The history of classical liberalism is closely related to the history of modern libertarians who revived the original doctrine of liberalism, and often call themselves "libertarians" and "classical liberals" interchangeably. The term "classical liberalism" itself was coined in the 20th century, and applied retroactively to pre-1850 liberalism, to avoid confusion with an accepted modern definition of liberalism.
Renaissance thinkers such as Erasmus, Francis Bacon, Niccolò Machiavelli and Galileo Galilei represent the rise of empiricism and humanism in place of scholastic tradition of Middle Ages. This was followed by Age of Reason, which attempted to organise philosophy on rational, skeptical and axiomatic grounds. Three major thinkers of this period were René Descartes, Blaise Pascal and most importantly, Thomas Hobbes, whose Leviathan set the framework of all subsequent Western political philosophy. Influenced by the English Civil War, Hobbes conceived the hypothetical notion of the natural condition of mankind from the axiomatic proposition of human nature. Hobbes's state of nature is exemplified by the famous motto, bellum omnium contra omnes ("war of every man against every man"), where every person has a right and a need to do anything to preserve their own liberty and safety. To escape this state of chaos, people form social contract, ceding their individual rights to create sovereignty ruled under absolute monarch in explicit rejection to democracy. The law under this Leviathan state is positive, that is man made law which has no inherent or necessary connection with ethics or morality.
The Lockean framework was further developed by later Enlightenment thinkers, most notably, Immanuel Kant, Jean-Jacques Rousseau and Adam Smith. Kant expanded the concept of natural rights in his formulation of categorical Imperative, from which all other moral obligation and natural rights are generated as inalienable natural law. Rousseau, reformulated state of nature by contending that man was good by nature, a noble savage in direct conflict with the notion of the original sin. Rousseau suggested that man's bad habits are the products of civilization, specifically social hierarchies, property, and markets, which led to increased interdependence and inequality and chaos, resulting in deeply flawed original social contract which ought to be revised. The idea of Rousseau together Montesquieu's separation of powers provided the founding principle of revolutionary republicanism of subsequent era.
Republican reformulation of Lockean framework, which emphasise civic virtue and the common good is somewhat contrasted by the classical economics of the Wealth of Nations, magnum opus of Adam Smith. The book was Smith's attempt at refutation to the theory and policy of mercantilism, bullionism and monopolistic guilds. Written at the dawn of industrial revolution, Smith further reformulated Lockean labour theory of property into labour theory of value. He also demonstrated that division of labour is a result as well as a consequence of dynamic engine of economic progress which was made possible by the use of capital. At the same time, he stated that such specialisation leads to a 'mental mutilation' in workers and advocated government investment in compulsory public education. Smith stresses the critical importance of meritocracy, allowing individuals to achieve what their "God-given talents" will allow them to, without interference from outside forces which lead to inefficiency in the division of labor and hamstring progress generally. Smith stated that "a voluntary, informed transaction always benefits both parties." provided that there is no coercion or fraud. Smith repeatedly admonished the tendency of merchants and craftsmen to form cartels. But despite this tendency, the market, while appearing chaotic and unrestrained, is actually guided by so called invisible hand to produce the right amount and variety of goods at its natural price. His thinking was further developed by subsequent English classical economist such as David Ricardo, Thomas Malthus and John Stuart Mill.
General tenet of Enlightenment was that nature, while basically good, was not basically self-ordering and, instead, had to be ordered with reasoning and maturity. Thinking of later enlightenment thinkers such as Smith and Rousseau who believed that social order at its natural state as somewhat self-ordering and that chaos was, in a real sense, the result of excessive intervention of authority or entrenched political or commercial interest. This shift represented the impending end of the Enlightenment and the beginning of Romanticism.
The origin of utilitarianism is credited generally to Jeremy Bentham who was born at a time of great social change accompanied by demands for greater democracy. He stated that the utility, that is pain and pleasure, is the only absolute in the world which govern human behaviour. He further insisted that what is ethical is whatever brings "the greatest happiness to the greatest number of people". Bentham soon realised that the former could potentially conflict with the later and dropped the second part and simply talked simply about the Greatest happiness principle. The ethical proposition of Bentham was a clear break from the ethical proposition of natural law. Moreover, in political terms, the principle can be applied to both totalitarian and anarchist principles.
John Stuart Mill reformulated Bentham's utilitarianism in term of individual liberty. Mill states that "Over himself, over his own body and mind, the individual is sovereign". Mill is compelled to say this is due to what he calls the "tyranny of the majority", wherein majority could control the etiquette and morality of individuals. Mill also articulated the harm principle: that people can do anything they like as long as it does not harm others. Mill insisted that cultural and spiritual happiness to be of greater value than mere physical pleasure and that utilitarianism requires that political arrangements which satisfy the "liberty principle", where each person would be guaranteed the greatest possible liberty that would not interfere with the liberty of others, so that each person may maximize his or her happiness.
Laissez-faire economics is the combination of quantity theory of money proposed by Jean-Baptiste Say, Say's law of demand and supply articulated by James Mills, international trade theory based on David Ricardo's comparative advantage, and lastly, John Stuart Mill's articulation of theories of production based on factors of production. In essence, it states that recession cannot occur because of a failure in demand or lack of money. These theories evolved into what is sometimes called the "law of markets" which was the framework of macroeconomics from the mid-1800s until the 1930s and inspired neoclassical economics which arose later in the 19th century.