My research with Will Fleming finds that the Scottish historian William Robertson appears to be the most significant innovator, repeatedly using “liberal” in a political way, notably in a book published in 1769. (I presented more details in a lecture at the Ratio Institute, viewable here .) Of the Hanseatic League, for example, Robertson spoke  of “the spirit and zeal with which they contended for those liberties and rights,” and how a society of merchants, “attentive only to commercial objects, could not fail of diffusing over Europe new and more liberal ideas concerning justice and order.”
Robertson’s friend and fellow Scot Adam Smith used “liberal” in a similar sense in The Wealth of Nations , published in 1776. If all nations, Smith says, were to follow “the liberal system of free exportation and free importation,” then they would be like one great cosmopolitan empire, and famines would be prevented. Then he repeats the phrase: “But very few countries have entirely adopted this liberal system.”
Smith’s “liberal system” was not concerned solely with international trade. He used “liberal” to describe application of the same principles to domestic policy issues. Smith was a great opponent of restrictions in the labor market, favoring freedom of contract, and wished to see labor markets “resting on such liberal principles.”
Elsewhere, Smith draws an important contrast between regulating “the industry and commerce of a great country … upon the same model as the departments of a publick office”—that is, to direct the economy as though it were an organization—versus “allowing every man to pursue his own interest his own way, upon the liberal plan of equality, liberty and justice.” In drawing such a contrast, Smith again is signaling the label “liberal” for the latter, which he favors.
Regular readers of this blog know that I never use the term “liberal” to describe people who look first to government as the “solution” to their real and imaginary problems; and I never use it to modify the word “policies” when the policies in question involve greater government control over people’s lives and property. In short, I refuse to give that noble word to people who are, in my opinion, illiberal. I might here be tilting at lexicographical windmills, but Dan’s essay gives some background for the motives of those of us who continue to call ourselves – and to regard ourselves as – liberals.