Understanding Economic Liberalism and Free Markets

The Foundations of Economic Liberalism

Economic liberalism is an economic theory that emerged during the Enlightenment, primarily formulated by influential thinkers such as Adam Smith and David Ricardo. It advocates for minimal government interference in the economy, asserting that economic freedom and free enterprise are crucial for societal progress.

Proponents believe that these principles foster a more egalitarian society and lead to an indefinite increase in prosperity, thereby preventing national decline. A core concept is the idea of a spontaneous order generated by the 'invisible hand,' which guides individuals pursuing their self-interest to collectively benefit society.

This philosophy is often summarized by the French phrase Laissez faire, laissez passer (let do, let it pass). While commonly associated with economic liberalism, this motto originated from Physiocracy, an earlier economic theory.

Adam Smith and the Labor Theory of Value

Adam Smith, often regarded as the creator of modern liberalism, conducted detailed studies on wealth creation, capital investment, and distribution. He famously postulated the labor theory of value, arguing that labor is the sole source of wealth. In primitive communities, the exchange value of goods was determined by the effort required to obtain them. As Smith stated, "Work was the first price, the first money to purchase and pay for all the things."

The Invisible Hand and Market Harmony

Modern industrial societies differ from their predecessors due to a greater accumulation of wealth, largely driven by technological innovations. Smith observed that both employers and workers are guided by the natural psychological law of self-interest: employers seek maximum profit, while workers aim for the highest possible wage for their labor.

He concluded that the forces of supply and demand, along with production costs, are spontaneously regulated by the 'invisible hand' – a metaphor for market competition. Smith believed that any economic system allowing the free activity of individuals would develop harmoniously, leading to a continuous increase in the general wealth of the country.

Economic Liberalism and the Enlightenment Era

Initially, liberal economic theory faced significant opposition. It had to contend with the entrenched power of feudal privileges, aristocratic traditions, and the mercantilist policies where kings drove national economies in their own interest. However, by the late nineteenth and early twentieth centuries, these opposing forces were largely defeated, paving the way for the widespread adoption of liberal economic principles.