David Leonardo Guzmán Soacha

International Political Economy

Professor: Ross Philip Eventon
Theoretical Essay
Universidad del Rosario

Classical Liberalism and Neoliberalism: Economic Life and

Social Death.
It is common to hear that the current economy is open and globalized. But what will people
specifically refer to when they say that it is open and globalized? Without doubt, an economy
has these characteristics when in one way or another it has had contact with any or several
elements of the classical liberal model. Liberalism is one of the essential economic theories
to the understanding of capitalism and the contemporary international system. But the current
geopolitical structure, the international market model, the new social dynamics, and the
historical background, make classical liberalism an unsustainable and ineffective economic
system today, in fact, even if it wants to be seen as an option in governing a country.
“Economic liberalism is a doctrine in which the best way to achieve economic development
and efficiency in resource allocation is through a free market without state intervention.” 1
Although liberalism has several exponents, the theory’s father is Adam Smith, who in 1776
wrote The Wealth of Nations. There he advocated the Invisible Hand theory, in which he
established that all individuals in society in search of their own benefit direct the economy
toward an optimal balance. This balance is achieved through the free market, the automatic
regulation between supply and demand and the elimination of state intervention. Economic
liberalism was born in opposition to mercantilism – also called nationalism – in order to
expand economies, had a major impact on industrial development and innovation, generation
product and service diversification, and making an automatic price regulation. Liberalism
has been highly influential. Nowadays, all the world’s major industrialized countries are,
formally at least, liberal democracies with market economies 2 and given that the prevailing
political system in the world is liberal democracy, it can be deduced that the world is now
universally within a capitalist market economy fueled by globalization and basic liberal
principles.
However, it is important to note that this market economy that we know today is not fully
anchored in the classical liberal model or neo-liberalism proposed by economists like Von
Hayek but responds to interventionist or mixed systems. At the end of the 20th century, there
was the rise of neoliberalism led by the alliance between Ronald Reagan and Margaret
Thatcher -the political leaders at that time in the United States and the United Kingdom
respectively- who were betting to set aside the welfare state and go straight for profits through
exacerbated capitalism. From there, multiple criticisms of neoliberalism begin to emerge,
and although nations adapt the market economy as an essential element of their financial
system, they do not completely eliminate state intervention.
Historical events have shown that liberalism at its extreme level is a trap for social well-being
and for humanity itself. Karl Polanyi, a critic of economic liberalism, argues that there is a
double market movement in which the economic system moves in a pendulum between
market liberalization and vulnerability to the corrosive power of markets. In essence, Polanyi
explains how when the market takes power, societies are destroyed and then, to recover, they
need regulation through state-imposed socio-political relations. The market society promoted
by the liberalism of the minimum state, having as its last purpose the presence of high profits,
becomes harmful once everything (nature, labor and currency) is reduced to the simple
category of merchandise. That’s why, if we detail the models of the current economic powers
- the United States, China, Russia, Germany and the United Kingdom - we will find a bet on
mixed models, where there is a basic market economy and a protection system driven by
social policies and state regulation.
However, it would be important to stop at finding out what the damage to society is
specifically when liberalism reaches its extreme. Basically, when the market economy is
unconstrained, we are faced with a libertarian state. A libertarian state is a system in which
all individuals are supposed to be free thanks to minimal state intervention, but the reality is
that the only beneficiaries are those with the greatest purchasing power. According to
Michael Sandel in his book called Justice, there are three types of policies and laws rejected
by libertarians. The first one is paternalism, the second is moral legislation, and the third is
the income or wealth distribution. The problem with this is that, although the 3 principles
initially revolve around an economic environment, they end up having an impact on people's
political and social life. When a State does not set such limits, it is impossible to guarantee
basic rights and principles that are contemplated in a rule of law or in a liberal democratic
state. Some of the adverse consequences of a libertarian state could be organ trafficking,
surrogacy, normalization of the black market, deterioration of the public good due to lack of
taxes and mortality growth.
In conclusion, it is impossible to think of an economic system or theory without its political
influence and repercussions. In the case of liberalism, we can show that, although its basic
elements are key to understanding: the modern capitalist system, the new dynamics of world
trade and the power of the market for the states survival, its model is unsustainable and
counterproductive when it is not accompanied by market regulatory laws and social policies.
Today’s world is economically consolidated thanks to the liberal structure, but without
political reforms, or the influence of other critical economic theories, it would be another
ideal. A model that is completely unenforceable and useless to the International System and
people needs.
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