The Economic Liberal Perspective

 

Like many other terms in the International Political Economy (IPE), the generic term “liberalism” suffers from something of a personality disorder. The term means different things in different contexts. In the United States today, for example, a liberal is generally regarded as one who believes in an active role for the state in society, such as helping the poor and funding programs to address the social problem. Since the mid-1980s, someone who has been thought of more narrowly as an economic liberal believes almost (but not exactly) the opposite.

Roots Of The Economic Liberal Perspective

            The liberal perspective today reveals many insights about political economy that mercantilists miss or do not address. Essentially, the broad term “liberalism” means “liberty under the law”. Liberalism focuses on the side of human nature that is competitive in a constructive way and is guided by reason, not emotions. Classical economic liberalism is rooted in reactions to important trends in Europe in the seventeenth and eighteenth centuries.

The Dominant Features Of Capitalism

The five main element of capitalism are the following:

  • Market coordinate society’s economic activities.
  • Extensive markets exist for the exchange of land, labor, commodities, and money
  • Competition regulates economic activity: consumer self-interests motivate economic activity
  • Freedom of enterprise: individuals are free to start up any new business enterprise without state permission
  • Private property: the owner of a resource is legally entitled to the income that flows from the resource.

The Transformation Of Liberal Ideas And Policies

            Adam Smith’s writings were part of a broader intellectual movement that engendered intense economic and political change in society. Classical liberals, in general, at the time are represented by the writings of John Locke (1632-1704) in England and Thomas Jefferson (1743-1826) the United States.

Economic liberals tend to focus on the domain in which nation-states show their cooperative, peaceful, constructive natures through harmonious competition. International trade is seen as being mutually advantageous, not merely cutthroat competition for wealth and power.

Under a system of perfectly free commerce, each country naturally devotes its capital and labor to such employments as are most beneficial to each. The pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labor most effectively and most economically.

An Outdated Economic Theory And Ideology

            As noted earlier, Keynes was adamant that markets are prone to failure, with the great depression being a prime example of that reality. Since his time, many governments became better at dealing with smaller recessions that were considered a normal part of the business cycle.

Policies based on these outlooks about the validity of free markets complemented by weak state deregulation seemed to work for some time in the developed countries. Fed chairman Greenspan criticized excessive state regulation of banks, and together with investors seemed to view recessions in the United States as a thing of the past.

In effect, some argue that free market theorists have underestimated distortions in markets, overestimated markets’ ability to self-adjust, and failed to account for the long-term problems resulting from markets’ short-term incentives. They have also suggested that the financial crises could shake up the discipline of economics and force it to rethink some of its basic scientific assumptions. In the face of such of a major meltdown in the global financial system, why have laissez-faire ideas remained popular outside academia? Scholars have offered several possible answers to this question, as noted below.

The financial crisis has brought to the fore a division between economic liberals. In this section, we contrast some of their arguments to demonstrate the richness of debate, the different views about the role of the state and globalization and the re-emergence of Keynesian thought among HIL’s.

A few of the most often discussed HIL proposals are as follows :

  • Spend more to grow the economy, without worrying too much about inflation. It is more important to create jobs.
  • Invest more in new technology for energy and transportation, infrastructure, education, and healthcare.
  • Impose tougher regulation on banks related to derivatives, deposit requirements, pay, and bonuses.
  • Break up big banks to increase competition.
  • Better manage globalization, but without stopping it.

The ideas and values associated with the economic liberal version of liberalism have changed in recent history to reflect major historical, political, economic, and social developments. Political economist Smith, Ricardo, Mill, Keynes, Hayek, Friedman, and others have debated the relationship of the state to society as capitalism has spread over large parts of the world, profoundly shaping global production and distribution.

During the Great Depression, a split emerged between those HILs who supported a positive role for the state in the economy and those OELs who saw the state’s role in the economy and society as decidedly negative. In the 1980s, the chasm widened even more. The Reagan an Thatcher administrations implemented decidedly more OEL-oriented policies, emphasizing economic growth alongside cuts in domestic welfare programs.

Both orthodox and heterodox liberals ultimately believe that capitalism is the desirable system to maintain, despite the differences in how they propose to reform globalization and tackle the problems of debt and inequality. In that sense, they both place their faith in the ability of markets to promote the values and interests of most people in the world.

Reference:

Balaan, David N., & Dilman, Brodford. (2011). Introduction to International Political Economy. 05. Person Education Australia. ISBN: 978025008643.