laissez-faire economics

An approach to economics that asserts the importance of the free, competitive market of individual suppliers and individual purchasers to the efficient production, distribution, and allocation of goods and services as well as to the maximization of individual choice, and emphasizes the need to keep state regulation to a minimum. Current laissez-faire economic theorizing has its origins in the work of the classical economists, such as David Ricardo, Thomas Malthus , and Adam Smith at the end of the eighteenth and beginning of the nineteenth century. InThe Wealth of Nations (1776) Smith, for example, argued that though individuals in the market would pursue their own self-interest, the market's ‘invisible hand’ would lead to the realization of the common good.

In the twentieth century, the slump of the 1930s was followed by a period in which Keynesian economics , with its emphasis on state intervention and the value of public spending as a means to reduce unemployment, were dominant. An increasingly mixed economy , combining public and private enterprise, was developed. However, since the end of the 1970s, following the state's fiscal crisis and the increasing influence of New Right philosophies, laissez-faire economics is now once more in the political foreground, with writers such as Friedrich A. Hayek (The Road to Serfdom, 1944) and Milton Friedman (Capitalism and Freedom, 1961) providing inspiration. The result has been an increasing privatization of state activities and a return to an all-pervasive market economy. However, despite its impact on government policies, the criticisms of laissez-faire theorizing are powerful, not least because actual markets bear so little relation to the theorists' idealized models of rational, atomized individuals making choices in the market. In the real world, markets are beset by so-called imperfections: there are often monopolies of supply, imperfect information, few purchasers, external constraints, and so forth. Moreover, individuals' preferences are shaped and limited by culture and social norms, so reducing choice. The idea of efficient, let alone equitable, allocation via the market is something of a chimera: it functions far more effectively as myth than reality. See also liberalism ; Mont Pelerin Society, The.