Liberalism has three strands: 1) orthodox liberalism, 2) interventionist liberalism, and 3) institutional liberalism. Orthodox liberalism originated from the ideas of Adam Smith. Its basic tenets are as follows: 1) the market is a self-regulating economic machine, 2) individual selfish interests lead to advantages for the whole society, 3) there is the existence of mutual forms of trade that benefits all parties involved based on the principle of comparative advantage, and 4) there should be minimal or no state intervention.
Interventionist liberalism though differs from orthodox liberalism on several counts: 1) there is greater degree of government intervention than orthodox liberalism, 2) the focus is on the exact manifestations of economic growth or development rather than the replacing function of the market. This strand of liberalism was developed by the Great British economist Sir John Maynard Keynes. He posited that economic growth is dependent on four factors: a) consumption, b) investment, c) government expenditure, and d) trade balance of payments.
Increasing factors a, b, and c would stimulate economic growth (Keynes, p. 611). Increasing consumption would provoke an increase in the investment level of the country. Lower interest rates would tend to encourage investors to increase their capital outflow in a country. Government expenditure would necessarily increase overall public output. The role then of the government is on the fiscal side.
To facilitate economic development/growth, the government should increase government expenditure to a point that such condition does not hamper the financial stability of a government (Keynes, p. 611). The intervention of the government is more noted on the monetary side of economic policies. The government can control the prevailing interest rates in a country. Lower interest rates would encourage investors at the expense of the consuming public (lower savings). Higher rates would mean otherwise. The last is interventionist liberalism.
Its main tenets are as follows: 1) there is mutual dependence through various channels that creates needs for jointly developing and implementing state’s policies, 2) the goal is cooperation among stakeholders and parties involved, and 3) there are sets of explicit or implicit rules, norms, principles, and decision-making models or procedures around which the actor’s expectations converge in a given area of international relations. This is somewhat a mixture of orthodox and interventionist liberalism. Personal Critique of Liberalism
There are definitely many changes that should be made to liberalism. First, the statement that the goal of the state is to protect individual rights and freedoms seems to be a misguided statement if we consider the existence of big and multinational corporations. In his book, Carson argued that the so-called free-enterprise system that classical economists are boasting is in fact transformed into the so-called capitalist system. The capitalist system provides the businessmen when the capacity of limiting the wages of the laborer.
The state now, “protects corporations (which are embodiments of the capitalist ordeals) through limited liability, laws on protection of assets, high interest rates, and of course low taxes” (Carson, p. 274). Liberalism therefore only serves big corporations at the expense of the laboring class (low wages) and medium scale industries (middle capitalists). Free-enterprise system, as espoused by liberalism is the opposite of the capitalist system in its true economic goals and assumptions.
Hence, the “protection” statement that originated from liberalism (expressed in the capitalist/free-enterprise system) is a total contradiction of economic policies of most countries. Keynes noted that in the era of modern economics, prices of goods in the market are inflexible in the short-run (Keynes, p. 326). Short-run adjustments of production schedules and wages will not be smooth since the overall inventory of the firm depends on the expected rate of demand of the public, the actual expenditure, and the price itself. The implication of this is the fact that free-enterprise can only be achieved partially in the long-run.
The assumption of liberalism that supply and demand (prices and quantity demanded) would smoothly adjust is also an understatement. It should be noted that the existence of inflation is the direct result of a slow adjusting market. In the real economic free-enterprise world, there is no such thing as a zero-inflation market (prices remain the same). In Communist countries, there is no inflation because prices are set to level that equal costs, although at the expense of economic development. The assumption that liberalism cannot explain the nature and causes of wars is also a misinterpretation of the theory.
Remember that most of the wars of the 17th, 18th, and 19th centuries were caused by economic recessions. Countries experiencing such wars first experienced the workings of inflation, stagflation, and economic depression. The competition for natural resources and colonies resulted to high-degree tensions between powerful countries. Hence, it is safe to assume that while liberalism does not or is incapable of explaining the causes and nature of wars; its major propositions give hint as to the extent and credulity of human conditions in times of economic crisis.
Human conditions, miserable or not, result to action, and such actions are competitive in orientation (for survival). As one famous social scientist say “war is caused by the geopolitics of competition. ” There is only one may for the theorists to convince the audience of the plausibility of liberalism is to make the theory more flexible in explaining variations in economic actions. Added to that, the theory should, if it were not capable of being flexible, be left as an “armchair theory” that has a loose connection to practical economic considerations.
This should not be applied to its major strands, because they are specific approaches to solving economic problems (with liberalism as the guiding – armchair – framework).
Carson, Kevin. The Iron Fist Behind the Invisible Hand. NY: MacMillan Publishers, 2001. Keynes, John Maynard. The General Theory of Employment, Interest and Money. England: Macmillan Cambridge University Press, 1936. Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. London: Methuen and Co. , Ltd. , 1776 (1904).