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Economic liberalism is the ideological belief in organizing the economy on individualist and voluntarist lines, meaning that the greatest possible number of economic decisions are made by individuals and not 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. However, economic liberalism may accept government intervention in order to remove private monopoly, as this is considered to limit the decision power of some individuals. While economic liberalism favours markets unfettered by the government, it maintains that the state has a legitimate role in providing public goods.
Economic liberalism is most often associated with support for free markets and private ownership of capital assets, and is usually contrasted with similar ideologies such as social liberalism and social democracy, which generally favor alternative forms of capitalism such as welfare capitalism, state capitalism, or mixed economies. Economic liberalism also 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.
Theories in support of economic liberalism were developed in the Enlightenment in opposition to mercantilism and feudalism, and is believed to be first fully formulated by Adam Smith, who advocated minimal interference of government in a market economy, though it does 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.
Position on state interventionism
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.
Position on public enterprise
Economic liberalism can be supportive of public enterprise for the provision of public goods. For instance, Adam Smith argued that the state has a role in providing roads, canals, schools and bridges that cannot be efficiently implemented by private entities. However, he preferred that these goods should be paid proportionally to their consumption (e.g., a toll). In addition, he advocated retaliatory tariffs to bring about free trade, and copyrights and patents to encourage innovation. Robert Cox's further research highlighted the importance of innovation and its deeper implications on the free market.