3.2.2 Laissez-Faire Capitalism

3.2.2 Laissez-Faire Capitalism

Every day, we make decisions about what we want, what we need, what we can afford, and how we can obtain goods and services. Within our capitalist economic system, most of those decisions are made by individuals who have the economic freedom to make choices.

Historically, this was not always the case. In earlier times in many societies, the strong took what they wanted and the weak suffered. Hereditary rulers inherited power but also wealth and the authority to maintain their wealth. The rich got richer, and the poor struggled. Later, governments had much power over economic systems, preventing individuals and privately-owned companies from making their own decisions. In countries that adopted collectivist ideologies, there was little private property and limited economic freedom. Instead, these countries developed economic systems that valued collective interest and economic equality.

In some parts of the world, including many Aboriginal societies, there is no concept of private property. Land is not considered to be something a person can own.

What is an Economic System?

There are various economic systems, which are the ways a society makes decisions about how its
resources will be used. Some of these decisions include the following:

• Who will decide what goods will be produced?
• How will good and services be produced?
• How will goods and services be distributed?
• How will society deal with unlimited demands limited resources?

Economics is sometimes called the "science of scarcity", the study of the distribution of goods when there are not enough to go around. This does not mean there is not enough food or money to satisfy all mankind's basic needs, but it does mean that there is not enough for everyone to have everything. Economic systems try to satisfy the wants and needs of people by making decisions about the production, consumption, and distribution of goods.

Laissez-Faire Capitalism

The first type of economic system based on classic liberalism was called laissez-faire capitalism.


Also known as economic liberalism, laissez-faire capitalsm  belief in acting in one's ow n self-interest, competition, and the ownership of private property.

Economic systems based on these key principles are called free-market or private enterprise systems. Laissez-faire economists believe that natural laws control the economy and that no one, including the government, should regulate the economy because it works best when left alone.

The government does not have much role in the economy beyond providing rules to govern public safety. Review Adam Smith's ideas in the diagram.

Supply and Demand

In a competitive market, the price of goods is determined by the production balanced with the quantity demanded by consumers; the result is some kind of balance or equilibrium.

You don't need to know the specific economic characteristics, but how supply and demand helps establish prices and relies on individual self-interest and competition between producers for consumers.

The Business Cycle

There are natural ups and downs in production and economic activity over time. Periods of economic growth with general employment, high wages, and wealth creation are followed by periods of recession or depression  in which the economy grows less quickly or even shrinks. Less is produced, unemployment occurs, and people have less money to spend.


History shows that the economy left alone to experience the business cycle booms and busts can severely impact the lives of citizens. This is covered in the next section.