What Is a Limited Government, and How Does It Work?

Limited Government

Investopedia / Zoe Hansen

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.

Key Takeaways

  • Limited government describes a political system where government bodies are prohibited from certain activities.
  • In Europe, the concept of limited government gained force during the Enlightenment, but it can be dated back at least to the Magna Carta (1215).
  • Many modern political systems have codified legal rights that cannot be violated by the government, police, or military.
  • In economic policies, limited government is frequently associated with the ideas of classical liberalism and laissez-faire economics.
  • While many theorists support the principle of limited government, there are disagreements on how strong those limitations should be.

Limited Government

Understanding a Limited Government

The theory of limited government can be traced back to the Enlightenment philosophers of the seventeenth 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.

While limited government is frequently associated with the free market, the terms are not interchangeable. There have been many instances of authoritarian governments that were friendly to business interests.

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 it is possible for individuals to 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.


The phrase "limited government" appears to have originated during the reign of James VI & I, King of Scotland, England, and Ireland.

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 2021 Economic Freedom of the World Index (“Fraser Index”), which analyzes 165 countries and territories.

Hong Kong

Technically an autonomous region of China, Hong Kong was nevertheless ranked first in the 2021 Fraser Index, largely because of its low barriers to trade and foreign investment. Hong Kong also has low tax rates and relatively lax labor protections.

It should be noted that the Fraser Index places significantly more importance on economic freedom than political freedom. In 2019—the year that the 2021 data were based on–Hong Kong was also the site of fierce crackdowns, including arbitrary arrests and deportations. Nonetheless, the Fraser Institute ranked Hong Kong first in economic freedom.


Although it was ranked 70th 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 its monetary policy and minimal interventions in the economy, balancing out low scores for its legal system.

New Zealand

According to the Fraser rankings, New Zealand was the third-freest economy in the world, though it ranked 92 in terms of size of government. The country earned high marks for allowing freedom of trade, business-friendly regulations, and its legal system. However, the country scored lower in size of government, largely due to government spending and subsidies.

How Is Federalism Connected to the Idea of Limited Government?

Federalism refers to a political system that delegates certain powers to local or provincial bodies. In a federalist system, local governments may have their own legislature, courts, tax authority, and other functions of government. In some cases, they may also have the power to secede from the central government.

How Does the Constitution Reflect the Principle of Limited Government?

In the United States, the constitution divides the government into three separate branches, with separate powers and constraints. All three must work together to enact new policies and laws. At the time the constitution was written, it was considered unlikely that any one person or faction to control all three branches. Therefore, this separation was considered a way of preventing government overreach.

Who Came Up With the Idea of Limited Government?

While the concept of limited government dates back to the Magna Carta, the idea was further developed by Enlightenment thinkers in the seventeenth and eighteenth centuries. The idea that government power requires the consent of the governed originates from John Locke. The concept of separating the government into three branches is attributed to Baron de Montesquieu, and the idea that the government should avoid intervening in commerce is frequently attributed to Adam Smith. Many of these ideas were later integrated into the American and French Revolutions.

Which Countries Have the Highest Degree of Limited Government?

According to the annual Human Freedom Index Report for 2021, co-published by the Cato Institute and Fraser Institute, the highest-scoring country in terms of limited government was Switzerland. The top 10 included (a score of 10.0 is the highest possible):

  1. Switzerland — 9.11
  2. New Zealand — 9.01
  3. Denmark — 8.98
  4. Estonia — 8.91
  5. Ireland — 8.90
  6. Finland — 8.85
  7. Canada — 8.85
  8. Australia — 8.84
  9. Sweden — 8.83
  10. Luxembourg — 8.80

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.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Encyclopedia Britannica. "Enlightenment."

  2. The British Library. "Magna Carta: An Introduction."

  3. Legal Information Institute. "Checks and Balances."

  4. National Archives. "What Is the Bill of Rights?"

  5. World Bank. "Effects of Public Sector Wages on Corruption," Page 2 of PDF.

  6. Oxford Dictionaries. "Limited Government."

  7. Fraser Institute. "Economic Freedom of the World 2021."

  8. Fraser Institute. "Economic Freedom of the World 2021," Page 90.

  9. CNN. "Hong Kong Protests."

  10. Fraser Institute. "Economic Freedom of the World 2021," Page 89.

  11. Fraser Institute. "Economic Freedom of the World 2021," Page 133.

  12. Britannica. "John Locke."

  13. Britannica. "Montesquieu."

  14. Cato Institute. "Human Freedom Index, 2021."

Open a New Bank Account
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Open a New Bank Account
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.