Economic Liberalism Definition Theory Examples Pros Cons

Economic Liberalism Definition

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Wealth and property are the two pillars of economic liberalism. It is the foundation of capitalism and challenges the guiding policy while gaining from the state’s preferences. Free trade, deregulation, tax reductions, privatization, and the flexibility of the labor market are all features present in an economically liberal country.

Key Takeaways

Economic liberalism promotes the notion that the government should refrain from engaging in commercial and industrial activities and shouldn’t try to interfere in the economic relationships between different classes of people and between different individuals.Adam Smith is regarded as the father of economic liberalism.The system is designed to be more productive, generate income, and facilitate multiple exchanges. Economic liberalist countries support individualism and promote innovation and growth. However, it has certain downsides, such as the growth of unwanted business dominance and poverty.

Economic Liberalism Theory Explained

Economic liberalism is a philosophy as well as a way of coordinating capitalism. Adam Smith (1723-1790), a professor of philosophy at Glasgow University in Scotland, is considered the father of economic liberalism. In contrast to the new neoliberalism, this liberalism is now known as Palaeoliberalism or “old liberalism.” It gave the market absolute precedence and was the dominant ideology in the founding countries during the 1830s and the 1920s. However, the ideology produces little social cohesion since it contains ongoing competition, inequality, and radical individualism.

Economic liberalization includes strategies and programs undertaken to promote a system of economic liberalism. One can summarize the core principles of economic liberalization as follows:

#1 The natural order of the economy

Liberalism believes that the economy has a built-in order, a “pre-established harmony,” in which everything functions well if people allow the natural forces to flourish unchecked. It also believes that the government must avoid its economic planning if the state does not want to cause chaos in this natural system.

#2 The individualistic idea of freedom

Economic liberalist countries advocated the independence of human beings and their property, the freedom of competition, trade, and industry, and denounced the shackles of the medieval guild and manorial systems. Adam Smith argued in 1776 that the state should “totally remove all systems of preferential treatment and constraint.” The “evident and straightforward system of natural liberty” will exist independently. This inherent freedom will drive the economy to prosperity.

Planning and interference by the government disrupt the economy and have adverse effects. On the other hand, state abstention fosters unity and yields the best outcomes for all parties. Therefore, according to palaeoliberalism, complete economic freedom for each individual is a requirement for a thriving economy.

The duties of the state are confined to the defense of the nation against foreign aggressors, the establishment of domestic law and order, and legal security, along with the creation and upkeep of public institutions such as roads, schools, and other necessities that are not profitable but are necessary.

#3 Self-interest as the driving force in the economy

According to Adam Smith, self-interest is the economy’s natural driving force and its natural motive. Each person acting in “his own interest” frequently advances society’s interest more successfully than when he intends to promote it. Hence everyone supports the common good while pursuing their interests, even if they are unaware of it or intend it.

Individuals involved in the economy who act by their interests complement one another and thereby promote the general welfare. Self-interest keeps human society intact through self-interest. It is “the bond that keeps all human beings together and forces them into the mutual exchange to promote the general well-being of their fellow humans as well as their well-being.”

#4 Competition as the steering wheel of the economy

In Adam Smith’s opinion, competition serves as the economy’s steering mechanism in the same way that self-interest motivates and drives it. It directs the course of the economy and brings about harmony and the common good between the numerous and diverse individual interests. According to Adam Smith, “everyone” is free to follow their interests and let their businesses and assets “compete with that of other people” as long as they do not break the law.

Competition ensures the public’s welfare. The manufacturers and merchants who are interested benefit from the exclusion of competition. Although they have the power to raise prices at the expense of consumers and reap monopoly profits, this is contrary to the community’s interests as a whole.” Therefore, healthy competition is the steering wheel; it directs the course of the economy as a whole and the economic process.

Examples

Here are a few examples for the reader to get a better idea of economic liberalism:

Example #1

The government centrally controls economy A. The centralized authority decides what to produce, how much quantity, and the production method. There are few or no private producers in the economy. This type of economy is typically classified as a socialist economy.

The government does not control economy B. There are private players, and the market decides what to produce, how to produce it, and the quantity they need to produce. Individuals make decisions, and there is minimal government intervention in the economy. It works with the motive of making a profit, and economy B follow economic liberalism.

Example #2

Grand-scale economic liberalization in China began during the Deng Xiaoping era. It introduced significant economic reforms, including the release of private activities, leading to increased trade and opening the gates of the Chinese market to the world.

Advantages And Disadvantages

This form of liberalism, without a doubt, generates income, multiplies exchanges, and fosters innovation.

Thus, economic liberalism undoubtedly has advantages. Economic liberalism in the international political economy also has similar effects.

However, it also has drawbacks, such as the potential to promote domination and tolerate injustice and poverty. Finding the best regulatory approach to prevent wholly relying on the market or full government intervention is thus a challenging task.

Economic liberalism vs Neoliberalism vs Capitalism

Capitalism is an economic and political structure where private proprietors, acting for their financial gain, control a nation’s trade and industries. Economic liberalism is a liberal form of capitalism. The system, therefore, imbibes the liberal characteristics of capitalist society and promotes individualism. Other forms of economic liberalism theory, such as liberal internationalism (economic liberalism in international political economy) and classical economic liberalism, are concerned with the same principles with slight variations.

Accordingly, classical economic liberalism is present in all subsequent schools of liberal thought. The theories that followed may then be seen as different branches of classical liberal theory at the heart of economic neoliberalism, maximizing individual liberty and freedom of choice. This suggests that even in the face of market dynamics resulting in lower economic efficiency, the state should take on a very minimal and mainly regulatory form and avoid most forms of economic intervention. However, the state is crucial in protecting private property rights and upholding contractual obligations.

On the other hand, the maximization of overall economic gains is encouraged by neoliberal institutionalism. However, it may enable an interventionist government to address harmful externalities and inefficient market failures. Along with liberal internationalism, it fosters economic interdependence and establishes global institutions to bring about harmonious international relations across economies. Additionally, neoliberalism vehemently rejects such measures, even if they may result in more significant economic advantages. Other schools of liberal economic theory may embrace state intervention to advance economic justice and address market failings.