in London, a place more venerable than many courts of justice, where the representatives of all nations meet for the benefit of mankind. There the Jew, the Mahometan, and the Christian transact together, as though they all professed the same religion, and give the name of infidel to none but bankrupts. There the Presbyterian confides in the Anabaptist, and the Churchman depends on the Quaker’s word. At the breaking up of this pacific and free assembly, some withdraw to the synagogue, and others to take a glass. This man goes and is baptized in a great tub, in the name of the Father, Son, and Holy Ghost: that man has his son’s foreskin cut off, whilst a set of Hebrew words (quite unintelligible to him) are mumbled over his child. Others retire to their churches, and there wait for the inspiration of heaven with their hats on, and all are satisfied. (Voltaire  1994, pp. 29–30)
This doux-commerce thesis, which argued that commerce was a civilizing influence on humanity, has been identified with Montesquieu (1689–1755) and Voltaire, and then received its systematization in the works of David Hume (1711–1776) and Smith. It is very much a part of the underlying argument for the laissez-faire doctrine. Understanding the logic of this argument and its implications came to be synonymous with becoming an economist or a classical political economist.
Critics of the laissez-faire doctrine emerged from the beginning and tended to focus on variants of the following arguments through the years:
- Poverty traps that cannot be escaped through free choice.
- General glut that results from overproduction or underconsumption.
- Monopoly power that emerges naturally in the market and allows businesses to exploit consumers.
- Exploitation of the working class that pushes wages down to subsistence and compels laborers to work in harsh and unsafe conditions.
- External economies that generate situations where desirable goods are underproduced on the market, and undesirable goods are overproduced on the market.
- Public goods that are not supplied by the market due to free-rider problems.
Beginning in the late nineteenth and continuing throughout the twentieth century, a stream of economic schools of thought rose to challenge the presumption for laissez-faire. In fact, the American Economic Association was formed by economists who were decidedly non-laissez-faire thinkers, but instead were government reformers and activists. Laissez-faire was identified in their minds with an economic policy of noninterventionism, which meant that the social ills of monopoly, unemployment, inequality, and exploitation would go unchecked. The institutional school of Thorstein Veblen (1857–1929), John Commons (1862–1945), and Clarence E. Ayres (1891–1972) was critical of the laissez-faire doctrine. John Maynard Keynes (1883–1946) declared “The End of Laissez Faire” in the 1920s, and the development of Keynesian economics in the 1930s and 1940s transformed the discipline of economics from one that sought philosophic understanding to one that provided tools for social control. Mid-century arguments for market socialism and market failure theory added to the dismissal of the presumption for laissez-faire that was in the classics from Smith to Mill. And the arguments against laissez-faire from Karl Marx (1818–1883) to Paul Samuelson relied on some version of the six critiques listed above. Even the most sophisticated modern criticisms of laissez-faire (e.g., asymmetric information, network externalities, or behavioral irrationalities) rely on a variant of these basic criticisms that have been leveled since the beginning of the history of the idea.
The argumentative strategy of the opponents of laissez-faire usually took the form of: (1) characterization of the laissez-faire position as based on unrealistic assumptions concerning man (e.g., atomistic and hyperrationality); (2) depiction of reality that highlighted deviations from what would be theoretically optimal (e.g., deviations from marginal cost pricing); and (3) a willful ignoring of the costs of decision-making when government is called upon to serve as a corrective to social ills.
During the twentieth century, three figures emerged as the heirs to Adam Smith and the defenders of the laissez-faire doctrine—F. A. Hayek (1974 Nobel Prize in Economics), Milton Friedman (1976 Nobel Prize in Economics), and James Buchanan (1986 Nobel Prize in Economics). Keep in mind what was argued in the beginning of this entry concerning Smith’s argument—that there were two intellectual moves in the laissez-faire argument: first, the invisible hand; second, the comparative analysis on nonmarket decision-making. Hayek, Friedman, and Buchanan argued that more often than not the breakdown of the invisible hand was a consequence of governmental policy that had previously not been considered by the critics of laissez-faire. Adam Smith, they reminded everyone, did not argue that self-interest under any conceivable set of circumstances would produce a beneficial social order. Self-interest within a system of clearly defined and strictly enforced property rights could be relied upon to channel self-interest to serve the public welfare, but if property rights are unclear or weakly enforced, self-interest may very well produce undesirable outcomes. The tragedy of the commons, in other words, is not a challenge to Smith (or Hayek, Friedman, and Buchanan) but a confirmation of their basic insight into how the “invisible hand” works. Second, even if the market order failed to produce the best of all possible outcomes (as it inevitably always did at any point in time), the critic must not leave the costs of governmental decision-making unexamined (including unintended and undesirable consequences). The standard twentieth-century argument for interventionism presumed both that the government possessed the knowledge to solve the problem, and that the decision process was relatively costless because the government actors were acting as economic eunuchs. Works such as Hayek’s The Road to Serfdom (1945) and The Constitution of Liberty (1960), Friedman’s Capitalism and Freedom (1962) and Free to Choose (1980, with Rose Freidman), and Buchanan’s The Limits of Liberty (1975) and Democracy in Deficit (1977, with Richard Wagner) challenged the government as corrective presumption, and helped forge a revitalized case for laissez-faire in the late twentieth century.
In the narrative on laissez-faire just constructed, little reference was made to the actual historical record for the simple reason that such a discussion would require multiple entries. The critics of laissez-faire attribute the late nineteenth-century robber barons, the miserable working conditions of the poor in early twentieth century, the Great Depression, and the bigotry of racial segregation to laissez-faire capitalism. The defenders of laissez-faire, on the other hand, reject each of these interpretations and attempt to show either that the root cause of the problem was government interference with the competitive process or that the competitive forces of the economy were in fact alleviating the problem at the time that government stepped in to claim credit for easing social tension. One side sees market forces as ameliorating social ills and reconciling conflicts, while the other side sees the market as augmenting social ills and aggravating conflicts. This has been an ongoing argument for three centuries, and it does not appear to be resolvable in a clear-cut empirical manner. Instead, the debate turns on analytical arguments, empirical evidence and counterevidence, and explicit or implicit moral judgments.
SEE ALSO Austrian Economics; Bentham, Jeremy; Capitalism; Competition; Economics, Classical; Free Trade; Government; Hayek, Friedrich August von; Liberty; Market Fundamentals; Markets; Mill, John Stuart; Natural Rights; Naturalism; Physiocracy; Smith, Adam; Social Statics
Buchanan, James M. 1975. The Limits of Liberty: Between Anarchy and Leviathan. Chicago: University of Chicago Press.
Buchanan, James M., and Gordon Tullock. 1962. The Calculus of Consent: Logical Foundations of Constitutional Democracy. Ann Arbor: University of Michigan Press. Buchanan, James M., and Richard E. Wagner. 1977. Democracy in Deficit: The Political Legacy of Lord Keynes. New York:Academic Press.
Friedman, Milton. 1962. Capitalism and Freedom. Chicago: University of Chicago Press.
Friedman, Milton, and Rose Friedman. 1980. Free to Choose: A Personal Statement. New York: Harcourt. Hayek, Friedrich A. 1945. The Road to Serfdom. Chicago: University of Chicago Press.
Hayek, Friedrich A. 1960. The Constitution of Liberty. Chicago: University of Chicago Press.
Keynes, John Maynard. 1926. The End of Laissez Faire. London: Hogarth.
Knight, Frank H.  1999. Laissez-Faire: Pro and Con. In Selected Essays by Frank H. Knight, ed. Ross Emmett, vol. 2. 435–453. Chicago: University of Chicago Press.
Mill, John Stuart.  1976. Principles of Political Economy New York: Kelley.
Nozick, Robert. 1974. Anarchy, State, and Utopia. New York:Basic Books.
Smith, Adam.  1976. An Inquiry into the Nature and Causes of the Wealth of Nations. Chicago: University of Chicago Press.
Viner, Jacob.  1991. Adam Smith and Laissez Faire. In Essays on the Intellectual History of Economics, ed. Douglas Irwin, 85–113. Princeton, NJ: Princeton University Press.
Viner, Jacob.  1991. The Intellectual History of Laissez Faire. In Essays on the Intellectual History of Economics, ed. Douglas Irwin, 200–225. Princeton, NJ: Princeton University Press.
Voltaire.  1994. Letters Concerning the English Nation. Ed.
Nicholas Cronk. Oxford: Oxford University Press.
Peter J. Boettke
Laissez-faire, literally "leave alone," constituted the core doctrine of classical economics that there should be minimal government intervention in economic affairs. According to this theory, an economy operating under a system of free competition will tend to produce at maximum capacity with the result that labor and other resources of production will be fully utilized. Its adherents also contended that recession was a temporary, self-correcting situation. They reasoned that when unemployment rose, wages and prices fell, with the consequence that the real supply of money in the economy grew, which in turn would eventually generate economic expansion.
The political corollary of laissez-faire held that the best government was the one that governed least. This view enjoyed its heyday during the industrial revolution of the late nineteenth century (though it did not preclude protective tariffs). Its last hurrah in the 1920s reflected the view that government had grown too large as a result of progressive regulatory expansion and wartime economic controls. Moreover, big business—once the progressives' whipping boy—had regained popular esteem through its war production success. Getting government off the back of business therefore became a primary goal of the Republican administrations of Warren Harding and Calvin Coolidge.
Though they could not dismantle the progressive state, Harding and Coolidge (just as Ronald Reagan did later) named conservatives unsympathetic to regulation to head the Interstate Commerce Commission, the Federal Reserve Board, and the Federal Trade Commission (FTC). Republican fiscal policy, guided by Secretary of the Treasury Andrew Mellon, also reaffirmed traditional principles. Though federal spending was not reduced to prewar levels, every 1920s budget was balanced, ending a period of regular deficits that stretched from 1894 to 1919. The national debt, which had risen from $1.2 billion in 1916 to $25.5 billion in 1919, was reduced to $16.2 billion by 1930. Finally, convinced that the 1920 to 1921 recession was attributable to the Wilson administration's high taxes, the Republican governments practiced trickle down economics to justify tax reductions that principally benefited business and the well-to-do as being necessary for the entire economy's good.
In contrast to other Republican leaders, Herbert Hoover had no truck with what he dubbed "the eighteenth century thesis of laissez-faire." As Secretary of Commerce from 1921 to 1929, Hoover made this hitherto minor agency into the most dynamic federal department in the 1920s by promoting its economic planning and coordination capabilities. When the Depression hit, Hoover's brand of progressive conservatism allowed him to become the first president in American history to exercise federal leadership in such an emergency.
On Hoover's recommendation, Congress reduced personal taxes and increased public works appropriations in 1930 and later enacted measures to underwrite credit to farmers, homebuyers, and banks. Hoover's most significant initiative in this regard was the creation in January 1932 of the Reconstruction Finance Corporation, which was initially empowered to extend federal loans to banks and other financial institutions and later authorized to loan funds for self-liquidating state and local government public works. Nevertheless, his activism was constrained by concern to preserve the ethos of free enterprise and self-help that he regarded as fundamental to American individualism. Being convinced that there was no major flaw in America's domestic economy—he denied there was maldistribution of wealth and blamed the severity of the downturn on world conditions—Hoover was determined not to spur the irreversible growth of big government. Accordingly he would not use compulsion to restrict business wagecutting practices and manifested a flinty attitude towards unemployment and farm relief. His anti-Depression programs were largely indirect, involved recoverable outlays (such as loans), and did not entail permanent expansion of the federal budget. As a result they were utterly insufficient to compensate for the catastrophic decline in the private economy.
Hoover's presidential policies represented a pre-modern transitional phase between old-style laissez-faire and New Deal interventionism. His party had little option in the face of Roosevelt's immense first-term popularity but to move further away from its traditional orthodoxy. Some die-hard conservative Republicans and renegade Democrats (including former presidential candidates Alfred E. Smith and John Davis) joined the American Liberty League, created by wealthy businessmen, to demand the restoration of laissez-faire, but its stand hurt the Republican cause in the 1936 elections. By then the bulk of the party recognized the need for some accommodation with the New Deal. The 1936 Republican platform condemned unemployment insurance, old-age pensions, the Wagner Act, and deficit spending, but accepted other Roosevelt policies, including the farm program, federal work relief, and regulation of the financial sector. Even when Roosevelt's popularity declined in the second term, mainstream conservatives did not wholly revert to laissez-faire. The Conservative Manifesto of 1937, a statement of bipartisan congressional conservatism, demanded lower taxes, less spending, and balanced budgets to restore business confidence but accepted unemployment relief (provided it was not politicized and permanent) and government programs that did not harm or compete with private enterprise (the farm program and large scale public works were acceptable, public utility development was not). Business groups like the National Association of Manufacturers and the Chamber of Commerce also railed against New Deal taxes and deficits. Nevertheless, it was evident by the late 1930s that political and economic debate no longer centered on whether government should intervene in the economy but on the extent to which it should do so.
No Western democracy pursued such a wide-ranging program as the New Deal in the face of the 1930s Depression, but none pursued a wholly laissez-faire approach. In the United Kingdom, the national government rejected New Deal-style public works for expenditure retrenchment and tax increases to balance the budget (which it did from 1934 onward). However, old-age pensions, unemployment compensation, and housing assistance programs were already established in Britain. French governments of the 1930s eschewed macroeconomic activism but some intervened in other ways, especially to improve workers' conditions. It was the need for postwar economic reconstruction that compelled the final abandonment of classical economic doctrine in Western Europe.
Hawley, Ellis W. The Great War and the Search for a Modern Order: A History of the American People and Their Institutions, 1917–1933. 1979.
Hoff, Joan. Herbert Hoover: Forgotten Progressive. 1975.
Kindleberger, Charles P. The World in Depression: 1929–1939, rev. edition. 1986.
Savage, James D. Balanced Budgets and American Politics, 1986.
Stein, Herbert. The Fiscal Revolution in America. 1969.
LAISSEZ-FAIRE, a French term that translates loosely as "let things alone," originated in the eighteenth century with a school of French economists, known as the Physiocrats, who opposed trade restrictions that supported older economic systems such as mercantilism. Adam Smith, an eighteenth-century Scottish economist, popularized the term and gave it added influence in later economic thought. He argued that a society's economic well-being and progress are assured when individuals freely apply their capital and labor without state intervention. The theory holds that individuals act out of self-interest and that self-interested action will benefit the larger community's general well-being. Proponents of laissez-faire reject state intervention through measures such as protective social legislation and trade restrictions, viewing them as socially injurious. The doctrine of laissez-faire involves not only a negative social policy of nonintervention but also a positive philosophy that recognizes a harmony between individual and social interests.
The United States has never adhered unconditionally to this doctrine, either theoretically or practically. Tariffs, components of American trade policy almost since the country's independence, contravene the principle of individualism expressed in the doctrine of laissez-faire. Antitrust legislation such as the Sherman Antitrust Act (1890) and the Clayton Act (1914) similarly violate laissez-faire principles. Numerous examples of protective labor legislation, such as minimum-wage laws, workers' compensation statutes, hours legislation, and social security laws, belied professed allegiance to laissez-faire principles during the first half of the twentieth century. Since World War II, only a small minority of Americans have espoused laissez-faire theories.
Bensel, Richard Franklin. The Political Economy of American Industrialization, 1877–1900. Cambridge, U.K.: Cambridge University Press, 2000.
Weiss, Thomas, and Donald Shaefer, eds. American Economic Development in Historical Perspective. Stanford, Calif.: Stanford University Press, 1994.
Gordon S.Watkins/s. b.
While the notion of laissez-faire is usually associated with the decline of the medieval and mercantilist economic regimes, it has an enduring modern counterpart, or legacy, in the views of the neo-classical and new classical economists, who may use different terminology, but whose essential view is that individual freedom to function within untrammelled markets, with little involvement from government, represents the best type of economic organization. Variations of this position are found in monetarism, public choice theory, and the belief of some new classical economists that involuntary unemployment does not exist. All these strands of thought assert the right of the individual and depict state involvement in the economy as ineffectual or malign. See also free trade.
Clive H. Lee
lais·sez-faire / ˌlesā ˈfe(ə)r; ˌlezā/ • n. a policy or attitude of letting things take their own course, without interfering. ∎ Econ. abstention by governments from interfering in the workings of the free market: [as adj.] laissez-faire capitalism. DERIVATIVES: lais·sez-faire·ism / ˈfe(ə)rˌizəm/ n.
The remark ‘Laissez-nous-faire [Allow us to do it]’, dated c.1664, is recorded in a source of the mid 18th century, as a reply to the French statesman Jean Baptiste Colbert (1619–83), who had asked what could be done for commerce. The expression became particularly associated with 18th-century political economists, as d'Argenson and Quesnay.