Liberalism is an ideology that defends the economy free from government intervention, and the maximum individual freedom to make consumer decisions, through capitalism. It is also an ideology that defends private property.
A liberal economy, also known as a market economy, is characterized by free supply and demand, and the formation of prices from benefits above costs. This freedom in economic transactions is given by competition between sellers and, furthermore, by the absence of taxes.
History of liberalism
The first ideas of economic liberalism appeared in the era of mercantilism, when governments, mainly European, controlled foreign trade and the internal movement of the market. It was then that some French thinkers of the Enlightenment began to demand a state with less control and taxes.
These ideas influenced the economist Adam Smith, who in 1776 published his book known as “The Wealth of Nations.” He argued that individuals in a market offer goods and services for their own benefit, but that they benefited society, as if there was an “invisible hand” to guide them, without the need for a government to impose rules.
Adam Smith had realized that the UK economy had benefited from this freedom in the market and the power of institutions to protect individual property, compared to other countries that imposed high taxes on merchants and consumers.
From these principles, classical economics, also known as classical liberalism, or let-go liberalism , emerges .
Neoclassical economics
The era of neoclassical economics is marked by the development of economic studies, after the appearance of the ideas of Adam Smith. These analyzes always considered the liberal economy as an object of study, also known as the market economy.
The market economy is characterized by the formation of prices through supply and demand, the production and distribution of income through the free market, with a minimum of political intervention.
Liberalism began to be disputed and to share space with other political and economic ideologies, such as socialism, a contrary ideology that supports the central planning of the economy.
Since the First World War, and also, the Crisis of 1929, the lack of confidence in the free market to give stability and growth to the economy, gave rise to a more interventionist strategy that had to do with having a welfare state and the decrease in unemployment.
Many countries are beginning to adopt macroeconomic planning policies, such as the creation of state-owned companies and the increase in public employment, or also, in most cases, mixed economies between the free market and central planning by governments.
Neoliberalism
After World War II, the reconstruction of many countries led to increased government intervention in their economies. With that, however, liberal economists continued to advocate for a freer economic system. Among the best known was the Austrian school economist Friedrich Hayek.
With the crises in the 1970s, governments began to focus on controlling the currency and inflation, prompting several countries to sell their state-owned companies and downsize the public sector, returning to the ideas of liberalism.
This return of economic liberalism to the surface became known as neoliberalism or the new liberalism, which is a term associated with countries that abandoned more interventionist policies in the market.