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Study Notes

Laissez-faire Capitalism (Liberalism)

A-Level, IB
AQA, Edexcel, IB

Last updated 3 Jun 2020

Classical liberals argue that a free-market (‘free’ that is from government intervention) facilitates the optimum allocation of scarce resources within an economy.

The liberal perspective is strongly in favour of a capitalist economic system, which may be defined as an economic system based upon private ownership and market forces. This observation applies to both main strands of liberal thought, although they differ over the extent to which the state should intervene in order to uphold the smooth functioning of the marketplace.

Classical liberals argue that a free-market (‘free’ that is from government intervention) facilitates the optimum allocation of scarce resources within an economy. Over time, prices reach a state of equilibrium based on the interplay of supply and demand. Those on the right-wing of the Liberal Democrats (such as the Orange Bookers) believe that a laissez-faire system is compatible with freedom because economic agents are allowed to make decisions on a voluntary basis. This argument applies to firms, customers and workers themselves.

Equally, classic liberals offer a firm rebuke to the left-wing argument that the owners of the means of production exploit their workforce. As workers are free to offer their labour in return for wages, employers have every incentive to treat their workforce in a fair and reasonable manner. If they do not, workers will either leave or become demotivated. Either way, the level of service provided by that firm will be adversely affected and that would be bad for business.

Classical liberals also offer an insightful argument in regard to reducing trading barriers within the global economy. It has long been a fundamental tenant of classical liberalism that free trade raises living standards for all. According to contemporary theorists such as Thomas Friedman (2000), globalisation represents a positive force within international relations. Free trade generates prosperity and opportunity whereas state control denies people the chance to better themselves. There are few better illustrations of this argument than China, a country that once experienced dreadful famines during the cultural revolution under Chairman Mao is now responsible for the largest number of people being lifted out of poverty in world history. China demonstrates that free-market reforms (as instigated by Deng Xiaoping) represent the best route available towards the eradication of poverty. Deng’s theory is known as ‘one centre and two bases’ – the centre being economic constriction and the two bases being adherence to one-party rule and furthering economic reform.

It should also be noted that social liberals are as favourable towards capitalism as classical liberals. However, there is a major line of disagreement between these two strands over the proper role of the state and the level of welfare provided. The social liberal stance facilitates an enabling role for the state to correct market failure. Social liberals argue that the allocation of resources derived from the free exchange of economic agents can lead to undesirable consequences. In order to resolve this, social liberals argue in favour of state intervention to make the market work more effectively – which leads neatly onto the next section.

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