ECONOMIC LIBERALISM

The 'liberal theory of economics' is the theory of economics developed in the Enlightenment, and believed to be first fully formulated by Adam Smith which advocates
minimal interference by government in the economy. The case for economic liberalism which began to be argued in the eighteenth century was the then-startling claim that if everyone is left to their own economic devices instead of being controlled by the state, then the result would be a harmonious and more equal society of ever-increasing prosperity^[1] (see spontaneous order and invisible hand). It is associated with the political ideology of classical liberalism. The concept of 'economic liberalism' or 'market liberalism' underpinned the move towards a free market capitalist economic system in the late 18th century, and the subsequent demise of the mercantilist system. Today, the liberal theory of economics is strongly associated with libertarianism, neoliberal economics and some schools of conservatism, particularly liberal conservatism.

Contents

Basis of Liberalism

History of Economic Liberalism

Economic Liberalism and the Enlightenment

Decline and revival

Proponents

Notes

Basis of Liberalism

Private property and individual contracts form the basis of the liberal theory of economics. The early theory was based on the assumption that the economic actions of individuals are largely based on self-interest, and that allowing them to act without any restrictions will produce the best results, provided that at least minimum standards of public information and justice exist, e.g., no-one should be allowed to coerce or steal.

History of Economic Liberalism

Economic Liberalism and the Enlightenment

Initially, the liberal theory of economics had to contend with the supporters of feudal privileges for the wealthy, aristocratic traditions and the rights of kings to run national economies in their own personal interests. By the end of the 19th century and the beginning of the 20th, these had been largely defeated.

Decline and revival

However, new challenges arose from nationalists as well as the left. The most significant challenge to the liberal theory of economics in the nineteenth century came with the reinstitution of tariffs in Germany, which undertook that action to achieve self-sufficiency in order to be able to survive a long war.
Another significant challenge to the economic liberalism came from the progressive and socialist schools of thought that favoured redistribution of wealth, greater economic equality, government programs to help the poor and, in some cases, planned economies. At the turn of the century, many of the liberal parties were taken over by the progressives that opposed economic liberalism and appropriated the mantra of liberals for themselves.
Following World War I and the Great Depression, the theory fell out of favour. It was largely superseded by Keynesian economics in 1945–70 period, which take into account macro-level phenomena and call for a mixed economy involving significant state intervention.
After Keynesianism failed to explain stagflation in the 1970s, many concepts from the classical liberal theory were revived by monetarist and new classical economists. Keynesian economics as practiced in the post World War period is generally considered incapable of explaining the behavior of modern economies. There has been a revival in some Keynesian ideas based more rigorously on economics theory in certain universities under the name New Keynesian economics. The dominant discourse in modern macroeconomics in particular and economics in general, is new classical. New classical economics is rigorously based in theory, in contrast to Keynesian models. The majority of central banks as well as international institutions such as World Bank and International Monetary Fund use the new liberal models in their policy making process.
Since the 1970s, the governments of many countries around the world have adopted economic liberalism to a greater or lesser degree. For example, the theories of Friedrich von Hayek (winner of the Nobel Prize in Economics in 1974) inspired the market-oriented policies of Ronald Reagan and Margaret Thatcher. India, under the direction of then Finance Minister and now Prime Minister Manmohan Singh began to liberalize its economy in the early 1990s, with spectacular results as evidenced by its 9% GDP growth.

Proponents

★ Adam Smith

★ Anders Chydenius

★ François Quesnay

★ Jean-Baptiste Say

★ Frédéric Bastiat

★ Carl Menger

★ Ludwig von Mises

★ Friedrich Hayek

★ Milton Friedman

★ James M. Buchanan.

Notes

1. Adams, Ian. Political Ideology Today. Manchester U Press 2001. p 20