GPE lecture 2: Liberalism

orthodox liberalism (classical liberalism)

1. purest and most dominant form of liberalism

2. with the notion that markets function best when left free

3. and where minimal government intervention maximizes effiency and economic growth.

heterodox liberalism

critiques orthodox liberalism
1. as it stresses the limits of free markets and
2. believes that markets cannot be wholefully free as that would lead to inequality, instability and environmental destruction.
3. For this reason state intervention is promoted to correct these issues
4. and thus is still pro capitalist but also emphasizes the need for regulation.
5. close to mercentalist and structuralist thought.

what are the different phases of liberalism

Orthdox I: Classical liberalism in the context of the British Industrial Revolution (dominant for a long time).
Orthodox II: Neoclassical economics (late 19th–early 20th century). Developed into a scientific economic theory of how markets achieve efficiency.
Heterodox I: Keynesianism after the Great Depression and postwar era.
Orthodox III: Neoliberalism from the 1980s onwards, in the context of globalization.
Heterodox II: New critiques of neoliberalism after the 2008 Global Financial Crisis (GFC), COVID-19, war in Ukraine, and the rise of protectionism and mercantilism.

core ideas of orthodox economic liberalism

1. Reason, progress: belief that progress and welfare can be achieved through proper institutions and a market economy.
2. Liberalism in the 19th century was optimistic and progressive — linked to more personal freedom.
3. Liberty (from the state, but with property rights): laissez-faire economics.
4. Rational individual choice: individuals act in self-interest but that in turn promotes collective good (the “invisible hand”).
5. Market efficiency: price mechanism allocates resources optimally.
6. ‘Man’ is selfish, but in pursuit of self-interest one maximizes welfare/utility under economic freedom.

Ha-Joon Chang critique orthodox liberalism

“There is no such thing as a free market.” All markets are politically bounded by laws, bans, and regulation.

Karl Polanyi critique orthdox liberalism

The liberal utopia of the “self-regulating market.” Markets cannot exist without the state; completely free markets cause social disruption (rise of trade unions, socialism, fascism).

thinkers that critiques orthodox liberalism

1. Ha-Joon Chang

2. Karl Polanyi

classical liberal thinkers

1. Adam Smith

2. David Ricardo

3. John Stuart Mill (early heterodox)

Adam smith

1. ‘Wealth of nations’ (1776)

2. Criticized mercantilism and state regulation

3. prmoted free markets and division of labour as drivers of efficiency.

4. “Invisible hand’’: self interest unintentionally benefits society

David Ricardo

-Theory of ‘comparative advanatge’: States should specialize for mutual gain.
-Context: British hegemony and promotion of free trade.

John Stuart Mill

1. early heterodox liberal

2. supported limited state intervention for education and equality.

3. Critical of equality as the outcome of capitalism, and sought more egalitarian outcomes.

key features neoclassical economics

1. Rational preferences: individuals maximize utility/profit.
2. Law of supply and demand determines equilibrium.
3. Market equilibrium: balance between supply and demand.
4. Efficient market hypothesis: free markets allocate resources optimally.
Microeconomics → focus on individual choices and efficiency.
Macroeconomics → later added by Keynes, focusing on employment, output, and inflation.

neoliberalism

1. Free markets should dominate society; the state should actively reduce its own role and expand markets everywhere. State should be used to create a strong market economy.

2. Advocated return to minimal state, free markets, deregulation, privatization.

3. Emphasized property rights, individualism, and global market integration.

key figures neoliberalism

1. Friedrich von Hayek

2. Milton Friedman

Friedrich von Hayek

1. Argued that state interference leads to authoritarianism

2. Advocated economic freedom as more important than democracy.

3. Promoted minimal state, anti-trade unionism.

4. Founded Mont Pelerin Society (1947).

5. Believed global markets promote peace and prosperity.

Milton Friedman

1. Main proponent of monetarism: control inflation through monetary policy rather than fiscal spending.

2. Criticized welfare states and union power.

3. Advocated privatization and deregulation.

4. Believed in small government and individual responsibility.

neoliberalism as a project > core program:

1. Freedom of enterprise; anti-unionism (breaking unions).
2. Deregulation and privatization.
3. Restrict welfare state; austerity and labor “reforms.”
4. Global marketization → neoliberal globalization.
5. Anti-welfare state: property rights prioritized over social rights

Keynesian critique

1. John Maynard Keynes (1883–1946).

2. The General Theory of Employment, Interest, and Money (1936).

3. Context: Great Depression.

4. Goal: Saving capitalism through state management.           

5. “In the long run we are all dead.” → Need short-term macroeconomic intervention.

6. Paradox of thrift: when everyone saves, demand falls, worsening recession.

Keynesian demand management

refers to government policies aimed at influencing aggregate demand (total spending in the economy) to maintain full employment and stable growth.
-fiscal: raise expenditure and/or lower lower taxes
-moetary: lower interest rates to encourage borrowing

multiplier effect

Fiscal policy: raise expenditure and/or lower taxes to stimulate demand —> money gets pumped into the economy, people will have more money to spend and they will spend it, buying a car e.g. will stimulate demand and leads to companies investing more in hiring workers or production. So it overall has an amplifying effect —> multiplier effect.