Economic liberalism
Encyclopedia
Economic liberalism is the ideological belief in giving all people economic freedom
, and as such granting people with more basis to control their own lives and make their own mistakes. It is an economic philosophy that supports and promotes individual liberty
and choice in economic matters and private property
in the means of production. Although economic liberalism can be supportive of government regulation to a certain degree, it tends to oppose government intervention in the free market
when it inhibits free trade and open competition, however it can also lead to the support of government intervention in order to remove private monopoly
, as this limits the liberty of the poor. Economic liberalism emphasises that people should make their own choices with their money, so long as it doesn't infringe on the liberty of others.
Economic liberalism opposes economic planning
as an alternative to the market mechanism. Economic liberalism contrasts with mercantilism
, state capitalism
, socialism
, market socialism
, and fascist economics (Corporatism
).
Economic liberalism opposes government intervention on the grounds that the state often serves dominant business interests, distorting the market to their favor and thus leading to inefficient outcomes. Ordoliberalism
and various schools of social 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 and economic planning. For example, the social market economy
is a largely free-market economy based on a free price system
and private property
, and includes government regulation to promote competitive markets and social welfare programs to address social inequalities that result from free-market outcomes. Economic liberalism also includes support for equality of opportunity (also known as social mobility
), due to the belief that a lack of equality of opportunity will lead to an increase in private monopoly and therefore infringed liberty of individuals.
Theories in support of economic liberalism were developed in the Enlightenment
, and believed to be first fully formulated by Adam Smith
, which advocates minimal interference of government in a market economy, though it does not necessarily oppose the state's provision of a few basic public goods with what constitutes public goods originally being seen as very limited in scope. Smith claimed 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. This underpinned the move towards a capitalist
economic system in the late 18th century, and the subsequent demise of the mercantilist
system.
Private property
and individual contract
s form the basis of classical economic liberalism. The early theory was based on the assumption that the economic actions of individuals are largely based on self-interest (invisible hand
), and that allowing them to act without any restrictions will produce the best results (spontaneous order
), provided that at least minimum standards of public information and justice exist, e.g., no-one should be allowed to coerce or steal.
While economic liberalism favors markets unfettered by the government, it maintains that the state has a legitimate role in providing public good
s. For instance, Adam Smith argued that the state has a role in providing roads, canals, schools and bridges that cannot be efficiently implemented by private entities. However, he preferred that these goods should be paid proportionally to their consumption (e.g. putting a toll
). In addition, he advocated retaliatory tariff
s to bring about free trade, and copyright
s and patent
s to encourage innovation. Robert Cox's further research highlighted the importance of innovation and its deeper implications on the free market.
Initially, the economic liberalism 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 were largely defeated.
Today, economic liberalism is associated with social liberalism
, social democracy
, classical liberalism
, "neoliberalism
", "propertarian
" libertarianism
, and some schools of conservatism
.
Economic freedom
Economic freedom is a term used in economic and policy debates. As with freedom generally, there are various definitions, but no universally accepted concept of economic freedom...
, and as such granting people with more basis to control their own lives and make their own mistakes. It is an economic philosophy that supports and promotes individual liberty
Liberty
Liberty is a moral and political principle, or Right, that identifies the condition in which human beings are able to govern themselves, to behave according to their own free will, and take responsibility for their actions...
and choice in economic matters and private property
Private property
Private property is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other forms of property. Private property is distinguishable from public property, which refers to assets owned by a state, community or government rather than by...
in the means of production. Although economic liberalism can be supportive of government regulation to a certain degree, it tends to oppose government intervention in the free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
when it inhibits free trade and open competition, however it can also lead to the support of government intervention in order to remove private monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
, as this limits the liberty of the poor. Economic liberalism emphasises that people should make their own choices with their money, so long as it doesn't infringe on the liberty of others.
Economic liberalism opposes economic planning
Economic planning
Economic planning refers to any directing or planning of economic activity outside the mechanisisms of the market, in an attempt to achieve specific economic or social outcomes. Planning is an economic mechanism for resource allocation and decision-making in contrast with the market mechanism...
as an alternative to the market mechanism. Economic liberalism contrasts with mercantilism
Mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
, state capitalism
State capitalism
The term State capitalism has various meanings, but is usually described as commercial economic activity undertaken by the state with management of the productive forces in a capitalist manner, even if the state is nominally socialist. State capitalism is usually characterized by the dominance or...
, socialism
Socialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...
, market socialism
Market socialism
Market socialism refers to various economic systems where the means of production are either publicly owned or cooperatively owned and operated for a profit in a market economy. The profit generated by the firms system would be used to directly remunerate employees or would be the source of public...
, and fascist economics (Corporatism
Corporatism
Corporatism, also known as corporativism, is a system of economic, political, or social organization that involves association of the people of society into corporate groups, such as agricultural, business, ethnic, labor, military, patronage, or scientific affiliations, on the basis of common...
).
Economic liberalism opposes government intervention on the grounds that the state often serves dominant business interests, distorting the market to their favor and thus leading to inefficient outcomes. Ordoliberalism
Ordoliberalism
Ordoliberalism is a school of liberalism that emphasised the need for the state to ensure that the free market produces results close to its theoretical potential . The theory was developed by German economists and legal scholars such as Walter Eucken, Franz Böhm, Hans Grossmann-Doerth and Leonhard...
and various schools of social liberalism
Social liberalism
Social liberalism is the belief that liberalism should include social justice. It differs from classical liberalism in that it believes the legitimate role of the state includes addressing economic and social issues such as unemployment, health care, and education while simultaneously expanding...
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 and economic planning. For example, the social market economy
Social market economy
The social market economy is the main economic model used in West Germany after World War II. It is based on the economic philosophy of Ordoliberalism from the Freiburg School...
is a largely free-market economy based on a free price system
Free price system
A free price system or free price mechanism is an economic system where prices are set by the interchange of supply and demand, with the resulting prices being understood as signals that are communicated between producers and consumers which serve to guide the production and distribution of...
and private property
Private property
Private property is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other forms of property. Private property is distinguishable from public property, which refers to assets owned by a state, community or government rather than by...
, and includes government regulation to promote competitive markets and social welfare programs to address social inequalities that result from free-market outcomes. Economic liberalism also includes support for equality of opportunity (also known as social mobility
Social mobility
Social mobility refers to the movement of people in a population from one social class or economic level to another. It typically refers to vertical mobility -- movement of individuals or groups up from one socio-economic level to another, often by changing jobs or marrying; but can also refer to...
), due to the belief that a lack of equality of opportunity will lead to an increase in private monopoly and therefore infringed liberty of individuals.
Theories in support of economic liberalism were developed in the Enlightenment
Age of Enlightenment
The Age of Enlightenment was an elite cultural movement of intellectuals in 18th century Europe that sought to mobilize the power of reason in order to reform society and advance knowledge. It promoted intellectual interchange and opposed intolerance and abuses in church and state...
, and believed to be first fully formulated by Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
, which advocates minimal interference of government in a market economy, though it does not necessarily oppose the state's provision of a few basic public goods with what constitutes public goods originally being seen as very limited in scope. Smith claimed 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. This underpinned the move towards a capitalist
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
economic system in the late 18th century, and the subsequent demise of the mercantilist
Mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
system.
Private property
Private property
Private property is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other forms of property. Private property is distinguishable from public property, which refers to assets owned by a state, community or government rather than by...
and individual contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
s form the basis of classical economic liberalism. The early theory was based on the assumption that the economic actions of individuals are largely based on self-interest (invisible hand
Invisible hand
In economics, invisible hand or invisible hand of the market is the term economists use to describe the self-regulating nature of the marketplace. This is a metaphor first coined by the economist Adam Smith...
), and that allowing them to act without any restrictions will produce the best results (spontaneous order
Spontaneous order
Spontaneous order, also known as "self-organization", is the spontaneous emergence of order out of seeming chaos. It is a process found in physical, biological, and social networks, as well as economics, though the term "self-organization" is more often used for physical and biological processes,...
), provided that at least minimum standards of public information and justice exist, e.g., no-one should be allowed to coerce or steal.
While economic liberalism favors markets unfettered by the government, it maintains that the state has a legitimate role in providing public good
Public good
In economics, a public good is a good that is non-rival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good...
s. For instance, Adam Smith argued that the state has a role in providing roads, canals, schools and bridges that cannot be efficiently implemented by private entities. However, he preferred that these goods should be paid proportionally to their consumption (e.g. putting a toll
Toll road
A toll road is a privately or publicly built road for which a driver pays a toll for use. Structures for which tolls are charged include toll bridges and toll tunnels. Non-toll roads are financed using other sources of revenue, most typically fuel tax or general tax funds...
). In addition, he advocated retaliatory tariff
Free trade area
A free trade area is a trade bloc whose member countries have signed a free trade agreement , which eliminates tariffs, import quotas, and preferences on most goods and services traded between them. If people are also free to move between the countries, in addition to FTA, it would also be...
s to bring about free trade, and copyright
Copyright
Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...
s and patent
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
s to encourage innovation. Robert Cox's further research highlighted the importance of innovation and its deeper implications on the free market.
Initially, the economic liberalism had to contend with the supporters of feudal
Feudalism
Feudalism was a set of legal and military customs in medieval Europe that flourished between the 9th and 15th centuries, which, broadly defined, was a system for ordering society around relationships derived from the holding of land in exchange for service or labour.Although derived from the...
privileges for the wealthy, aristocratic
Aristocracy
Aristocracy , is a form of government in which a few elite citizens rule. The term derives from the Greek aristokratia, meaning "rule of the best". In origin in Ancient Greece, it was conceived of as rule by the best qualified citizens, and contrasted with monarchy...
traditions and the rights of kings
Monarch
A monarch is the person who heads a monarchy. This is a form of government in which a state or polity is ruled or controlled by an individual who typically inherits the throne by birth and occasionally rules for life or until abdication...
to run national economies in their own personal interests. By the end of the 19th century and the beginning of the 20th, these were largely defeated.
Today, economic liberalism is associated with social liberalism
Social liberalism
Social liberalism is the belief that liberalism should include social justice. It differs from classical liberalism in that it believes the legitimate role of the state includes addressing economic and social issues such as unemployment, health care, and education while simultaneously expanding...
, social democracy
Social democracy
Social democracy is a political ideology of the center-left on the political spectrum. Social democracy is officially a form of evolutionary reformist socialism. It supports class collaboration as the course to achieve socialism...
, classical liberalism
Classical liberalism
Classical liberalism is the philosophy committed to the ideal of limited government, constitutionalism, rule of law, due process, and liberty of individuals including freedom of religion, speech, press, assembly, and free markets....
, "neoliberalism
Neoliberalism
Neoliberalism is a market-driven approach to economic and social policy based on neoclassical theories of economics that emphasizes the efficiency of private enterprise, liberalized trade and relatively open markets, and therefore seeks to maximize the role of the private sector in determining the...
", "propertarian
Propertarianism
The term propertarianism has been used to describe various views regarding private property. Those holding positive views on property rights may be described as propertarian. Conversely, others opposed to private property may be described as non-propertarian or...
" libertarianism
Libertarianism
Libertarianism, in the strictest sense, is the political philosophy that holds individual liberty as the basic moral principle of society. In the broadest sense, it is any political philosophy which approximates this view...
, and some schools of conservatism
Conservatism
Conservatism is a political and social philosophy that promotes the maintenance of traditional institutions and supports, at the most, minimal and gradual change in society. Some conservatives seek to preserve things as they are, emphasizing stability and continuity, while others oppose modernism...
.
See also
- Fiscal conservatismFiscal conservatismFiscal conservatism is a political term used to describe a fiscal policy that advocates avoiding deficit spending. Fiscal conservatives often consider reduction of overall government spending and national debt as well as ensuring balanced budget of paramount importance...
- CapitalismCapitalismCapitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
- Constitutional economicsConstitutional economicsConstitutional economics is a research program in economics and constitutionalism that has been described as extending beyond the definition of 'the economic analysis of constitutional law' in explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the...
- Classical liberalismClassical liberalismClassical liberalism is the philosophy committed to the ideal of limited government, constitutionalism, rule of law, due process, and liberty of individuals including freedom of religion, speech, press, assembly, and free markets....
- NeoliberalismNeoliberalismNeoliberalism is a market-driven approach to economic and social policy based on neoclassical theories of economics that emphasizes the efficiency of private enterprise, liberalized trade and relatively open markets, and therefore seeks to maximize the role of the private sector in determining the...
- OrdoliberalismOrdoliberalismOrdoliberalism is a school of liberalism that emphasised the need for the state to ensure that the free market produces results close to its theoretical potential . The theory was developed by German economists and legal scholars such as Walter Eucken, Franz Böhm, Hans Grossmann-Doerth and Leonhard...
- Social market economySocial market economyThe social market economy is the main economic model used in West Germany after World War II. It is based on the economic philosophy of Ordoliberalism from the Freiburg School...
- Market economyMarket economyA market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
- Private propertyPrivate propertyPrivate property is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other forms of property. Private property is distinguishable from public property, which refers to assets owned by a state, community or government rather than by...
- Rule of lawRule of lawThe rule of law, sometimes called supremacy of law, is a legal maxim that says that governmental decisions should be made by applying known principles or laws with minimal discretion in their application...
- Economic freedomEconomic freedomEconomic freedom is a term used in economic and policy debates. As with freedom generally, there are various definitions, but no universally accepted concept of economic freedom...
- List of countries by economic freedom