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Economic liberalism is an economic system organized on individual lines, which means that the greatest possible number of economic decisions are made by individuals or households rather than by collective institutions or organizations. It includes a spectrum of different economic policies, such as freedom of movement, but it is always based on strong support for a market economy and private property in the means of production. Although economic liberalism can also be supportive of government regulation to a certain degree, it tends to oppose government intervention in the free market when it inhibits free trade and open competition.
Economic liberalism is most often associated with support for free markets and private ownership of capital assets. It contrasts with protectionism because of its support for free trade and open markets. Historically, economic liberalism arose in response to mercantilism and feudalism. Today, economic liberalism is also generally considered to be opposed to non-capitalist economic orders, such as socialism and planned economies.
An economy that is managed according to these precepts may be described as a liberal economy.
Arguments in favor of economic liberalism were advanced during the Enlightenment, opposing mercantilism and feudalism. It was first analyzed by Adam Smith in An Inquiry into the Nature and Causes of the Wealth of Nations, which advocated minimal interference of government in a market economy, though it did not necessarily oppose the state's provision of basic public goods with what constitutes public goods originally being seen as very limited in scope. Smith claimed that if everyone is left to their own economic devices instead of being controlled by the state, then the result would be a harmonious and more equal society of ever-increasing prosperity. This underpinned the move towards a capitalist economic system in the late 18th century, and the subsequent demise of the mercantilist system.
Private property and individual contracts form the basis of economic liberalism. The early theory was based on the assumption that the economic actions of individuals are largely based on self-interest (invisible hand), and that allowing them to act without any restrictions will produce the best results for everyone (spontaneous order), provided that at least minimum standards of public information and justice exist, e.g., no one should be allowed to coerce, steal, or commit fraud, and there is freedom of speech and press.
Initially, the economic liberals had to contend with the supporters of feudal privileges for the wealthy, aristocratic traditions and the rights of kings to run national economies in their own personal interests. By the end of the 19th century and the beginning of the 20th, these were largely defeated.
Economic liberalism opposes government intervention on the grounds that the state often serves dominant business interests, distorting the market to their favor and thus leading to inefficient outcomes. Ordoliberalism and various schools of social liberalism based on classical liberalism include a broader role for the state, but do not seek to replace private enterprise and the free-market with public enterprise and economic planning. For example, a social market economy is a largely free-market economy based on a free price system and private property, but is supportive of government activity to promote competitive markets and social welfare programs to address social inequalities that result from free-market outcomes. Economic liberalism also includes support for equality of opportunity (also known as social mobility), due to the belief that a lack of equality of opportunity will lead to an increase in private monopoly and therefore infringed liberty of individuals.
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