In The Making of Modern Economics: The Lives and Ideas of Great Thinkers, Mark Skousen, the esteemed economic analyst, stated that the Swedes mostly rewarded free-market economists. The Swedish Central Bank started the Prize
Nothing exposes the absurdity of government regulation better than Frederic Bastiat’s satiric article – The Candlemaker’s Petition. This classic describes a petition taken out by candle makers against what they term as an unfair competitor – the Sun itself!
Laissez Faire is a term that finds its etymological roots in the French language, in which it means ‘allowed to do’. Also referred to as ‘let it be’ economics, Laissez Faire refers to a sect of political thought that does not favor political interference in private sector free markets. It was claimed to have first been first coined by Marquis D’Argenson, who was to later become Louis XV’s foreign minister during the Austrian War, in his work titled Memoires, published in 1736.
Various political groups throughout American history have made it their clarion call, right from Thomas Jefferson to recent political leaders such as Ron Paul.
Also known as delegative leadership, laissez-faire leadership is a ‘hands off’ form of leadership, in which the leader believes in freedom of choice for his team. The leader provides minimal direction to the team and delegates most responsibilities to members, allowing them to take decisions. Under this form of leadership, the team has complete freedom to carry out tasks and projects.
Is the Term Laissez-Faire Leadership an Oxymoron?
Laissez-faire leadership seems to be an oxymoron, since the two words – laissez-faire and leadership appear to be absolute opposites. While laissez-faire (a French term) means non-interference, leadership is about giving direction and ensuring everyone is performing to the best of their abilities. Then how can these two words be used together to form a management style?
Providing direction, guidance or mentorship does not necessarily curtail freedom. When Mahatma Gandhi or Winston Churchill motivated multitudes to attain seemingly impossible feats, they were not using force or regulations. They were getting buy-ins. This is exactly what laissez-faire leadership is all about. Laissez-faire leadership is not easy and can go terribly astray if not understood in its entirety or implemented correctly. It needs a strong leader who can develop a vision, get buy-ins from the team towards the vision and establish processes that highlight whether the team’s activities and achievements are in sync with the larger picture. Laissez-faire leadership is about inspiring and motivating people, but most importantly it is about empowering people to set goals within the larger picture and achieve their best.
Characteristics of Laissez-Faire Leadership
Lewin, Lippitt, and White were among the early researchers to consider behavioral characteristics as the parameter to categorize leadership styles. The basic characteristics of laissez-faire leadership are:
- Minimal guidance or supervision from the leader
- Absolute freedom of decision making to team members
- Team members solve problems on their own, without much involvement of the leader
- Resources are at the disposal of the team to be used to achieve goals
This form of leadership relies heavily on the competence of the team members.
Benefits of Laissez-Faire Leadership
The Laissez-faire form of leadership can prove to be highly advantageous, if executed correctly:
- Laissez-faire leadership instills a higher sense of responsibility among team members.
- This form of leadership exposes team members to tough business situations, helping them to gain more experience and grow faster.
- Laissez-faire leadership keeps team members aware of and continuously working towards the larger picture.
- This form of leadership can boost the commitment of team members to achieve the desired goals.
- Minimal intervention by leaders can also bring out the best in members, encouraging greater innovation and out-of-the-box initiatives.
Shortcomings of Laissez-Faire Leadership
If not understood and implemented correctly, laissez-faire leadership can damage and destroy an organization. Here are some of the things one should be aware of when considering this form of leadership:
- If team members do not have adequate experience or the required skills, the achievement of targets may be at great risk.
- Important decisions that need to be taken at short notice can go horribly wrong.
- If people are not self driven and disciplined, laissez-faire leadership can lead to a great deal of inefficiency.
- The team may become prone to repeating mistakes and may fail to get out of problems that they encounter during a project.
- Team members may get off track and may not prioritize correctly.
Scenarios Where Laissez-Faire Leadership can Work
Under certain scenarios this form of leadership can foster positive results.
- Strong Leadership: The prerequisite for laissez-faire leadership is having a strong leader, with a proven track record of success.
- Team Members Having Expertise: If there are subject matter experts as part of the team, this form of leadership can thrive.
- Entrusting Responsibilities to Senior Members: The final decision makers can entrust senior members to lead their teams. This should happen in the presence of proper communication. Such initiatives can relieve the top management of everyday decision making, enabling them to focus on the bigger picture and larger issues.
- Regular or Everyday Tasks: The responsibility of routine tasks can be transitioned to the team. Businesses must identify tasks and projects that can be managed by the team, depending on the complexities involved and the expertise of the team members. This helps both the individual and the company by instilling confidence and accountability among team members.
For laissez faire leadership to be truly beneficial, the leader needs to first build a team of efficient and skilled performers, who are capable of comprehending the bigger goals and can perform without stringent supervision. The leader can be a source of guidance in setting the mission and the broad strategy. He must trust his team members and inspire them to do their best.
Finally, one of the most important factors crucial for this form of leadership is accountability. Everyone taking decisions must be accountable for all the actions and steps adopted. Being a complex form, only a ‘true’ leader, with the right team, can master laissez faire leadership.
Which kind of economy would you vote for – a laissez-faire market or a planned economy? My vote is for free markets.
The term ‘laissez-faire’ implies “leave it alone”. The essential traits of such as system usually are freedom to establish a business of one’s choice, no price controls and governmental function limited to that of a ‘watchman’. This entails respect for private property, the society is protected against internal lawbreakers, disputes are settled peacefully and people’s rights are upheld.
Compare Nepal with Switzerland and you will realize that though both are landlocked, one is controlled, repressed with no rule of law and poor the other is open, freer and has a rule of law. One starves the other fasts.
Laissez-Faire System and Economic Growth
A laissez-faire system gives individuals immense incentive to create wealth and this, in turn, works well for the economy. The working of this kind of a system is simple –understand the need or demand of the masses and produce the product. If you want to be richer or better off than your competition, you have to be a pioneer. Innovation, speedy implementation and affordability are held in high regard in a free market economy.
In a laissez-faire economy, you cannot produce substandard products, cheat your clients or even steal from your employees. Your competition will take over the market at the slightest hint of fraudulence on your part. Constant competition boosts efficiency and lowers costs. People work hard as rewards and penalties are meted out immediately and swiftly. In this way, the market promotes peaceful commerce and encourages excellence.
Take the example of cell phones. If you remember the first ones which came out – they were bulky, awkward and had faulty reception. I remember the first one costing almost USD 5000. Look what competition between Nokia, Samsung, Motorola and now Apple has given to us. Even as these companies made billions they enriched all of us constantly giving us a better product at great prices.
People endeavor to gain technical knowledge and industry skill as the market broadens. The forces of production undergo speedy development. New opportunities for making profits attract foreign investment. A huge variety of goods are made available. Laissez faire or capitalism feeds, clothes and facilitates bigger and better standards of living as compared to any other system.
Planned economies, where the government has the last say, are also the ones that are the poorest in terms of wealth. It is a fact that people work harder and better when they work for themselves than when they have to do it for the government. The sad part is that the adoption of a laissez-faire system is not widespread. Government power to boost the pace of growth has a kind of seductive lure and this dominates most economies. The endeavor to further growth through government intervention has more often than not electrocuted developing countries instead of electrifying them. However, did we learn lessons from this?
It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
– Adam Smith (Wealth of Nations, 1776, Vol. I Chapter II.2, p27)
The recent economic crisis showed that we live in a global economy. Economies across the globe are connected so that ups and downs in exchange rates, stock prices and product prices impact every corner of the earth. But, was the recent global crisis caused by the breakdown of the free markets? Can markets be sustained only by the state? This sentence assumes Laissez Faire. No country is even close to it.
The laissez faire philosophy does not support government intervention on matters related to the economy. This obviously implies minimal regulations and taxes and private ownership of property. Laissez faire does not support wealth redistribution. Wealth redistribution involves taking capital from the productive sectors and injecting it into the less productive ones. This forced economic egalitarianism, kills innovation and the incentive to work hard, thereby destroying productivity. Take the former Soviet Union. Its people are brilliant – no other country has chess as a spectator sport. And yet when its rulers tried to make all of us its people they destroyed the country but equality was not achieved.
Even if wealth redistribution leads to the establishment of equality temporarily, this situation would soon collapse. Every individual has different motivation levels, skill sets and qualities. Therefore, their economic choices are bound to differ. Furthermore, economic inequality is essential for people to select their own actions, without any external influences.
Coming back to the crisis… Markets always go through the process of correction. Sometimes the correction is miniscule and at other times it is huge. What happened with the busting of the housing bubble in the US was a market correction. Who caused the bubble? The government rescued Fannie Mae and Freddie Mac and pumped in billions of dollars into the economy. But the US is still reeling under economic pressure. Fannie Mae and Freddie Mac were formed with a charter and special privileges and functioned as an arm of the US government to promote house ownership. They incentivized banks to lend by purchasing all mortgages from the lender banks with no regard as to the capacity of the borrower to repay. Banks merely did what the US government them to do.
The same happens in countries across Asia. Whether it is India, Nepal, Bangladesh, or the rest of SAARC countries, banks are used for political purposes. Government will instruct lending to privity sector – means that lending is directed to areas where the party in power can gain the most. In India it is farmers and businessmen who carry favor and patronage with the political establishment. Bankers are never free to make sound business decisions. In Nepal, political interference results in loans which otherwise never be given. So why blame the US alone.
When next time you think about what caused the monetary crises – remember banking and finance is by far one of the most regulated, centralized sectors of all governments. It is not lack of controls but the regulation and the interference which caused the crises.