History

Before Liberalism

For most of human history, there was little economic freedom as most political scientists or political economists would define it today. In democratic Athens and republican Rome, many citizens owned property and engaged in free trading through contracts. Yet, these states still depended largely on slaves for the operation of their farms and industries. Indeed, until the advent of political and economic liberalism, most people were legally or informally bound to an owner, employer, or ruler. They were slaves considered a form of property; serfs legally tied to specific agricultural land through obligatory labor and rent; or indentured servants liberated only after a fixed period of time by a tradesman.

In many countries, property and economic rights were distributed by the monarch, who possessed the realm's wealth and territory. The king divided the land, usually by giving it to nobles who were then expected to raise military forces when called upon. This gave rise to hereditary landowning aristocracies, some of which became more assertive of their own rights and privileges and obliged monarchs to limit their powers through such means as the Magna Carta. Under the feudal system, towns and cities also enjoyed special rights as distinct units. Town merchants and artisans (known in France as the bourgeoisie) often organized themselves into collective entities to hold wealth, conduct business, or defend rights in common. These became known as corporations since legally they were considered a single person (the word derives from the Latin word corpus, meaning body). Monarchs granted charters of incorporation and some began to encourage groups of merchants to undertake risky or expensive enterprises to benefit their kingdoms. Among the most famous of these were the respective East India Companies of Great Britain and the Netherlands for purposes of engaging in oceanic trade. These companies founded colonies and sought to monopolize trade with parts of America, Africa, and Asia between the 17th and 19th centuries.

Mercantilism and the Stirring of Capitalism

Chartered trading companies were a key component of mercantilism, the dominant economic system in much of Europe from the 16th to the 18th century. According to mercantilist theory, a nation's wealth depended on the acquisition of gold and silver through increased exports and internal self-sufficiency. This required protectionist policies to safeguard a country's domestic industries and colonial expansion to secure exclusive sources of raw materials and markets for export products. Mercantilism encouraged domestic and overseas commerce, manufacturing, the accumulation of wealth, and the development of large and uniform national economies. It thus set the stage for the emergence of a new form of political economy based on the largely unfettered operation of markets.

The Wealth of Nations

Just as John Locke's Two Treatises of Government had a revolutionary influence on political philosophy by establishing the principles of self-governance (see "Consent of the Governed"), Adam Smith's The Wealth of Nations, published nearly a century later in 1776, had a seismic effect on the field of economics by laying out new principles based on individual liberty.

In The Wealth of Nations, Smith argued that mercantilism ignored the true nature of wealth, which was best attained through open competition and the interaction of supply and demand rather than the enforcement of monopolies and the excessive accumulation of gold and silver. In pursuing their own self-interest, individuals created competition, which helped to keep prices close to the cost of production and encouraged growth. Mercantilism's protectionist system, according to Smith, raised certain prices artificially and benefited state imperialism and the commercial classes to the detriment of the whole society. The accumulation of bullion, he argued, simply led to inflation by increasing the amount of gold (currency) and keeping total production stagnant. Smith advocated laissez-faire ("let to do" in French), which means limited government intervention that allows for competition in production and trade and a free market — a system that would benefit the whole nation by increasing its wealth. The government, Smith argued, should restrict itself generally (but not exclusively) to providing law and order and protecting private property.

Smith spoke to the needs of an emerging class of manufacturers, traders, and property owners within an evolving economy. His impact has been enduring. The Wealth of Nations remains the basis for free-market theory and Smith's views continue to influence political party platforms and government policy.

The Twin Characteristics of Democracy

Since the late 18^th century, economic freedom, or expanding the property rights of individuals and establishing private trading markets, has been connected with the expansion of political freedom. While the free market economy arose at a time when serfdom and slavery still were being practiced, these institutions proved incompatible with both capitalism and democracy. In most countries, the abolition of serfdom and slavery coincided with major advances in economic growth and the development of democracy. Capitalism, however, also entailed new forms of labor exploitation and conflicted with individual rights. New industrialists, drawing upon the masses of people displaced from the countryside by more efficient farming, were able to pay low wages and maintain poor working conditions. In market terms, the labor supply exceeded demand, making individual workers cheap and expendable. But business tycoons maintained their economic power by denying workers the right of freedom of association. It was the rise and success of labor unions from the late 19^th century to the mid-20^th century that gave workers more collective bargaining power and thus improved pay, alleviated poor working conditions, and expanded political representation. Still, severe treatment of workers is common in many countries, including democracies, reflecting an ongoing tension between free market principles and freedom of association (see "Freedom of Association").

Two Rival Political Trends

For more than 100 years, two rival sets of economic principles and policies have dominated the political debate in democracies. Social democracy as a philosophy leans toward concern for workers and the broader society, favoring labor rights and government intervention in the economy to achieve greater economic equality. Economic liberalism as a philosophy focuses on individual self-interest and liberty and promotes laissez-faire to encourage greater market freedom and economic growth. In general, parties representing these two broad views came to accept the basic elements of both a free market economy and a state welfare system. (In the US, terms are different: economic liberals in the European sense are generally called conservatives, while the term liberal refers to what Europeans call the Left or social democracy.)

These competing political parties have alternated in power and adjusted their policies based on the interests and preferences of the citizenry in dealing with specific political and economic conditions of the time (such as adopting lower taxation to stimulate business or increasing state subsidies to alleviate poverty). During the Great Depression and post–World War II periods, the social democratic parties were more dominant in Europe and the United States and instituted policies to redistribute income, protect workers’ rights to freedom of association and collective bargaining, and foster economic growth through government investment and state-funded infrastructure programs. These parties also put more emphasis on regulations to protect the environment and the consumer than on economic freedom or the protection of business interests. In the last 25 to 30 years, liberal economic parties have successfully promoted more laissez faire policies in major world economies, including the United States, replacing state intervention with lower taxes, reduced regulation, and free trade initiatives. Conservative (or economic liberal) parties in the US, the UK and some other countries have also sought to greatly minimize the welfare system, privatize or eliminate government services, and restrict worker rights with the aim of reducing the power of labor unions.

Capitalism vs. Communism

In the 20^th century, the biggest ideological challenge to economic freedom — and to freedom generally — was communism. It was first instituted by the Bolshevik Party following the Russian Revolution in 1917 and imposed in the territories of the Russian empire through the Union of Soviet Socialist Republics (USSR) in 1922. Communism was imposed in Eastern Europe through military occupation by the USSR and through revolution and war in the post-war period in China, North Korea, Vietnam, Yugoslavia and other states. Like social democracy, communism drew inspiration from German theorist Karl Marx's mid–19th century critique of capitalism. But unlike social democracy, whose proponents rejected Marx's theories of historical determinism and sought reforms within a democratic political framework, communism advocated violent revolution to abolish capitalism and achieve the “dictatorship of the proletariat.” in practice, this meant a totalitarian dictatorship of the Communist Party. In economic terms, it meant abolishing property rights and directing the economy through state planning. All property was seized by the state and collectivized and property owners “liquidated.” The process of collectivization resulted in widespread famine in which tens of millions of people died (see, for example, Country Study of China). Millions of people were forced into a penal labor system used to fulfill the state's economic plan, while workers had no freedom of association or other means to protect themselves from exploitation by the new owners of property, the state. Dissidents likened life under Communist regimes to slavery.

Communist systems produced chronic shortages and widespread deprivation, while democratic countries saw remarkable growth and abundance in the decades after World War II. Over time, the Soviet Communist system decayed economically and collapsed politically in 1989-91 in the face of competition from its democratic and capitalist rivals. Chinese Communist leaders, however, prevented the collapse of their regime by repressing any mass uprising and creating a hybrid system of authoritarian capitalism, loosening some economic controls while maintaining a political dictatorship. China's controlled economic reforms propelled a period of impressive economic growth. The same system was also adopted by Vietnam with some economic success. But the remaining handful of unreformed Communist states — such as North Korea and Cuba — have sunk to extreme poverty.

The End of History?

The collapse of Soviet communism in 1989–91 contributed to a period of worldwide expansion of both political and economic freedom. Some theorists, most prominently Francis Fukuyama, speculated that the dominance of political and economic liberalism signaled “the end of history,” with capitalism overcoming its main global challenger, communism. In general, it is true that the “third wave” of democratization that began with the fall of fascist dictatorships in Portugal and Spain in 1973-75 coincided with the greater adoption of free markets and economic liberalism in many parts of Africa, Asia, and Latin America. At the same time, the prediction of “the end of history” was premature. For one, communist countries like Cuba and North Korea have been impermeable to change. As well, many countries of the former Soviet Union, like Russia, Kazakhstan and Uzbekistan, simply replaced communist dictatorship with an authoritarian version in which the dominant political ruler controls nearly all of the economy despite adopting some features of capitalism. In Asia, the People’s Republic of China and Vietnam avoided a collapse similar to the Soviet bloc countries by creating a hybrid system combining communist political dictatorship with state-driven capitalism. Other countries like Malaysia and Singapore also succeeded in combining authoritarianism and capitalist economics. In both types of dictatorship, the political leaders argue that democracy and political freedom is contrary to “Asian culture.” Until now, each of these countries has forestalled any transition to democracy (see Country Studies).

Thus, while communism no longer poses a central challenge to economic freedom or democracy, other forms of state dictatorship and rival ideologies continue to pose challenges to liberal democracies and political freedom. In China and Russia, two variants on a new authoritarian model have emerged that appear to join capitalism and political dictatorship, akin to various fascist and military regimes in the 20^th century. Such a model raises the question of how capitalism can co-exist within dictatorial systems. Some argue that the capitalist business model is by nature authoritarian and thus consistent with authoritarian political structures. Others, citing examples like Mexico, South Korea, and Taiwan, would argue that capitalism, by fostering greater economic rights of individuals and expanding the middle class, will move dictatorships toward democratic reform (see also Essential Principles). Whichever proves true, businesses in Western capitalist countries regularly defend unrestricted free trade in order to make easier the transplanting of manufacturing plants from democracies to dictatorships — considered highly advantageous by multinational businesses since freedom of association is generally protected in the former while lower production costs are maintained in the latter by restricting or repressing worker rights. In this instance, principles of economic freedom overwhelm those of political freedom, creating political and economic contradictions have that have yet to be resolved.