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The liberal theory of economics is the theory of Economics begun in the Enlightenment , and believed to be first fully formulated by Adam Smith . It is associated with the political Ideologies of Classical Liberalism and Neoliberalism . The concept of '''economic liberalism''' or '''market liberalism''' underpinned the move towards a Free Market Capitalist economic system in the late 18th century, and the subsequent demise of the Mercantilist system.

Private Property and individual Contract s form the basis of the liberal theory of economics. The early theory was based on the assumption that the economic actions of individuals are largely based on self-interest, and that allowing them to do so without any restrictions will produce the best results, provided that at least minimum standards of public information and justice exist, e.g., no-one should be allowed to coerce or steal.

This implies that the privileges and restrictions should be abolished and everybody should have the freedom to choose a profession, sell and buy, make contracts etc. as long as all participants are voluntary. Every restriction reduces the set of alternatives and thus often forces people to choose less beneficial alternatives.

Famous proponents and theorists of the theory include Anders Chydenius , Smith, François Quesnay , Jean-Baptiste Say , Frédéric Bastiat , Ludwig Von Mises , Friedrich Hayek , Milton Friedman and James M. Buchanan , and almost all Enlightenment philosophers except Rousseau supported liberal economic principles, Laissez Faire Market Economy with little government intervention and regulation and no tariffs.


OUT OF FASHION

The liberal theory of economics fell partially out of practise in the late 19th and early 20th century, when many countries followed the Protectionism of Germany , which wanted to achieve self-sufficiency in order to be able to start a long war.

The theory fell further out of favor in the first half of the 20th century, following World War I and the Great Depression . It was largely superseded by modern economic theories, such as Keynesian Economics , which take into account Macro-level phenomena and call for a Mixed Economy involving significant State Intervention . After Keynesianism failed to explain Stagflation in the 1970s , many concepts from the traditional liberal theory were remembered by Monetarism and are currently promoted by the World Bank and IMF as part of the process of Globalization , although both organizations were actually founded by Keynes . Many liberals see them as regulatory organizations that reduce the economical freedom that the global economy needs in order to function.


REVIVAL

After World War II the world markets have again been opened slowly, and the comprehensive studies conducted in the 70s showed the success of international-trade-oriented policies over self-sufficiency policies. Also the development of microeconomic theories and empirical experience gave the liberal theory of economics a very strong academic position. Therefore, since the 70s,

For example, the theories of the Nobel-prize-winner economist and philosopher Friedrich Hayek inspired the market-oriented policies of Ronald Reagan and Margaret Thatcher , although Hayek condemned part of their policies.