6.2.2 Modern Liberalism: Reaction to Free-Market Capitalism and Expanded Freedom

History of Modern Liberalism

Modern liberalism developed in the late 19th and early 20th centuries as a response to the social and economic challenges of industrialization. While still valuing individual liberty, modern liberals believe that the state has a role in ensuring social justice and addressing the inequalities and failures of the free market.

The Impact of Industrialisation

Challenges of Industrialisation

Revised Beliefs

• Modern liberals found it difficult to maintain the belief that industrial capitalism had brought general prosperity and liberty for all. They began to revise the early liberal expectation that the unrestrained pursuit of self-interest produced a socially just society.
• Economic individualism came under attack, and liberals rethought their attitude towards the state. The minimal state of classical theory was deemed incapable of rectifying injustices and inequalities. Modern liberals thus supported the development of an interventionist or enabling state.

Criticism and Evolution

• Classical liberals have argued that modern liberals broke from the principles of earlier liberalism, abandoning individualism for collectivism. However, modern liberals argue they built upon, rather than betrayed, classical liberalism, representing a marriage between new and old liberalism, embodying ideological and theoretical tensions, notably over the role of the state.

Positive Freedom

Concept of Altruism

Positive vs. Negative Freedom

• Negative freedom acknowledges only legal and physical constraints on liberty. Positive freedom, however, recognizes that liberty may also be threatened by social disadvantage and inequality. It involves the ability of individuals to develop and attain their potential, skills, knowledge, and fulfillment.
• By protecting individualism from social evils, the state can expand freedom rather than merely diminishing it. Modern liberals advocate for an enabling state that exercises a broad range of social and economic responsibilities.

Self-Reliant Individuals

• Modern liberals share the classical liberal preference for self-reliant individuals who take responsibility for their own lives, but they recognize that this can only be achieved if social conditions are conducive to it.

Economic Development

Managing the Economy

• 20th-century western governments sought to deliver prosperity by 'managing' their economies, rejecting the classical liberal belief in a self-regulating free market and the doctrine of laissez-faire.
• The abandonment of laissez-faire arose due to the increasing complexity of industrial capitalist economies and their failure to guarantee general prosperity if left unregulated.

Keynesian Economics

• Keynes suggested that governments could 'manage' their economies by influencing aggregate demand. Government spending acts as an 'injection' of demand into the economy, while taxation is a 'withdrawal' that reduces aggregate demand and dampens economic activity.

State Intervention and Economic Management

Role of Government

• Modern liberals advocate for active state intervention to correct market failures, reduce inequality, and promote social welfare. They support government regulation of industries, enforcement of labor standards, and provision of public goods to ensure fair competition and protect the public interest.

Keynesian Influence

• Influenced by Keynesian economics, modern liberals support government spending and monetary policies to stabilize the economy, particularly during downturns. They believe the state must manage the economy to prevent crises and ensure full employment.

The Welfare State and Social Justice

Support for Welfare State

• The welfare state protects individuals from the insecurities of the free market, ensuring that economic growth benefits all members of society, not just the wealthy.

Taxation and Redistribution

• Redistribution through taxation is seen as a way to create a fairer society with more evenly distributed wealth, where the government actively levels the playing field for all citizens.

Regulating Capitalism

• They believe unchecked capitalism can lead to significant social and economic inequalities, environmental degradation, and market failures. Therefore, they support government regulations that protect consumers, workers, and the public good.

Modern Liberalism Solutions to Unemployment

Keynesian Recommendations

• Keynesian demand management promised government ability to manipulate employment and growth levels to secure general prosperity. Unregulated capitalism, according to Keynes, tends to bring low investment, short-termism, and social fragmentation.

Social Liberalism

Growth of State Intervention

• The 20th century saw the growth of state intervention in western states, taking the form of social welfare efforts to support citizens by addressing poverty, disease, and ignorance. Governments aimed for national efficiency, healthier workforces, and stronger armies, and faced electoral pressure for social reform from newly enfranchised industrial workers.

Contrast with Classical Liberalism

• Modern liberals defend social welfare based on equality of opportunity, contrasting with classical liberals who extol self-help and individual responsibility. They argue that the state has a social responsibility to reduce disadvantages and create equal life chances.

Beveridge Report (1942)

• The Beveridge Report aimed to tackle the 'five giants': want, disease, ignorance, squalor, and idleness, promising protection from 'cradle to grave'.

Social-Democratic Liberalism

• Social liberalism evolved into social-democratic liberalism, characterized by support for relative social equality and the idea of 'equality as fairness'. John Rawls argued that an egalitarian society is fairer than an inegalitarian one, proposing the 'difference principle': social and economic inequalities should benefit the least well-off, recognizing the need for some inequality to provide work incentives.