Liberal economics is a school of thought in economics that emphasizes individual freedom and limited government intervention. It is based on the idea that people are rational and self-interested, and that the market is the best way to allocate resources. Liberal economists believe that the government should intervene only to correct market failures, such as monopoly power or externalities.
It’s an economic philosophy that focuses on free markets and the unbridled behavior of private sector participants. The liberal view blames the free market and private sector participants for the booms and busts that happen repeatedly in our economy, necessitating frequent government bailouts. Liberals, for instance, blame greedy financial institutions for the housing crash, while Keynesian economists claim that the free market is the source of the housing crisis.
Keynesian economics
While they share some principles, the two approaches are not necessarily mutually exclusive. Keynesians favored a more flexible fiscal constitution, but the consequences of this approach were not always desirable. Keynesians were concerned with chronic inflation. They also worried that the power of planners to mobilize resources may lead to miscalculations or overreach. In such cases, a forcible response by government is necessary. Keynes also opposed totalitarian states, the central mobilisation of resources, and regimentation of individuals.
In the 1930s, the Great Depression shook faith in capitalism. As a result, Keynes belonged to a new generation of liberal economists who rejected the laissez-faire doctrine. This doctrine never held up in practice, and Keynes believed that the state should leave the decisions of individuals and allow them totake the initiative. While Keynes’s ideas have been adopted by many economists throughout history, they are arguably at odds with the current state of economics.
Economic liberalism
The earliest roots of modern liberalism can be traced back to the New Deal, initiated by Franklin D. Roosevelt in response to the Great Depression. Roosevelt, a progressive, won an unprecedented four elections and influenced a generation of American presidents. During the Great Depression, British economist John Maynard Keynes began studying the relationship between unemployment, money and prices. In 1929, the global Great Depression hit, discrediting liberal economics and strengthening the call for government control of the economy.
The neoliberal economics of the 1980s and early 1990s were a reaction to the economic crisis. Neoliberalism favored international trade and foreign direct investment. FDI soared, with the US being the largest source of FDI. However, this trend has not been consistent across countries. A lack of empirical evidence and the presence of rival explanations makes it difficult to establish causality. In some cases, the emergence of a new type of neoliberalism may signal a shift in the direction of globalization.
Free market economies
A comparison of liberal economics and free market economies reveals that in the former the government has little role in market activities, while in the latter it is the opposite. A free market relies on the willingness of the consumer to pay over the cost of production. Anything else distorts the value of a good and leads to distorted prices and supply and demand. A free market is the ideal situation where there are no government intervention or restrictions on the exchange of goods and services.
In both types of economies, the government is heavily involved, directing the means of production and distributing wealth. It dictates the prices of goods and wages paid to workers. A free market economy, on the other hand, relies on the law of supply and demand to control the production and distribution of goods and services. Companies and workers are allowed to sell products at the price consumers will pay and earn wages they are willing to accept.
Keynes’ theory of perfect markets
One of the most fundamental changes in Keynes’s theory is the way he treats saving. The “Keynesian cross” by Paul Samuelson illustrates Keynes’s view. The Keynesian cross identifies saving and consumption propensity as a function of income, and the intersection of I (r) and S (Y) is equilibrium income. Keynes did not attempt to derive a formula for this multiplier.
Most economists today would say that the market system is fundamentally healthy but will get sick from time to time and needs a “remedy” that is limited in duration and scope. Keynes rejected this view, arguing that the market system can never be perfectly healthy if left untreated. While this view may sound more plausible today, Keynes’ theory remains a crucial part of contemporary economics.
Keynesian economics’ axioms
The axioms of Keynesian economics have a long and storied history. Keynes, himself a socialist, built his critique of liberalism to criticize the existing economic order. He argued that these axioms cannot be understood within the confines of liberalism’s basic tenets, which imply that freedom and capitalism are inextricably linked.
The axiom of a liquidity trap is a concept that hampers the effectiveness of monetary policies. Typically, economists believe that the interest rate cannot fall below a certain threshold, which is usually zero or a slight negative number. Keynes argued that the limit could be higher, although he did not attach much practical significance to it. It was later recognised by John Hicks and Dennis Robertson in General Theory, who coined the term.
Keynes’ critiques of liberal economics
One of the most important critiques of liberal economics is that Keynes failed to recognize that private property does not necessarily promote economic freedom. In fact, the most famous modern system incorporated private property, limited markets, and an overriding role for the state. In response to this, economic liberalization evolved. But Keynes’ mistakes undermined the free-market order, and opened the door to the colossal growth of state power.
The critiques of Keynes’ original theory were adopted by the new school of thought. They added an understanding of long-run neutrality, the idea that a change in the money stock has no effect on real variables in an economy. That is, Keynes argued that a slump was not a sign of a lack of spending, but a cure for misdirected spending. Thus, a slump does not pose a conflict between economic freedom and financial stability, as long as it is not caused by a lack of freedom, or government intervention.
In conclusion, Liberal Economics is a school of thought that believes in a free market economy with minimal government interference. It is based on the belief that people are rational and will make choices that benefit themselves and society as a whole. Liberal Economics is widely used in the United States, and has been credited with creating the world’s largest and most prosperous economy.
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