Laissez-faire

Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT

Meaning

Laissez-faire (French for "let do" or "let it be") is the belief that the state should interfere in the economy as little as possible. Prices, production and trade are left to free markets. The state keeps only a few basic duties, such as defence, justice and some public works.

It matters because it is one answer to the basic question every school of economics asks: should the market decide, or the state? Mercantilism, the classical school, Keynes (1936) and Indian planning since 1950 can all be placed by how close they stand to laissez-faire or how far they move from it.

Explanation

Where the idea came from

• The physiocrats (France, 1750s–70s) first used the idea as a policy slogan.
• Their slogan was "Laissez faire, laissez passer": let things be made, let goods pass. In plain words, it meant free trade and fewer rules.
• Quesnay wanted free trade and lower taxes [2].

• They wanted trade and industry left to follow their natural course. Because of them, faith in mercantilism began to fade in the 18th century [3].

• The physiocrats were reacting against mercantilism, the 16th–18th century system in which the state led the economy.

• Mercantilists used tariffs (taxes on imports), bans on exporting raw materials, colonies and chartered monopoly companies (firms given sole trading rights by the Crown).

• Laissez-faire says the state should stop doing all of this.

• Adam Smith met Quesnay and Turgot in France in 1764–66. He took the free-trade idea from them and made it popular in Wealth of Nations (1776).

• The phrase came from the physiocrats. Smith made it famous, but he did not coin it.

Why the classical school trusted the free market

• Self-interest works for society. Smith's butcher-brewer-baker line says people seek their own gain, and society still gets fed.
• The invisible hand clears markets on its own.
• excess demand (buyers want more than sellers offer) → price rises
• excess supply (sellers offer more than buyers want) → price falls

• this goes on until demand = supply (market equilibrium), with no need for a state order

• Say's law (J.B. Say, 1803): "supply creates its own demand".

• Producing goods creates incomes. People spend those incomes, so all output finds buyers.
• So there can be no general glut (overproduction across the whole economy).

• Because of this, the classical school believed a free market settles at full employment by itself. On that view, the state has no need to step in.

• Free trade helps both sides. Smith's absolute advantage and Ricardo's comparative advantage showed that trade is positive-sum. Mercantilists had seen it as zero-sum, where one nation gains only if another loses.

Worked example: why laissez-faire favours free trade

Ricardo's example, in labour-years needed to make one unit:

	Wine	Cloth
Portugal	80	90
England	120	100

• In Portugal, 1 wine costs 80/90 = 0.89 cloth. In England, 1 wine costs 120/100 = 1.2 cloth.
• So Portugal should make wine and England should make cloth, then trade. Both gain.
• A mercantilist state would put tariffs on imports to protect home industry. Laissez-faire says to let goods pass, and then both countries are better off.

What the state still does: Smith's three duties

• Laissez-faire does not mean having no state. Smith gave the state three duties: 1. Defence: protect society from foreign attack 2. Justice: protect each person from injustice by others 3. Public works and institutions that no private person would profit from building (roads, bridges, basic education)

• Critics mocked this limited role as the night-watchman state, meaning a state that only runs the police, courts and defence. The phrase is linked to the German socialist Ferdinand Lassalle.

Why support for it rose and fell

• It rose with industrialisation (late 18th–19th century). Markets were expanding and the state-led mercantilist system was losing trust.

• Ricardo attacked the Corn Laws (British import duties on grain). They were repealed in 1846, a win for free trade.

• It weakened from within. J.S. Mill (Principles of Political Economy, 1848) said the laws of production are fixed by nature, but the laws of distribution can be changed by society, for example through taxes. This made room for a bigger state.

• It was challenged after the 1930s depression. Keynes (1936) rejected Say's law.
• people hoard their savings → demand falls short → firms cut output → workers lose jobs
• so the market may not reach full employment on its own, and the state must step in

In India

• Colonial era: the opposite of laissez-faire. The East India Company (1600) was a chartered monopoly, which is mercantilism in action. India was made to export raw materials and buy finished British goods. Its export surplus paid for British expenses. This outflow is called the drain of wealth.
• 1950–90: the state led. The Mahalanobis model and import substitution (making at home what was earlier imported) protected infant industries behind tariffs. Critics compare this with mercantilist protection.
• 1991 reforms: a move towards laissez-faire. Liberalisation brought India closer to Smith's idea of free markets and free trade.
• But India is not a pure laissez-faire economy.
• It keeps Smith's three duties (defence, justice, public works).
• It adds a large welfare role, which comes from utilitarian welfare economics ("the greatest happiness of the greatest number").
• Example: the RBI does not leave the rupee fully to the market. It holds forex reserves (foreign currency and gold kept by the central bank) as insurance, to steady the rupee and to pay for imports in a crisis. Reserves stood at US$ 698,192 million (about US$ 698.2 billion) on 25 July 2025 [1].

Don't confuse with

• Mercantilism: this is the opposite doctrine. The state leads, with tariffs, colonies and monopolies, and treats trade as zero-sum. Laissez-faire says the state should step back and let trade be free.
• Invisible hand: this is the mechanism (prices adjust on their own until demand = supply). Laissez-faire is the policy built on it (so the state need not interfere).
• Night-watchman state: this is a critics' mocking label for the minimal state, linked to Lassalle. Laissez-faire is the doctrine itself.
• Keynesianism: Keynes (1936) argued that markets can get stuck in unemployment, so the state must manage demand. Laissez-faire assumes full employment through Say's law.

Prelims Hooks

• The phrase "Laissez faire, laissez passer" is a physiocratic slogan (France, 1750s–70s). Smith popularised the idea, but the phrase did not start with him.
• Smith gave the state only three duties: defence, justice, public works. Trap: "the state has no role at all" is wrong.
• Night-watchman state is a phrase linked to Ferdinand Lassalle, a critic of laissez-faire. It was not coined by Smith.
• Laissez-faire rests on Say's law (1803: "supply creates its own demand", so there is no general glut). Keynes (1936) rejected it.
• Wealth of Nations was published in 1776. The phrase "invisible hand" appears only once in it.
• Quesnay (physiocrat) wanted free trade and lower taxes [2]. Mercantilism's decline began with the physiocrats [3].

Mains Points

• State versus market in Indian policy (GS-III)
• 1950–90: Mahalanobis model and import substitution (the state leads).
• 1991: reforms move India towards laissez-faire.

• Today India follows a middle path: markets do most of the work, while the state keeps Smith's three duties and adds a welfare role. A good answer argues for balance and does not pick one extreme.

• Free trade versus neo-mercantilism (GS-III)

• Tariff wars and export-led surplus strategies bring back zero-sum mercantilist thinking.
• Laissez-faire and Ricardo's comparative advantage support the WTO view that trade is positive-sum.

• India's reserves of about US$ 698 billion (25 July 2025) [1] are held for safety, not hoarded as wealth. This is a limited, practical departure from pure laissez-faire.

• Limits of laissez-faire (GS-III/GS-II)

• Market failures need the state:
  • public works that no private firm will build
  • mass unemployment in a slump (Keynes, 1936)
  • unfair distribution of income (Mill, 1848)
• The debate today is about how much the state should do, not whether it should do anything.

Related concepts

• Mercantilism
• Bullionism
• Physiocracy
• Classical economics
• Night-watchman state
• Division of labour
• Labour theory of value
• Say's law
• Malthusian theory of population
• Malthusian trap

Read more

• Mercantilism, physiocracy and classical political economy