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Left Alliance for National Democracy and Socialism

Liberal Economics

Liberal Economics


Liberal Economics

Liberalism is a political ideology that is based on the idea of individual rights and private property being more important than anything else. There have been several contributors to liberal thought.

John Locke

John Locke was a philosopher who laid the foundation for the socio-political aspects of liberal ideology. Locke was a social contract theorist, who believed that the importance of forming public institutions was to protect individuals from being subject to coercion by other individuals. He believed that a situation of anarchy, or "the state of nature" would have individuals defending their freedoms and property on their own. However, having to constantly focus on your security would distract you from being productive. For example, a farmer would not be motivated to produce a lot of food if he thought that it was going to get stolen anyways. Locke believed that creating a civil environment for resolving disputes, and by having individual rights and property rights collectively recognised, persons would feel that their efforts and investments were more secure, so they would have a greater incentive to produce and pursue their aspirations.

Adam Smith (Classical Liberalism)

Adam Smith was an economist who developed the economic aspect of the liberal ideology. He challenged the basis of Mercantilism, a practice of governments heavily intervening in the economy and controlling trade. Mercantilism was built on the idea that any exchange was zero-sum, i.e. if one entity gained, the other lost; both entities could not gain at the same time. He advocated instead for a removal of all barriers to trade, insisting that it was possible for there to be mutual gains in trade.

Adam Smith noted the benefits of 'division of labour' or what we know as specialisation. On a small scale, this meant that someone could focus on a specific aspect of production while someone else focuses on another specific aspect; production would be more efficient overall since each person has less to focus on. On an international scale, this applies to specialisation of economies, where a country can produce something more efficiently than another country. For example, imagine if Jamaica produces coffee more efficiently than Guyana, while Guyana produces rice more efficiently than Jamaica; instead of Jamaica producing both coffee and rice, it should simply focus on producing coffee, and Guyana should focus more on producing rice. Jamaica could then trade coffee for rice from Guyana; both countries would benefit from this, because it would be more costly for Jamaica to produce its own rice or for Jamaica to produce its own coffee.

Mercantilism involved what we call "Protectionism" in modern times. An empire would try to produce everything on its own to avoid relying on trade with another empire. In empires and their colonies, there were tariffs or even bans on goods from other empires. In the analogy above, what would happen is that Jamaica would put a tax on Guyanese rice to ensure that it is more expensive than Jamaican rice, so that Jamaican rice farmers would not be subject to competition from Guyanese rice farmers. Adam Smith disliked this idea, because it discouraged competition and facilitated inefficiency. Adam Smith thought it would be cheaper for both countries to focus on what they are best at producing, while trading with each other. He did not believe that there should be any tariffs or other barriers to trade, and he did not believe that the government should intervene in the economy. He believed that the economy would regulate itself.

John Maynard Keynes and Welfare Capitalism

With Adam Smith's model of free trade, where there are no authorities to oversee or regulate the market, a lack of coordination among all participants in the market would lead to boom and bust cycles, and therefore market failures. Among the most well-known market failures in Western history is the Great Depression that took place in the late 1920s and 1930s. This is where John Maynard Keynes came in to rescue the liberal economic doctrine by reforming it. He believed that the government should react to inflation and recession, and use special measures to manipulate the economy to cushion the people from rapid changes, e.g. rising prices or recessions.

Keynes' brand of Liberalism led to the use of welfare programmes to combat recessions. If an economy was moving slow, and if there was high unemployment, the government could spend on welfare programmes that put money into poor people's hands so that they could go out and spend the money, thereby stimulating economic activity. We must understand, then, that the role of welfare is not necessarily done in the interests of the poor masses, but instead done in the interests of ensuring that they have enough money to serve their functions as consumers for businesses to make profits from. Keynes saw how the economy could stagnate if the wealth was stored away in savings, and proposed taxing the wealthy to put the money back into circulation, but this ends up benefiting the wealthy. When poor people spend their money, it is going into the pockets of retailers, landlords, the owners of utility companies, and so on. It also preserves Capitalism because poor people can live slightly more comfortably, just enough to prevent them from revolting against the system.

Hayek and Neoliberalism

You probably hear about the 1980s with Ronald Reagan, Margaret Thatcher, and our own Edward Seaga. You also may have heard the term "Neoliberalism" and you were not sure what it meant. Neoliberalism is simply a return to the classical ideas of liberal economics that were expressed by Adam Smith. It involves free trade, deregulation of the economy, fiscal conservatism, and minimising the state's assets and responsibilities.

Neoliberal policies are promoted by the World Trade Organisation, the World Bank, and the International Monetary Fund. These organisations encourage governments to reduce barriers to trade, and to divest (sell off) state assets to the private sector. Neoliberalism upholds the idea that the economy will regulate itself if the government does not intervene, and that deregulating the economy is the best way for it to be efficient.

Neoliberal thinkers make grand assumptions about the economy, based on academic theories and formulas that are disconnected from the reality on the ground. Neoliberalism combines the theoretical assumptions of Classical Liberalism with the macroeconomic scale of Keynesian economics. Politicians often talk about "economic growth" and "economic development" in very vague terms, and report pretty statistics on how the economy has improved, but these are often not felt on the ground by the average person. Neoliberalism looks at the economy in terms of numbers and ideals, and not in terms of the actual quality of the lives of the people. Neoliberal policies tend to lead to the wealthy becoming wealthier, and the poor becoming poorer.