What Is a Limited Government?

A limited government is one where legalized force is restricted through delegated and enumerated authorities. Countries with limited governments have fewer laws about what individuals and businesses can and cannot do. In many countries, a written constitution is used to spell out the powers and limitations of government power. The opposite of a limited government is an interventionist or authoritarian government. In reality, most countries—even those with otherwise high degrees of freedom and liberty—operate with some amount of government control and intervention.

Understanding a Limited Government

The theory of limited government can be traced back to the Enlightenment philosophers of the 17th century, but the idea itself is much older. It is also associated with the free market and classical liberalism, though politicians and economists differ on the exact limitations that a government should have.

In its basic form, a limited government is one whose main function is the protection of people and their property, and it levies just enough taxes to finance services related to these purposes. According to this interpretation, a limited government might tax the population to pay for police or national defense, but it would not concern itself with the beliefs or moral behavior of its citizens.

Another interpretation defines a limited government as one that exercises only the specifically named powers that its constitution assigns to it. It can also be characterized by a separation of powers and a system of checks and balances. For example, the U.S. government is restricted to exercising the specifically named powers that the Constitution assigns to it.

History of Limited Governments

Limited government, in its modern conception, originated out of the classical liberal tradition in Europe. This tradition emphasized the rights of the individual, in contrast to the monarchies and theocratic governments that dominated Europe at that time.

The Magna Carta, drafted in the year 1215, is one of the earliest written descriptions of a limited government. The document limited the reach of the English king's power by giving the country's nobility the rights that they could exercise over the throne. However, the document only protected a small part of what is today the United Kingdom.

The United States Constitution, written in 1787, extended the idea of a limited government by separating the powers of state and federal governments. It also segmented the federal government into three branches: legislative, judicial, and executive. This is intended to make it difficult for any single person or interest group to control the entirety of government power.

In addition, the Bill of Rights—the first 10 amendments to the U.S. Constitution, ratified in 1791—enumerates certain prohibitions that apply to the government. These rights further limit the federal government by prohibiting certain uses of government power.

Limited Governments and the Economy

In economic policy, limited governments seek minimal interventions in trade or commercial activity. They are often associated with concepts such as laissez-faire economics, as first delineated in Adam Smith’s 1776 book entitled "An Inquiry into the Nature and Causes of the Wealth of Nations." In this context, the most extreme sort of limited government would be one that lets supply and demand drive the economy: the government would not intervene to set prices or influence business activity.

Proponents of this view believe that limited government can facilitate economic growth and prosperity by minimizing restrictions on commercial activity. This view—later associated with the Austrian school of economics—holds that government interventions in the economy can distort markets and reduce competition, resulting in shortages or high prices.

Critics of this view believe that the government has an obligation to intervene in the economy, either to support certain industries or reduce wealth inequality. In contemporary economics, this view is frequently associated with John Maynard Keynes, who argued that government spending can actually stimulate economic activity.

Problems With Limited Governments

While many contemporary political thinkers agree that government powers should be constrained, there is considerable disagreement on the exact limitations that government power should have. Many critics argue that government has the ability or obligation to solve collective action problems that cannot be solved by market forces alone.

A common example is the environmental regulations that punish businesses for polluting the air or water. Although individuals can pursue polluting industries through the court system, this solution is out of reach for many potential victims—particularly those who are excluded from the legal system. Instead, the Environmental Protection Agency is expected to penalize these industries on behalf of the public.

Another is the protection of key industries. Many governments use subsidies or tariffs to support domestic agriculture or manufacturing, even though prices would be cheaper on the world market.

Although protectionism sometimes works on behalf of political interest groups, it can also support industries with a strategic or security value. According to this reasoning, the cost of supporting these industries is lower than the cost of not having them—particularly in the event of a major crisis, such as a war or famine.

Limited Government vs. Small Government

It is also possible for a government to be too small. In colloquial usage, the phrase "limited government" is often used interchangeably with "small government"—the idea that governments should impose as few taxes as possible and employ a minimum number of administrators. While these ideas are closely connected, a small government may not necessarily have the resources to protect public interests.

For example, consider a hypothetical country whose taxes are not high enough to pay administrators a competitive salary. In order to make a living, some administrators might resort to graft or bribery, thereby imposing an even greater economic burden than that of taxation.

In fact, research by the World Bank confirms that public-sector salaries play a large part in anti-corruption measures. Based on country data, the Bank concluded that increasing wages could reduce corruption in certain situations when paired with appropriate policies.

Examples of Limited Governments

Since 1996, the Fraser Institute—a Canadian research and educational organization—has produced annual reports ranking countries in terms of how much their policies and institutions are supportive of economic freedom.

It measures limited government by the size of government (top marginal tax rates, public spending), the legal system (protection of property rights, judicial independence), sound money (inflation), freedom to trade internationally (tariffs, trade barriers), and regulation of credit markets, labor markets, and businesses.

The following rankings come from the Fraser Institute’s "2023 Economic Freedom of the World Index" report (“Fraser Index”), which analyzes 165 countries and territories. The 2023 rankings are assessed based on 2021 information.

Hong Kong

Technically an autonomous region of China, Hong Kong was nevertheless ranked second in the 2023 Fraser Index. Hong Kong has always been in the top spot in the Fraser Index due to favorable taxes, freedom to trade internationally, and favorable labor and business market regulations.

Hong Kong's drop from first to second has to do with the new security law imposed by China in 2021. The government's new laws "imposed new and significant barriers to entry, limits on the employment of foreign labor, and increases in the cost of doing business." The decline in Hong Kong has been larger than the world's average decline.

Honduras

Although it was ranked 71 in terms of economic freedom, the Fraser Index ranked Honduras second in size of government—just behind neighboring Guatemala. Honduras had a high score for transfers and subsidies, government investment, and foreign currency bank accounts, balancing out low scores for its legal system.

New Zealand

According to the Fraser rankings, New Zealand was the fourth-freest economy in the world, though it ranked 108 in terms of size of government. The country earned high marks for its legal system and property rights, sound money, and freedom to trade internationally. However, the country scored lower in size of government, largely due to government spending and subsidies.

The Bottom Line

The concept of limited government holds that there should be legal constraints on the power of political authorities, especially with respect to individual rights. The concept is also important in economic affairs, where government intervention may have the effect of disrupting markets and commerce.