Economic liberalism is a
political
Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations among individuals, such as the distribution of resources or status. The branch of social science that stud ...
and
economic ideology
An economic ideology is a set of views forming the basis of an ideology on how the economy should run. It differentiates itself from economic theory in being normative rather than just explanatory in its approach, whereas the aim of economic theo ...
that supports a
market economy based on
individualism
Individualism is the moral stance, political philosophy, ideology and social outlook that emphasizes the intrinsic worth of the individual. Individualists promote the exercise of one's goals and desires and to value independence and self-reli ...
and
private property in the
means of production
The means of production is a term which describes land, labor and capital that can be used to produce products (such as goods or services); however, the term can also refer to anything that is used to produce products. It can also be used as an ...
.
Adam Smith is considered one of the primary initial writers on economic liberalism, and his writing is generally regarded as representing the economic expression of 19th-century
liberalism
Liberalism is a political and moral philosophy based on the rights of the individual, liberty, consent of the governed, political equality and equality before the law."political rationalism, hostility to autocracy, cultural distaste for c ...
up until the
Great Depression and rise of
Keynesianism
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output ...
in the 20th century. Historically, economic liberalism arose in response to
feudalism
Feudalism, also known as the feudal system, was the combination of the legal, economic, military, cultural and political customs that flourished in medieval Europe between the 9th and 15th centuries. Broadly defined, it was a way of structur ...
and
mercantilism.
Economic liberalism is associated with markets and private ownership of
capital asset
A capital asset is defined as property of any kind held by an assessee, whether connected with their business or profession or not connected with their business or profession. It includes all kinds of property, movable or immovable, tangible or i ...
s. Economic liberals tend to oppose
government intervention and
protectionism
Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulatio ...
in the
market economy when it inhibits
free trade
Free trade is a trade policy that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold econ ...
and
competition
Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indiv ...
, but tend to support government intervention where it protects
property rights
The right to property, or the right to own property (cf. ownership) is often classified as a human right for natural persons regarding their possessions. A general recognition of a right to private property is found more rarely and is typically h ...
, opens new markets or funds market growth, and resolves
market failure
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indi ...
s.
An economy that is managed according to these precepts may be described as a liberal economy or operating under liberal
capitalism
Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, priva ...
. Economic liberals commonly adhere to a
political
Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations among individuals, such as the distribution of resources or status. The branch of social science that stud ...
and
economic philosophy
An economic ideology is a set of views forming the basis of an ideology on how the economy should run. It differentiates itself from economic theory in being normative rather than just explanatory in its approach, whereas the aim of economic theo ...
that advocates a restrained
fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variab ...
and a
balanced budget through measures such as low taxes, reduced government spending, and minimized government debt.
Free trade,
deregulation,
tax cut
A tax cut represents a decrease in the amount of money taken from taxpayers to go towards government revenue. Tax cuts decrease the revenue of the government and increase the disposable income of taxpayers. Tax cuts usually refer to reductions i ...
s,
privatization
Privatization (also privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when ...
,
labour market flexibility
The degree of labour market flexibility is the speed with which labour markets adapt to fluctuations and changes in society, the economy or production. This entails enabling labour markets to reach a continuous equilibrium determined by the inter ...
, and
opposition to trade unions
A trade union (labor union in American English), often simply referred to as a union, is an organization of workers intent on "maintaining or improving the conditions of their employment", ch. I such as attaining better wages and benefits (su ...
are also common positions.
Economic liberalism can be contrasted with
protectionism
Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulatio ...
because of its support for free trade and an
open economy
An open economy is a type of economy where not only domestic factors but also entities in other countries engage in trade of products (goods and services). Trade can take the form of managerial exchange, technology transfers, and all kinds of goo ...
, and is considered opposed to
planned economies
A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, par ...
and non-capitalist economic orders, such as
socialism
Socialism is a left-wing Economic ideology, economic philosophy and Political movement, movement encompassing a range of economic systems characterized by the dominance of social ownership of the means of production as opposed to Private prop ...
. As such, economic liberalism today is associated with
classical liberalism
Classical liberalism is a political tradition and a branch of liberalism that advocates free market and laissez-faire economics; civil liberties under the rule of law with especial emphasis on individual autonomy, limited government, econo ...
,
neoliberalism
Neoliberalism (also neo-liberalism) is a term used to signify the late 20th century political reappearance of 19th-century ideas associated with free-market capitalism after it fell into decline following the Second World War. A prominent fa ...
,
right-libertarianism
Right-libertarianism,Rothbard, Murray (1 March 1971)"The Left and Right Within Libertarianism" ''WIN: Peace and Freedom Through Nonviolent Action''. 7 (4): 6–10. Retrieved 14 January 2020.Goodway, David (2006). '' Anarchist Seeds Beneath the ...
, and some schools of
conservatism
Conservatism is a cultural, social, and political philosophy that seeks to promote and to preserve traditional institutions, practices, and values. The central tenets of conservatism may vary in relation to the culture and civilizati ...
like
liberal conservatism and
fiscal conservatism. Economic liberalism follows the same philosophical approach as classical liberalism and fiscal conservatism.
Origin and early history
![AdamSmith](https://upload.wikimedia.org/wikipedia/commons/0/0a/AdamSmith.jpg)
Developed during the
Age of Enlightenment
The Age of Enlightenment or the Enlightenment; german: Aufklärung, "Enlightenment"; it, L'Illuminismo, "Enlightenment"; pl, Oświecenie, "Enlightenment"; pt, Iluminismo, "Enlightenment"; es, La Ilustración, "Enlightenment" was an intel ...
, particularly by
Adam Smith, economic liberalism was born as the theory of economics of liberalism, which advocates minimal interference by government in the economy. Arguments in favor of economic liberalism were advanced by Smith and others during the age of enlightenment, opposing
feudalism
Feudalism, also known as the feudal system, was the combination of the legal, economic, military, cultural and political customs that flourished in medieval Europe between the 9th and 15th centuries. Broadly defined, it was a way of structur ...
and
mercantilism.
It was first analyzed by
Adam Smith in ''
An Inquiry into the Nature and Causes of the Wealth of Nations'' (1776), which advocated minimal interference of government in a
market economy, although it did not necessarily oppose the state's provision of basic
public goods
In economics, a public good (also referred to as a social good or collective good)Oakland, W. H. (1987). Theory of public goods. In Handbook of public economics (Vol. 2, pp. 485-535). Elsevier. is a good that is both non-excludable and non-riv ...
. In Smith's view, if everyone is left to his own economic devices instead of being controlled by the state, the result would be a harmonious and more equal society of ever-increasing prosperity. This underpinned the move towards a
capitalist
Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, priva ...
economic system in the late 18th century and the subsequent demise of the mercantilist system. Private property and individual
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
s form the basis of economic liberalism.
The early theory of economic liberalism was based on the assumption that the economic actions of individuals are largely based on self-interest (
invisible hand
The invisible hand is a metaphor used by the British moral philosopher Adam Smith that describes the unintended greater social benefits and public good brought about by individuals acting in their own self-interests. Smith originally mention ...
) and that allowing them to act without any restrictions will produce the best results for everyone (
spontaneous order), provided that at least minimum standards of public information and justice exist, so that no one is allowed to coerce, steal, or commit fraud, and there should be freedom of speech and press. This ideology was well reflected in English law;
Lord Ackner
Lord is an appellation for a person or deity who has authority, control, or power over others, acting as a master, chief, or ruler. The appellation can also denote certain persons who hold a title of the peerage in the United Kingdom, or are ...
, denying the existence of a duty of good faith in English contract law, emphasised the "adversarial position of the parties when involved in negotiations".
Initial opposition
Initially, the economic liberals had to contend with arguments from the supporters of feudal privileges for the wealthy, traditions of the
aristocracy and the rights of
monarch
A monarch is a head of stateWebster's II New College DictionarMonarch Houghton Mifflin. Boston. 2001. p. 707. for life or until abdication, and therefore the head of state of a monarchy. A monarch may exercise the highest authority and power i ...
s to run national economies in their own personal interests. By the end of the 19th century and the beginning of the 20th century, this opposition was largely defeated in the primary capital markets of Western countries.
Contrast with other economic philosophies
Contrast between British and American views
Historian Kathleen G. Donohue argues that
classical liberalism in the United States during the 19th century had distinctive characteristics as opposed to Britain: "
the center of classical liberal theory
n Europe
N, or n, is the fourteenth letter in the Latin alphabet, used in the modern English alphabet, the alphabets of other western European languages and others worldwide. Its name in English is ''en'' (pronounced ), plural ''ens''.
History
...
was the idea of ''laissez-faire''. To the vast majority of American classical liberals, however, ''laissez-faire'' did not mean no government intervention at all. On the contrary, they were more than willing to see government provide tariffs, railroad subsidies, and internal improvements, all of which benefited producers. What they condemned was intervention in behalf of consumers."
Limits of influence and influence on other perspectives
In its initial formation, economic liberalism was focused on promoting the idea of private ownership and trade; however, due to a growing awareness of concerns regarding policy, the rise of economic liberalism paved the way for a new form of liberalism, known as
social liberalism
Social liberalism (german: Sozialliberalismus, es, socioliberalismo, nl, Sociaalliberalisme), also known as new liberalism in the United Kingdom, modern liberalism, or simply liberalism in the contemporary United States, left-liberalism ...
. This promoted an accommodation for government intervention in order to help the poor. As subsequent authors picked up and promoted widespread appeal of a subset of Smith's economic theories to support their own work — of free trade, the
division of labour, and the principle of individual initiative — this contributed to obscuring other aspects of the rich body of political liberalism to be found in Smith's work. For example, his work promoted the ideal that the everyday man could hold ownership of his own property and trade, which Smith felt would slowly allow for individuals to take control of their places within society.
Economic liberalism and fiscal liberalism (conservatism)
Economic liberalism is a much broader concept than fiscal liberalism, which is called
fiscal conservatism or economic libertarianism in the United States. The ideology that highlighted the financial aspect of economic liberalism is called fiscal liberalism, which is defined as support for
free trade
Free trade is a trade policy that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold econ ...
.
Position on state interventionism
Economic liberalism opposes government intervention in the economy when it leads to inefficient outcomes. They are supportive of a strong state that protects the right to property and enforces contracts.
They may also support government interventions to resolve market failures.
Ordoliberalism
Ordoliberalism is the German variant of economic liberalism that emphasizes the need for government to ensure that the free market produces results close to its theoretical potential but does not advocate for a welfare state.
Ordoliberal ideals ...
and various schools of
social liberalism
Social liberalism (german: Sozialliberalismus, es, socioliberalismo, nl, Sociaalliberalisme), also known as new liberalism in the United Kingdom, modern liberalism, or simply liberalism in the contemporary United States, left-liberalism ...
based on classical liberalism include a broader role for the state but do not seek to replace private enterprise and the free market with
public enterprise
A state-owned enterprise (SOE) is a government entity which is established or nationalised by the ''national government'' or ''provincial government'' by an executive order or an act of legislation in order to earn profit for the government ...
and
economic planning. A
social market economy
The social market economy (SOME; german: soziale Marktwirtschaft), also called Rhine capitalism, Rhine-Alpine capitalism, the Rhenish model, and social capitalism, is a socioeconomic model combining a free-market capitalist economic system alon ...
is a largely free-market economy based on a
free price system
A free price system or free price mechanism (informally called ''the price system'' or ''the price mechanism'') is a mechanism of resource allocation that relies upon prices set by the interchange of supply and demand. The resulting price signals ...
and private property that is supportive of government activity to promote
competition
Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indiv ...
in markets and
social welfare
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...
programs to address
social inequalities
Social inequality occurs when resources in a given society are distributed unevenly, typically through norms of allocation, that engender specific patterns along lines of socially defined categories of persons. It posses and creates gender c ...
that result from market outcomes.
See also
*
Conservatism in the United States
*
Constitutional economics
Constitutional economics is a research program in economics and constitutionalism that has been described as explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of econo ...
*
Doux commerce
*
Economic freedom
Economic freedom, or economic liberty, is the ability of people of a society to take economic actions. This is a term used in economic and policy debates as well as in the philosophy of economics. One approach to economic freedom comes from the l ...
*
Economic liberalization
Economic liberalization (or economic liberalisation) is the lessening of government regulations and restrictions in an economy in exchange for greater participation by private entities. In politics, the doctrine is associated with classical liber ...
*
Economic progressivism
Economic progressivism or fiscal progressivism is a political and economic philosophy incorporating the socioeconomic principles of social democrats and political progressives. These views are often rooted in the concept of social justice and ...
*
Georgism
Georgism, also called in modern times Geoism, and known historically as the single tax movement, is an economic ideology holding that, although people should own the value they produce themselves, the economic rent derived from land—includi ...
* ''
Laissez-faire
''Laissez-faire'' ( ; from french: laissez faire , ) is an economic system in which transactions between private groups of people are free from any form of economic interventionism (such as subsidies) deriving from special interest groups ...
''
*
Libertarianism in the United States
In the United States, libertarianism is a political philosophy promoting individual liberty. According to common meanings of conservatism and liberalism in the United States, libertarianism has been described as '' conservative'' on economi ...
References
Bibliography
*
*
*
*
External links
*
{{neoliberalism
Classical liberalism
Conservative liberalism
Economic globalization
Economic ideologies
Free market
Ideologies of capitalism
Liberalism
Political ideologies