March 19, 2018 

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MACROECONOMIC SECTORS: The four aggregate sectors of the macroeconomy--household, business, government, and foreign--that reflect four key macroeconomic functions and are responsible for four expenditures on gross domestic product. These four sectors are the primary "actors" on the macroeconomic stage. Macroeconomic theories then explain macroeconomic phenomena by exploring the interaction among these four sectors.

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The notion that government should not intervene into production, consumption, and exchange activities and that the private sector (households and businesses) should be free to make allocation decisions. Laissez faire is a French term that roughly translates into "allow to act." It has been the rallying cry for many people (primarily business leaders) who oppose government intervention, regulation, or even taxation since it was popularized in the late 1700s by Adam Smith in The Wealth of Nations.
Laissez faire is based on the belief that individual choices and voluntary market exchanges are sufficient to achieve an efficient allocation of resources. It is often used synonymously with the term free enterprise and forms a cornerstone of many conservative economic policies.

The Physiocrats

The laissez faire philosophy entered economic thought with the French physiocrats of the mid-1700s (which might help explain the French origin of the term). The physiocrats, the first "professional" economists, contended that society and the economy operated according to natural laws. Hence all artificial, or government, laws were either redundant or irrelevant.

The laissez faire approach to economic activity was an outgrowth of this overall philosophical view. To the physiocrats government should not, and really could not, alter the natural order of economic activity. This natural order was people acting in their own self interests.

The Book of Smith

The Wealth of Nations, by Adam Smith, hit the economic world in 1776. Not only did The Wealth of Nations provide a comprehensive treatment of economic principles, it also extended the work of the physiocrats to make a strong argument for the efficiency of voluntary market exchanges.

Smith contended that if government would simply allow buyers and sellers to act in their own self interests (laissez faire), then the entire economy would benefit. Markets would achieve efficiency. Competition among buyers seeking a lower price and competition among sellers seeking a higher price would achieve an efficient equilibrium equating the value of goods produced and the value of goods not produced.

Government is not needed in this process. In fact, government intervention by way of price floors, price ceilings, or taxes, merely serves to disrupt the efficient equilibrium.

In large part, Adam Smith was rebelling against the existing merchantilist economic system. With mercantilism, government (that is, the ruling monarchy) was intertwined with most production activities. The purpose of production was to make the monarchy wealthy, which was (at least in the minds of the monarchy) synonymous with a wealthy nation.

Smith contended that the true wealth of the nation resulted when the monarchy extricates itself from production and allowed the producers to act of their own accord, that is, laissez faire.

Free to a Degree

Comparable to many economic notions, laissez faire works fine up to a point. Compared to mercantilism, less government is certainly an improvement. However, taken to the extreme, a totally laissez faire economic system is also bound to come up lacking.

The primary defect in the laissez faire philosophy is the existence of market failures. The principle market failures include:

  1. Public Goods: Goods that are characterized by nonrival consumption and/or the inability to exclude nonpayers.

  2. Market Control: The lack of competition among either buyers or sellers, such that one side of the market or the other can set the price.

  3. Externalities: Costs or benefits that are not reflected in the market demand price or supply price and affect people outside the market.

  4. Imperfect Information: A lack of information about a good or service exchange.
These market failures prevent the equality between the value of goods produced and the value of goods not produced that is needed to achieve efficiency. The persistent existence of market failures means that an economy that operates exclusively by a laissez faire philosophy does not achieve efficiency.

Some critics of laissez faire even go as far as to contend that because businesses benefit from market failures, the laissez faire rallying cry has a not-so-hidden ulterior motive. If businesses are allowed to act without government restraint or oversight, then they will expand their ownership and control over resources, production, income, and wealth. Good for them, bad for others.


Recommended Citation:

LAISSEZ FAIRE, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2018. [Accessed: March 19, 2018].

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