Economic Liberalism

Adam Smith and David Ricardo

 Liberalism

 Liberalism --- Freedom

 Origin of the liberalism can be traced back in agriculture societies

 Liberalism ----- Individual liberty ---- liberty was what natural rights

 Liberalism ---- Individuals are rational

 Sovereign State ---- protections of the citizens of society

 Liberals believed that freedom exist “under the law”

 State is created by the individuals and for the individuals

 Classical Liberalism
 It was the earliest liberal tradition
 Ideas of Classical liberalism developed during the transition from feudalism to
capitalism
 Is main focus was on economic liberty ---- freedom of economic development
 Individual participation should be free in market
 Markets are self regulatory ---- important decisions regarding market
 Free interaction between buyers and sellers
 Law of “demand and Supply”
 Government interference ----- market failure
 Capitalism born
 Classical Liberalism
 Classical liberalist believes in a minimal state that act as night watchman
 States proper role is restricted to the protection of society
 Classical liberalist believe in Natural rights ---- God given rights
 Government is established to protect the human rights
 James Mil –rejected the idea of nonsense and proposed the idea of ---Utility
 According to this idea individuals are motivated by the self interest
 The principle of utility can be defined as satisfaction that is gained from the
consumption of material goods and services
 This doctrine provided a moral philosophy to classical liberalism
 Economic Liberalism

 The idea of Economic Liberalism -- The Wealth of Nations

 Economic liberalism emerged in late eighteenth and early nineteenth century

 Adam Smith derived the idea of economic liberalism by criticizing Mercantilism

 It emerged as a critique of comprehensive political and regulations of economic

affairs which dominated European state building

 Mercantilism was dominant economic idea of sixteenth and seventeenth century

 Economic Liberalism

 Adam Smith focused on liberal and rationalist assumption about

human nature
 He wrote more about government restrictions towards economic
activity
 Smith ---- Economy---- market ---- series of interrelated market
 Market operate according to the wishes of the of individuals
 Therefore Economic liberalism ----- Individual
 This is all about freedom of choice
 Economic Liberalism

 Economic Liberalism ----- positive sum game

 According to this idea individuals and companies would not be
active in market place unless it was in their benefit
 Economic liberals believed that to some extent political interference
by the government may be necessary
 Early economic liberals called laissez fair economy
 The economy itself is thought to operate according to a set of
impersonal pressure
 Market force
 Laissez Faire

 According to this idea the state should simply leave the economy

 According to this doctrine economic activity should be entirely free

from government interference

 This is considered as the extreme belief in the free market

 This idea restrict the restrictions on employment of children, limit to

the number of hours work and regulation of working conditions
Social Darwinism

Liberals attitude towards poverty and social equality is quite different

They argued that Individual can make what they want according to their own
will
This idea was expressed as Self help and heavens helps those who help
themselves
This idea supported by the argument that laissez fair economy improve the
conditions of working class
 Self Regulating Mechanism

 But Smith criticized Mercantilist idea that economy/market work

best when it is left alone

 According to smith market has a self regulating Mechanism

 As no single producer can set the price of the good

 Prices are automatically by the market according to the demand of

that product or by the number of consumer of that good
 Neoliberalism
 Revival of classical liberalism

 It took place in 1970

 Neoliberalism also known Thatcherism

 Because initially it has great impact in two states, UK and USA

 Free market economy established in these two states

 It’s a market fundamentalism

An absolute faith in the market, reflecting the belief that the market
mechanism offers solutions to all economic and social problems
 Neoliberalism

 Market failure --- in some cases market may not work according to
the expectations
 And that political regulation may be necessary to correct or avoid
market failures
 John Maynard Keynes ---- economist
 Market economy is great benefit to people
 But it also has certain risks, uncertainty and ignorance
 Keynes in a favor of market managed by the state
 Classical Liberalism
 Great Depression 1929 --------- Challenge for economic liberalism
 John Maynard Keynes --- reforms in classical liberalism

1. Government role is important

2. Market is not self regulatory Keynesianism
3. Capitalism needs to be controlled

 Keynesianism ----- applied at domestic and international markets

 1944 ---- Bretton Woods system
Classical Liberalism