Liberalism and the Economy

Laissez-faire ideas

Classical Liberals have argued for the laissez-faire perspective that states that the state should not intervene at all in the economy. This means that classical liberals, over the years, have opposed state measures to regulate the economy, for instance:

• • Measures restricting the length of the working day.
• • Measures giving a minimum wage to each worker.
• • Measures giving health and safety standards that each employer should observe.
• • Measures giving environmental standards that companies and industries should observe.

The work of 18th century classical economists, like Adam Smith and David Ricardo, had influenced this viewpoint. Smith’s most famous book, The Wealth of Nations (1776), is still read by people today. It uses some of the basic principles of classical liberalism, such as negative freedom and limited state, for the economy. Smith wrote in a time when states would regulate the economy quite a bit. For instance, through the 15th and 17th centuries, many believed that states should intervene in the economy to increase the quantity of goods exported, but at the same time, decrease the quantity of good imported. One main reason for Smith’s economic writing was his desire to attack this idea and show that it would be much better if the state refrained altogether from intervening in the economy. To begin with, Smith argued that if the state intervened in the economy, it limited people’s freedom, for instance the freedom of company owners to decide which goods to produce, to whom they would sell them and for what price; the freedom of workers to decide for whom they would work, for how much of a wage and for how much time every week; and the freedom of customers to decide which goods they would like to buy. Also, as well as giving more economic freedom to individuals, Smith believed that the economy would be much more flexible and effective, if the state refrained from intervention. Smith believed that the economy should be considered as a market that can organise and regulate itself. As a result, the state should not intervene, for instance in cases of unemployment or inflation, leaving the ‘mysterious hand’ of the market to deal with them.

Similar arguments to Smith’s occurred more recently by some of the New Right’s neo-liberal thinkers, like Friedrich von Hayek and Milton Freedman. It could be argued that these and the politicians following their ideas, like the former Prime Minister, Margaret Thatcher, had placed even more emphasis upon free market matters and individualism and consumerism than Smith had centuries beforehand. Smith emphasised the moral value of the market and its contribution to society, while neo-liberals like Thatcher questioned the whole idea of society and collaboration for universal benefit. This is the viewpoint of the American philosopher, Robert Nozick – who states that we are a collection of individuals who choose to work together with others or not, and for personal reasons only. Another of the present neo-liberals’ most important ideas is the belief that the market is efficient, and it will always be better than political management of the state. For instance, Hayek said that state planning and regulation is slow and ineffective, not only with traditional economic matters, but also with social policy. This is what is behind the idea of introducing market principles in offering important services such as health. It is believed that this will lead to a more dynamic service that will better respond to ‘customer’ expectations.

Economic control

In opposition to the laissez-faire perspective, modern liberals believe that the state should be willing to play a more active role in the economy. The work of the economist John Maynard Keynes, and his book The General Theory of Employment, Interest and Money (1936) believes this. Keynes questioned whether the market could self-regulate, and deal with economic problems such as unemployment, without state intervention.

Keynes believed that the most important factor for a successful economy, and the jobs that would follow, is the general ‘demand’ within the economy. He argued that the state could take steps to steer the economy by increasing the level of demand. This could be achieved either by a decision to raise the level of public spending or cut taxes. Therefore, in difficult economic times, where unemployment is on the rise, one possible option would be for the state to invest in projects to build new schools, hospitals or roads. Keynes believed that using public money in this way would improve the economy in several different ways. First, other sectors of the economy would benefit, as many different materials would need to be bought for the new construction projects. Also new workers would need to be employed (e.g. engineers, builders, tradesmen) and these people would earn wages and would then spend the money in the economy. If the state intervened financially, therefore, the economy in general would grow.

Keynes’ ideas were very influential for a long period of time in the 20th century, especially between the 1930s and 1970s, and especially across North America and Western Europe. But, as several western states weathered a difficult financial period during the 1970s, more attention was given to the ideas of neo-liberals like Hayek and Friedman and the emphasis on laissez-faire policies. But several the western states returned to some of Keynes’ principles, and especially his argument for using public spending to boost the economy for a period of time following great international financial problems in 2008.