Economic liberalism is an ideology and perspective that states, countries are better off when the role of a nation in the economy is minimized. Orthodox economic liberals (OELs) are the individuals who favor and adhere to the economic liberal principles on the other hand heterodox interventionist liberals (HILs) are who second the ideas of state intervention in the economy for market preservation and improvement of efficiency for majority.
Popularity and tenacity of laissez-faire ideas have been brought to light by economists. This is through suggestions of group think among politicians and financial experts as well as business sector officials, this is one of the reasons behind implementation of theories that are slow to change. James Galbraith suggests that laissez-faire is a doctrine that serves as a legitimizing myth. It sets straight the rules and boundaries of the debate, brings clarifications to those that oppose it and also restricts the flow of information and alternative ideas about it.
Both OELs AND HILs values and ideas are the ideologies of globalization campaign. It is believed that markets work best when embedded in society, and when the government only intervenes to solve problems not managed by the markets. HILs acknowledge that markets are in fact the source of many problems. OELs recommend that people should strongly value economic efficiency, this is the ability to effectively use and distribute resources with little waste.
OELs believe that public policy of letting the market decide is a simple and correct recommendation especially on the basis of objective study of the market. In relation to this, Laissez-faire policies have been easier to understand compared to social values, political roles and civil society in determining appropriate distribution of resources inside and between countries.
Economic growth has been given first priority compared to social stability as well as distribution of equal income among the people. This is made possible by the laid out principles of free market models. People with financial will power are believed to support laissez-faire more, they often dominate the mass media with their ideologies, and offer much needed financial support to those in public offices. As a result most citizens tend to admire them in the developed countries.
Financial oligarchy developed in the United States of America is composed of private firms and people with financial capability and use it to serve their interests at the expense of the larger public. To make it acceptable they explain that American financial position in the world depends on free market that supports flowing capital.
HILs assert that states must act fast to save the financial system and capitalism. Some of the OELs tend to agree as Martin Wolf acknowledges that the era of financial liberalization is over and the state is expected to play a significant role in rescuing banks and adopting other interventionist measures. HILs believe there is need to increase government spending and expansion of the powers of existing regulatory institutions at national and international levels (Ballam & Dillman, 2014). They are not opposed to globalization but would like to see policies and programs that distribute the wealth it produces to the masses in industrialized nations as well as poorer people in developing nations.
There is need to reform institutions such as World Bank, International Monetary Fund, and do away with the mentality of one-size-fits-all of economies should be run and rules to be followed by countries. HILs emphasize on creating short term policy space for developing countries for their protection. This is by restricting capital flow and developing lax rules on intellectual property rights. Presumably this will enable them grow faster and buffer them from global instabilities in investment flows, currencies and commodity prices.
According to HILs capitalism has unavoidable tendencies to fall into crisis leading to misallocation and unemployment among the people, this is evident in finance through analysis. It is argued that if transactions were less costly, easy access of information by people and rational self-interest by individuals then financial stability could easily be achieved. They also disagree on the labor market issue that states full employment would be achieved in the economy with presence of oversized companies and more wages. They explain that higher wages do not necessarily lead to high unemployment rates but rather wages as important ingredient in the overall demand, so reduction in wages may lead to counter production. This is seconded by Keynes a prominent heterodox economic, he argues that higher wages were not a barrier to employment rather it stabilizes the overall demand in economy.
HILs believe developed countries must actively help developing countries. This is through allowing immigration from poorer countries, forgiving excessive debts and increasing foreign aid. They also favor inducing countries into adopting more free market reform and democracy by offering them assistance rather than pressuring them.
HILS are open to the possibility of creating a different economy and social system that shifts state market formula, to the opposite side thus benefiting social democracies. They also agree on the maintenance of different models of economy (Oatley, 2013). They explain further that coordination between these different national systems of capitalism is more important than harmonizing all their institutions and policies.
On the other hand Orthodox Economic Liberals prefer to keep the main laissez-faire characteristics of the free market, subject to few and more passive reforms. OELs propose limiting government support for banks, infrastructure projects and social welfare programs, and to channel these funds elsewhere for development. Regulation of different parts of the economy should be decreased. Taxes of the wealthy and middle class need to be cut in order to stimulate economic growth. They are also for globalization as it will do more good to the world in development of the economy.
Despite the difference between the opinion and perspectives of Orthodox Economic Liberals and Heterodox Interventionists Liberals, they seek to answer some fundamental questions in regard to the economy. They stagnate at what values the market should serve and whose interest should they promote.
No single event in recent history has ever undermined economic liberalism as much as the recent global financial crisis, despite recent grumblings about neoliberal globalization. The financial crisis created severe economic collapse in most nations, thus can only be compared to the great depression. As a result of this, the public realized the widened gap thoughts between the laissez-faire and market interventionists supporters, these are Orthodox Economic Liberals and Heterodox Interventionists Liberals respectively. This difference came by after the former head of the Federal Reserve, Alan Greenspan testified before the United States of America Congress. He admitted his wrong judgment in the self-regulating nature of financial markets, and also took the blame for looking out for the self-interest of lending institutions with the aim of protecting shareholders equity. He blamed himself for putting too much faith in the economic model that had flaw and defined how the world works.
Orthodox Economic Liberals blame the government and not the banks for the financial crisis. They explain further that, the Federal Reserve dropped interest rates thus decreasing cost of borrowing during the housing bubble. Home buyers took loans they could not service in the end. OELs blamed human nature flaws than those found in capitalism itself.
Globalization improved growth in industrialized states and uplifting from poverty of developing countries (Ballam &Dillman, 2014). OELs are for the idea of lowering more trade barriers in areas such as agriculture, services and government procurement.
They also believe in order to increase national savings the United States of America needs to lower its out of control budget deficit, by reducing its trade deficit. Deleveraging commitments to banks and industries by government will help bailed out companies and assets to private control. Heterodox Interventionist Liberals state there is uncertainty when dealing with economy exclusive of rational expectations and justified effort to manage it in such a way to serve the broader interests of society instead of the wealthy. They also assert that the states must act to save the financial system and capitalism itself. This is brought forth by HILS proposals to spend more to grow the economy without worrying about inflation, by creating jobs, investment in new technology for energy, transport, education and healthcare. Tougher regulations to be imposed on banks related to derivatives, pay, and bonuses. Break up big banks to increase competition as well as managing globalization by not limiting it or stopping it.
Although both OELs and HILs have different views and reservations in relation to the financial crisis, many other experts and policy officials tend to agree that there is no clear set of policies that can solve the global financial crises in the near future. Capitalism will continue being politically and intellectually challenged because of its foundation in economic liberalism. Despite these challenges nothing has so far come up to fully replace capitalism, because of peoples fear of the potentially worse alternatives offered.
My preference between Orthodox Economic Liberals and Heterodox Interventionists Liberals, is HILs because they give advantages to us. Increase in government expenditure leads to creation of more jobs thus benefiting the people directly without having to worry about inflation. Government investment in new technology leads to improved living standards of its citizens. HILs encourage globalization through its management (Ballam &Dillman, 2014).Heterodox economics keeps evolving and incorporating new ideas that are of benefit to the whole economy of any given country, compared to the traditional rigid orthodox economics. They also seek to include social and historical issues in the analysis. It also adds in the evaluation of how societal and individual behaviors affect and alter equilibrium of market development. HILs promote capitalism which helps release market forces that both reflect and influence consumers demands for certain items as well as give an elaborate explanation how they are produced. The paradigm shift to free-trade at the heart of globalization profoundly helps shape global production and distribution.
Ballam, D.N. & Dillman, B (2014) Laissez-Faire: The Economic Liberal Perspective. Harlow, Pearson Education Limited.
Oatley, T (2013), International Political Economy. London, Routledge
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