liberalism and the economy knowledge flashcards

Compared to other areas such as human nature and society, where liberals of both strands broadly agree on core principles, in the economy there is much less communality. Basically, beyond a few points of agreement, the two strands have …

fundamentally different approaches to how to run the economy. Nevertheless, there are still some areas of common ground.

All liberals place a high value on the rights of the individual to own private property (refers to everything that one owns, not just to housing, including all one’s personal possessions, including those …

owned for commercial reasons). John Locke identified property ownership as one of mankind’s fundamental ‘natural rights’. The right to own property therefore lies at the heart of the freedoms liberals believe all people must enjoy.

Locke placed importance on property rights as he felt that the natural right to possess property is a right which has been earned from one’s Labour. State policy should therefore fully respect the ‘natural right’ to own private property. The state should not …

 seek to intervene or limit private property ownership - although the state may be needed to arbitrate neutrally between individuals competing for resources eg. two competing businesses arguing over an issue, or issues over ‘communal resources’ such as water, pollution etc.

Female liberal thinkers focused on the lack of property rights enjoyed by women within a patriarchal society. Mary Wollstonecraft (1759-97) campaigned for the same rights liberalism awarded to men be provided for women. This included the right to own land and property - which in the …

 18th century it was unusual for a woman to do. Middle Class women were also denied the right to work for the most part (although poor women throughout history have always worked anyway and 90% of women at the time were poor).

Mary Wollstonecraft believed once women were liberated and enjoyed the same property owning and working rights as men, they would …

firstly be freed from being ‘domestic slaves’ and secondly would be able to energise the free market economy. 

Keynesianism - A description of the economic views of John Maynard Keynes. He argued, in direct contrast to classic liberal economics, that the state should intervene aggressively to expand an economy suffering from a slump. Keynesian…

 intervention largely involved raising public expenditure, reducing taxes and borrowing to fill the resulting deficit.

Liberals have a shared belief in the merits of capitalism. They see free market principles as the most effective way to generate wealth for individuals and wider society. Everyone benefits from capitalism. Since the market produces a …

natural equilibrium between supply and demand, and this drives prices down for the consumer, whilst increasing choice and promoting innovation. In addition, liberals say capitalism greatly aids freedom. This is because within a free market, people are free to buy and sell what they choose. This gives the producer and the consumer freedom of choice. It also gives them a sense of contribution to a wider society. 

Compare this, for example, to a Communist system of government, where the state owns every business and tells each factory what to produce it, how to produce it, and sets the price it can be sold at - called  a ‘command economy’. There is no …

 incentive for those in charge of the factory to become more efficient or effective, and no freedom for them to make a meaningful contribution to the business. Equally, workers in a communist system are paid a fixed weekly wage.

There is little point in them therefore looking for alternative employment, seeking promotion, attempting to be more efficient, and …

the only incentive for them doing a good job is internal satisfaction. 

Meanwhile citizens in a communist state have only a fixed amount of money to spend, on a fixed number of goods available to buy, whose prices are also fixed In some cases, people were given ration cards denoting how many items in total the state …

awarded them each week eg. loaves of bread. Communists would argue that workers would be incentivized to do a good job, to ‘help the wider community’. Together the workers  would build a happy, equal and prosperous society.  Unfortunately, history proves they were not successful. As a comparison, in 1991 the GDP per capita of communist Germany was $7395, while the same figure in capitalist west Germany was around $21,000. 

For liberals, a communist ‘command economy’ is a disaster:

• It is inefficient and drives people into poverty

• It takes away freedom - from producers about what to make, from workers about where to sell their labour, and from consumers about what to buy,

• It completely stifles human creativity, and as such the generational progression liberals see possible within humanity stagnates. 

Liberals accept capitalism creates inequality (i): There will be winners and losers in the system. However they defend that inequality on several grounds …

even if some become much richer than others, as the wealthy spend their money it will ‘trickle down’ into the rest of the economy, and therefore ultimately, income will become more widely distributed (however, modern liberals no longer really support the idea trickle down works).

Liberals accept capitalism creates inequality (ii):  The overall wealth of the society is higher than in alternative economic systems. Therefore it is arguably…

better to be poorer in a rich country, since the poor in the rich country will still be enjoying an overall better standard of living.

Liberals accept capitalism creates inequality (iii): Inequality of wealth is a natural reflection of the different talents individuals have. To try to stop this, would deny the right of the individual to pursue their own path in life and achieve …

self-actualisation - principles every liberal holds dear. Thinkers like Mill made a virtue of a meritocratic society - and such a system inevitably will mean those with more ‘merit’ do better.

However, whilst both liberalism strands accept the inevitability of inequality from capitalism, modern liberals such as John Rawls believe it is essential to try to address this issue via …

 the state being interventionist in society and the economy eg. creating public service and welfare. John Stuart Mill also advocated for social reforms like regulations on work hours, arguing the government should practice utilitarianism - promoting actions which lead to the greatest good for the greatest number.

Classical liberals meanwhile believe ‘the market’ will correct any fundamental issues and any government intervention distorts the effectiveness of the market, to the detriment of all. Ideas like …

utilitarianism could be dangerous if the ‘greatest good for the greatest number’ could negatively affect the rights of the individual and minority groups.

All liberals would accept there is a need for the state to play some form of role in the economic system. This makes liberalism different from anarcho-capitalism, which as an ideology would …

want to see no government/state existing at all, and the free market to be entirely self-regulating.

It is important to be very clear about the fact that classical and modern liberals have very different ideas about how much of a role the state should play in the economy. For classical liberals they want a minimalistic ‘nightwatchman state’ who would limit itself to…

enforcing contracts, protecting individual freedoms and providing some essential public goods eg. national defence, clean air, communal resources such as street lighting and local roads etc. Modern liberals would envisage a much more extensive role for the government in the economy than this.

After these fundamental areas, classical and modern liberals don’t agree about much regarding the economy: Classical liberalism is based on laissez-faire economics (the C20th-C21st version of which is called neoliberalism). Modern liberalism rejects this approach because it fails to create freedom for all. They argue to defeat poverty and ignorance that limits freedom, demands state intervention in society and the economy to create good public services, welfare systems, and …

in modern liberalism’s most famous economy system - Keynesianism - for the state to aim to create jobs to ensure full employment for everyone in society, which would defeat poverty and therefore ensure everyone has enough wealth to enjoy a fulfilling life.

Laissez-faire Capitalism: Classic liberalism is strongly associated with laissez-faire, stipulating that the economy works best when left to the market forces of supply and demand. State intervention will lead to …

 the inefficiency bureaucracy and the misallocation of resources.

Laissez-faire Capitalism: The most famous of all classical liberals was a Scottish economist Adam Smith (1723-1790) who wrote the ‘Wealth of Nations’ (1776). In it, Smith explained how the division of labour and free trade had huge economic benefits, allowing each country to …

specialise in the production of goods and services that it is best suited to produce, the ones in which they have comparative advantage. The resultant increase in output would in turn contribute towards the creation of wealth and reduce prices of goods thereby benefiting all members of society.

Smith argued the role of the state within the economy should be limited to ensuring that contracts are honoured and that the market runs smoothly. The state may …

also have to provide some ‘social goods’ such as clean air and clean water, but no more. The job of the state was to be merely ‘a night-watchman’.

Laissez-faire Capitalism: Classical liberalism was at its height during the 18th and early 19th century. Belief in the virtues of capitalism was the dominant view of the time and was underpinned by a Darwinistic "survival of the fittest" mentality.  These ideas were …

 not fundamentally challenged until the 1930s, when the Great Depression and post-WWII eras led to the widespread adoption of modern liberalism with its Keynesian economic approach.

Laissez-faire Capitalism: Classical liberal economics enjoyed a revival during the 1970s and 80s in the US, UK and elsewhere, where right-wing parties were heavily influenced by the ideas of …

the Austrian philosopher Friedrich Hayek (1899-1992) and the American economist Milton Freidman (1912-2006).

Laissez-faire Capitalism:Leading politicians such as Ronald Reagan and Margaret Thatcher were elected on a mandate to roll back the frontiers of the state via a bold policy package of privatisation, de-regulation, a reduction in direct taxation and the marketisation of the welfare state. This particular brand of …

economics had more in common with classical liberalism than conservatism - and is called neoliberalism.

Laissez-Faire benefitted mankind … (1): Economically - Smith argued that capitalism had a limitless capacity to enrich individuals and society - as long as state intervention in the economy was severely restricted. Reflecting the notion of negative liberty, the state's role was to adopt a mainly laissez-faire approach to the workings of a market economy, so that …

market forces could operate and flourish'naturally'. Smith therefore advocated the end of tariffs and other forms of economic protectionism, and the spread of free trade between states. These ideas were radical in 1776 but became orthodox in Britain and the USA during the nineteenth century.

Laissez-Faire benefitted mankind … (2): Economically and Socially - Smith argued the free market operated through millions of individual autonomous decisions made by egotistical but rational human beings.  Whilst each individual is materially self-interested, this doesn’t lead to a disorderly or chaotic economic system, because the economy itself actually operates according to a set of ‘natural pressures’ - market forces - that tend naturally to promote prosperity and well-being. For instance…

no single producer can set the price of a commodity - prices are set by the market, by the number of goods offered for sale and the number of consumers who are willing to buy. These are the forces of supply and demand. The market is a self-regulating mechanism; it needs no guidance from outside. Smith called the self-regulation of the free market the "invisible hand".

Additionally the ‘natural order’ of the market bleeds through into wider society.  Rational self-interest would mean it was in everyone’s interest to maintain a free & liberal society that upheld the free market that had created the extra wealth. Should a producer choose to act in an illiberal manner …

e.g. by removing freedoms from their workers, consumers would turn away from their products.  Equally an illiberal worker could be sacked - so rational self-interest would mean instead people would ‘comply’ with liberal values within wider society.

Laissez-Faire benefitted mankind … (3): Socially - All classical liberals believe that the freer the market, the freer the people.  Adam Smith advocated capitalism for the sake of freedom, as did C20th neoliberal economist Milton Friedman who observed that "history suggests that capitalism is a necessary condition for political freedom" arguing that the market operates according to the wishes and decisions of free individuals. Freedom within the market means…

freedom of choice: the ability of the businesses to choose what goods to make, the ability of workers to choose an employer, and the ability of consumers to choose what goods or services to buy. Relationships within such a market - between employers and employees, and between buyers and sellers - are therefore voluntary and contractual, made by self-interested individuals for whom pleasure is equated with the acquisition and consumption of wealth.

Laissez-Faire benefitted mankind … (4): democratically - Classical liberals also justify their standpoint in terms of the democratic benefits of the free market. They argue the profit motive enables firms to meet the needs of consumers. Over time, prices reach an equilibrium level decided upon by the interaction of thousands of people within the market. As such …

the marketplace is based firmly upon the democratic will of the people. That capitalism and democracy go hand-in-hand is one of the most enduring aspects of classical liberal thinking. Such views have permeated to all areas of the world since the end of the cold war, when ‘the West’ led by the USA defeated the Communist bloc (with its state-controlled ‘command economy’ model). 

Laissez-Faire benefitted mankind … (5): the state - Free trade is equally important in drawing states into a web of interdependence which means that the material costs of international conflict are so great that warfare becomes virtually unthinkable.  German philosopher Immanuel Kant (1724-1804) believed that free trade would create a world without war.  Contemporary author Thomas Friedman in his book The World Is Flat: A Brief History of the Twenty-First Century (2005), has argued that ….

a globalised economy based upon the principle of free trade is the best economic system available in terms of ensuring peaceful cooperation between different countries. To support his view Freidman claims that "no two countries with McDonald's franchises have ever gone to war."

Keynesianism (‘Managed capitalism’ and the ‘Mixed economy’) …

An economy based upon laissez-faire economics with the state playing the role of a night-watchman cannot serve the core objective of liberalism - the maximisation of individual freedom. When left alone they argue markets struggle to self-regulate and are prone to fail, which in turn holds negative implications for individual liberty.

 Keynesianism (‘Managed capitalism’ and the ‘Mixed economy’) … Modern liberalism therefore rejects classical liberalism’s belief in laissez-faire minimal state intervention in the economy and minimal redistribution of wealth via the tax. Instead …

to maximise individual freedom, modern liberalism backs greater state intervention in a capitalist economy to deliver prosperity by 'managing' their economies.

Keynesianism (‘Managed capitalism’ and the ‘Mixed economy’) … Even classical liberals such as Adam Smith believed that state intervention in the market and society was justified in certain cases. For instance, he argued that…

"the state has an interest in educating the young” and he also supported progressive taxation on the basis of fairness and warned against the pernicious effects of unjustified levels of profit.

Keynesianism (‘Managed capitalism’ and the ‘Mixed economy’) … But modern liberalism took the role of the state in the economy much much further.  The abandonment of laissez-faire came about because of the increasing complexity of industrial capitalist economies and their apparent inability to guarantee general prosperity if left to their own devices. The Great Depression of the 1930s, sparked off by the Wall Street Crash of 1929, led to high levels of unemployment and was …

 the most dramatic demonstration of the failure of the free market. After World War II, virtually all western states adopted policies of economic intervention in an attempt to prevent a return to the pre-war levels of mass unemployment. To a large extent these interventionist policies were guided by the work of the UK economist John Maynard Keynes (1883-1946).

Keynesian economics is justified … (1): Socially/liberty - Modern liberals see those people with few resources unable to enjoy meaningful liberty. As such, the state is justified in redistributing wealth to the less well-off on the basis of progressive taxation. This argument is based on a fundamentally different conception of liberty than classical liberalism’s negative freedom - instead advocating positive freedom which T.H. Green described as …

"a capacity of doing or enjoying something worth doing." In order to facilitate that capacity, the state contributes to freedom via some redistribution of income via tax - although not at levels socialists advocate, which liberals fear stifles individualism and self-responsibility.

Keynesian economics is justified … (2): Socially - The two outstanding liberal theorists of the 1930s-60s era were Sir William Beveridge and John Maynard Keynes, both of whom laid the foundations for the ‘post-war consensus’. Beveridge was instrumental in the construction of a universal welfare state lasting from the ‘cradle to the grave’. Beveridge argued that the state should ensure that no-one fell below a certain level of poverty since those who lacked sufficient means cannot fulfil their potential. His programmes thus …

 tackled the ‘five evils’ of squalor (via housing), want (via unemployment benefits), disease (via the NHS), ignorance (via better state education) and idleness (via Keynesianism government job creation).  Beveridge ideas chimed with the spirit of post-war Britain, were central to the expansion of the welfare state, and remain central planks of all major UK parties’ policies to this day.

Keynesian economics is justified … (3): Economically - Keynes was an avid supporter of capitalism, but saw its flaws & weaknesses.  As such he sought to ‘save it’ via state management to create ‘a managed capitalism’ model  he believed could bring economic stability and full employment - both of which were crucial in facilitating the individual’s capacity to enjoy freedom. Following the Great Depression, Keynes identified there was an acute need to kick-start the depressed mid-1930s economy, and in…

'The General Theory of Employment, Interest and Money' he offered a practical remedy. Keynes turned conventional wisdom on its head by arguing that minimal state intervention in the economy, far from helping it function, instead led to periodic times of mass unemployment & poverty, with a resulting loss of freedom & self-fullment for millions of individuals. 

Classical economists argued the market would automatically self-correct as a solution to a depression and the unemployment it caused. Keynes however argued that …

the level of economic activity, and therefore of employment, is determined by the total amount of demand - ‘aggregate demand’ - in the economy. He suggested that governments could 'manage' their economies by influencing that level of aggregate demand.

Government spending is, in this sense, an 'injection' of demand into the economy. Taxation, on the other hand, is a 'withdrawal' from the economy: it reduces aggregate demand and dampens down economic activity. The Keynesianism model can be seen as …

a method of manipulating this aggregate demand in order to form a kind of ‘economic virtuous circle’.  At times of high unemployment, Keynes recommended governments should 'reflate' their economies by either increasing public spending or cutting taxes - therefore putting more aggregate demand (i.e. money) into the economy. This would solve unemployment - not by the invisible hand of capitalism, but by government intervention.

Keynes argued increasing aggregate demand would mean running a budget deficit, i.e. the government spending more money than it gets in tax and therefore would require borrowing. But in the long term …

 he argued this would be paid back through higher tax receipts & lower welfare payments, since people were now employed.  Equally if the government ‘kick-started’ the economy by increasing employment, this would further increase aggregate demand as these new wage earners would use their money to buy consumer goods and services, which would further fuel more employment opportunities in the private (non-government) economic sector.

This would further boost tax revenues, reduce welfare and increase aggregate demand - creating a ‘virtuous economic cycle’. Conversely, during a time of rapid economic growth Keynes argued that …

the government should deflate the economy by increasing taxation and cutting back government expenditure - to prevent ‘boom and bust’ economics.  Keynesian demand management thus promised to give governments the ability to manipulate employment and growth levels to secure general prosperity.

However, Rawls and others were naïve to assume that Keynesianism would prevent the return of recession. The re-emergence of economic difficulties in the 1970s generated renewed sympathy for classical liberal economic theories, and led to …

a shift away from Keynesianism. Nevertheless, the continued flaws and failures of the pure free-market approach e.g. to eradicate poverty, to improve social justice, to prevent social fragmentation, to deal with monopolies or to tackle short-termism thinking e.g. over environmental concerns, all led to the development of the economic school of neo-Keynesianism.

Modern Western governments tend to steer a middle ground, promoting much more of a government role in the economy than classical liberals and neoliberalists seek, but …

no longer advocating for the level of intervention to affect aggregate demand that Keynesians sought.

Neoliberals such as Robert Nozick, Friedrich von Hayek and Milton Friedman all opposed the ideas of modern liberalism on classical liberal terms:

• Modern liberalism's belief in an expanded enabling state limits individual liberty and erodes individualism. Rather than relying on themselves, individuals become dependent on a paternalistic state that supports them from 'cradle to grave' - creating a dependency culture which arrests individual development and initiative.

• Hayek also argued that the exponential cost of and demand for welfare provision would eventually bankrupt state and society. Today, many Western countries are running huge deficits because they spend more than they receive in taxation.

• Nozick argued that modern liberalism betrayed individualism by treating the individual as a ‘thing’ or resource to be exploited i.e. 

• with its enlarged state draining freedom through excessive taxation (arguing 'tax, for the most part, is theft')

• its principles of redistribution and social justice being socialist

• its forcing of the individual to obey obtrusive laws and fight for it

Milton Friedman was critical of the supposed efficacy of Keynesian economics. The state was ill-equipped to plan or intervene in the economy, and this …

 was as true for state planners in Western democracies as it was for communist societies.

Neoliberalism therefore sees the role of government limited to controlling inflation via 'monetarism' (limiting the supply of the money in the economy).  It backs privatisation - the state should run as little as possible and private businesses run as much as possible and believes …

state run industries - e.g. the NHS and education - are examples of ‘communist style’ inefficient organisations, largely run for the good of the workers, lacking the desire to improve & innovate since they can’t go ‘bust’.