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Liberalism focuses on the side of human nature that is competitive in a

constructive way and is guided by reason, not emotions. Although liberals believe
that people are fundamentally self-interested, they do not see this as disadvantages
because competing interests in society can engage one another constructively.
Classic economic liberalism started in seventeenth and eighteenth centuries during
the period of Physiocrats, a group of French philosophers led by Francis Quesnay
(1694-1774). Quesnay condemned government interference in market, with few
exceptions, it brought harm to society. The motto of Physiocrats is laissez faire
which becomes the theme of Adam Smith in his books The Wealth of Nation.
According to Adam Smith, notion is best served when power is used to create
wealth, which produces more power and security. For classic economic liberals,
individual freedom in market place represent the best alternative to potentially
abusive state power when it comes to the allocation of resources or organizing
economic activity. Smith also believed in the cooperative, constructive side of
human nature. For him, the best interest of all society is served by rational
individual choices, which when observed from afar appear as an invisible hand
that guides the economy and promotes the common good. Smith was the first to
develop comprehensive portrait of capitalism in The Wealth of Nation.
Basically, there are five elements of capitalism. First is markets coordinate
societys economic activity. Secondly is an extensive market exists for the exchange
of land, labor, commodities, and money. Third is competition regulates economic
activity; consumer self-interest motivate economic activity. Fourthly is freedom of
enterprise and the last one is private property.
Now, we will discuss the first tenet how markets coordinate societys
economic activity. Before capitalism, the economy was organized to serve society,
but today markets organize most of our lives in ways we are not aware of. Markets
not only determine our job but also shape our choices about travel, entertainment
and food.
Another feature of capitalism is the existence of markets for land, labor,
commodities, and money. Karl Polanyi explains that Great Britain gradually turn to
modern capitalism when land was privatized, people move off country side and into
small factories, and capital was generated by trade. Land, labor and money were all

commodified, which provided the financial foundation and labor for the industrial
revolution and the capitalist society. Third feature of capitalism is competition
regulates economic activity; consumer self-interest motivates economic activity.
Competition regulates economic activity referring to the ways in which market
convert the pursuit of consumer self-interest into an outcome that inevitably
benefits all of society. According to Smith, the pursuit of individual self-interest does
not lead to civil disorder or even anarchy; rather self-interest serves societys
interest. In capitalist economy, self-interest drive individuals to make rational
choices that best serve their own needs and desires. However, it is competition that
constrains and disciplines self-interest and prevents it from becoming destructive to
the interest of others. Producers also must compete with others, which forces them
to charge reasonable prices and provides quality goods to their customers, or lose
their business. Consumers also face competition from other consumers who are
willing to pay more for a product. Price competition also results in the efficient
allocation of resources among competing uses. Market coordination entails a
decentralized resource allocation process guided by the tastes and preferences of
individual consumers.
For capitalists, government interventions in the market distort resource
reallocation. Competition requires firms to be production efficient as it pays to adopt
cost-saving innovation in the production of goods and to remain on the cutting edge
of products and process innovation, the delivery services and the management
resources.
Freedom of enterprise means that individuals are free to start up new
business enterprise without state permission, thereby channeling resource to the
production of goods and services that are in high demand while simultaneously
intensifying competitive pressure in these industries. Freedom of enterprise allows
entrepreneurs to test new ideas in the marketplace. The development of technology
and innovation creates a new opportunity to entrepreneur to improve their
production process. So, firm can redeploy their resources such as to increase or
reduce their labor force.
In capitalism, the owners of resources have legal right to the income that
flows from the resources. Entrepreneurs who own the capital will get income in form

of profits. Capital goods such as plants equipment and tools that workers need are
important to produce other commodities. The owners will pay for all cost of
production includes the wages of workers, raw materials and so on. The difference
between revenue and cost is belongs to the capitalists. This is a legal right of
ownership, referred to as capital property rights.
David Ricardo followed Smith in adopting the classical economics liberal view
of international affairs. He was a successful businessman and Member of
Parliament. He was a champion of free trade. He opposed the Corn Laws which
restricted agricultural trade. For Ricardo, free commerce make nation most efficient
and efficiency is a quality that liberals value almost highly as liberty. The free
international market stimulates industry, encourages innovation and creates a
general profit by raising production. Economic liberals view the outcome of state,
market and society relations as appositive sum game, in which everyone can
potentially get more by making bargains with others as opposed to not trading with
them. Ricardo argued that, these positive-sum payoffs of trade bind together the
nations of the world by a common thread of interest and intercourse.
John Stuart Mill inherited the liberalism from Smith and Ricardo. His textbook,
Principles of Political Economy with Some of Their Applications to Social Philosophy,
helped defined liberalism for half a century. Mill developed a philosophy of social
progress based on moral and spiritual progress rather than mere accumulation of
wealth. Mill doubted the extent to which the competitive process and economic
freedom inherent in capitalism would guarantee the human to pursuit their selfinterest and contribute to the societys welfare. On that time, Mill observed that
whole families worked six days a week for more than eight hours a day and many
were laid off with little notice. This is a problem that created from capitalism market.
Mill proposed that to achieve social progress, state should take definitive action to
supplement the market, correcting for its weaknesses. Selective state action such
as educating children and assisting the poor might be inadequate in promoting
social welfare. He believed that parents had a duty to educate their children, but it
was intolerable to make them pay for this education if they were already poor. It
was also dangerous for state to take over education as centralized activity. Thus,
Mill suggested that state should grants for people to pay for private school.

Keynes ideas were popular in 1930 during the Great Depression crisis. Keynes
refuted some of the basic principles of economic liberalism. He believed that Great
Depression was evidence that the invisible of hand of the market sometimes errs in
catastrophic ways. Keynes suggested that laissez faire version of capitalism hardly
to explain the booms and busts because according to that model such disruptions
should not even occur. The market is also translates the rational and selfish
behavior of individual actors into an outcome that is socially optimal. According to
Keynes, the cause of recession and depression is that individuals tend to make
unwise decision when faced with situation in which the future is uncertain. For
example,

what

is

the

rational

thing

to

do

when

one

is

threatened

by

unemployment? One rational said that, we must spend less and save more so that
we have a fund to use in case we need them. However, if everyone spends less,
then less is purchased, less is produced, fewer workers are needed, and income
declines. For Keynes, the solution is to combine state and market influences in a
way that still relies on invisible hand but supports a larger but still limited sphere of
constructive state action. For example, during Great Depression, many states used
combination of monetary and fiscal policy to stimulate economic growth. States ran
a deficit policy to encourage production and consumption.
Keynes played important role to establish the new international economic
order. At New Hampshire meeting in 1994, a resolution was achieved to create IMF
and World Bank to manage the postwar economy. Three years later, the General
Agreement on Tariffs and Trade (GATT) was created to manage international trade.
Keynes believed that positive government actions are useful to deal with problems
the invisible hand did not solve. At the same time, he himself envisioned a liberal
international system in which market forces and free-trade policies would play major
roles in each states foreign economics. The result was that domestic trade
protection and capital controls became accepted exceptions to economy liberal
policies in international negotiations.
In 1960, Keynesianism was attacked, seeking to put more emphasis on
economic growth instead of stability. In 1973, United States replaced its fixed
exchange rate system to flexible exchange rate system which led to increased
speculation on currencies and more money circulating in the international economy.
In the same year, OPEC oil prices hikes led to economic recession in the

industrialized nation. Meanwhile, many new industrialized countries such as Japan


and Taiwan were competing with United States for new trade market. Keynesian
policies to deal with recession generated stagflations which were not supposed to
occur together.
In this situation, Keyness ideas were gradually replaced by Friedrich Hayek
and Milton Friedman. Their ideas was to reborn the idea of Adam Smith which is to
limit the role of state in economy. This idea was known as neoliberalism. Hayeks
most influential work, The Road to Serfdom, study about the growing state influence
that he felt can threatened the individual liberty. He asserted that, the growing role
of government to provide greater economic security was nothing more than the first
step on a slippery slope to socialism or fascism. For Hayek, the only way to have
security and freedom was to limit the role of government and draw security from
opportunity the markets provide to free individuals.
Echoing Hayeks foundation, Milton Friedman wrestled with problem of
keeping government from becoming a Frankenstein that would destroy the very
freedom we establish it to protect. According to Friedman, government is an
instrument that we can exercise our freedom, however concentrating power in
political hands can also threat to freedom. Friedman stresses the classical liberal
view that the market preserves and protects liberty.
Prime Minister Margaret Thatcher of Great Britain and U.S President Ronald
Reagen were the chief practitioners of neoliberalism policies. Neoliberalism
emphasized

economic

growth

over

stability.

Reagen

promoted

supply-side

economics which is the idea that lower taxes instead of increased spending by
government would increase the money supply and generate its own demand,
unleashing

capital

to

business

and

consumers.

Apart

from

that,

Reagen

implemented deregulation of banking, energy, investment and trade markets in


order to promote free trade. Many national telecommunications, airline and trucking
industries were privatized to allow for greater competition and freedom to set
prices. Some public housing in Britain was rolled back. Although these policies
might lead to greater income inequality, economic growth at the top of society
would gradually trickle down to benefit labor and society.

Many attribute the global economic recovery after 1992 to deregulation and
privatization, which became widespread policies in most parts of the world.
However, in mid-1990, neoliberalism was under attacked especially by antiglobalization protestors who accused it of causing violation of human right,
damaging the environment, depriving poorer countries of effective representation in
international economic organizations, and fostering sweatshops in developing
countries. Many civil society groups had lost faith in laissez faire capitalism. Major
recession in Mexico in 1994, Russia in 1996 and throughout much of Southeast and
East Asia in 1997 and 1998 led many officials in developing countries to question
the merits of weakening regulations and encouraging massive capital flows across
borders.
By

the

globalization

mid-2000s,
began

to

some

public

address

officials

potential

and

problem

intellectual
with

supporters

rapid,

of

unregulated

globalization. A good number of these critics were not inherently opposed to


economic liberal ideas but merely wanted today IPEs to be managed better. For
example, Joseph Stiglitz the former chief Former chief economist of the World Bank
and Nobel Prize winner in Economics has criticized IMF policies for making it difficult
for many developing nations to get out of debt and benefit from globalization.

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