The present paper discusses the nature of the relationships between the ruler and the people in the Laozi’s political theory. It maintains that the basic foundation of these relationships is the people’s lack of any political, economic or moral obligations toward the ruler or the state. This assumption has many far-reaching ramifications as to the functioning of the state, as well as to the nature and practical realization of ruler’s power. In particular, it provides a rational rather than metaphysical explanation of the “non-action” wu-wei ideal of ruler’s behavior.