Question

Explain key characteristic of a liberal economic system? What are the distinguishing features of such a system and how it differs from mercantilism and economic nationalism?

Answer 1

The key features of a liberal economic system are as follows -

1. Private ownership of resources (especially capital assets) in the economy

2. Free market adjustment mechanisms

3. No or very little government intervention in the functioning of the markets

4. No trade restrictions to ensure perfectly competitive trade

5. Economic decisions are made by individuals and not by collective organisations.

It differs from mercantilism as the predominant idea of mercantilism is to promote an export based economy, it involves exporting more than importing. Thus, this advcates active government intervention in the form of import restrictions - tariffs and quotas - to prevent more importing in the economy and subsidising the export sectors and the industries that contribute to the exporting sector like warehousing, shipping, etc. Thus, it is different from liberalism as it actively asks for government intervention in such a way that the imports are no longer competitive.

On the other hand, economic nationalism is the construst that advocates active intervention of the government in the economy in every aspect. It involves the concept of state control over resources, and also over the managenemt of the employment and price level in the economy. This also involves imposing the relevent taxes and the import and export restrictions on the economy. This is in sharp contrast with the liberal economic system, which advocates for very low or no government control.