The word "liberal" is often deployed, in today's political rhetoric, to signify (sometimes disparagingly) someone who believes in big government, high taxes, is weak on defense policy and is out of touch with traditional American values.
Modern liberalism and modern conservatism are two separate branches grown from the tree of classical liberalism. An easy, if somewhat oversimplified, way of thinking about the difference is that the two variants are mirror images of each other.
Modern conservatives believe the government should refrain from excessive intervention in the economy (e.g., keep taxes and regulations of business low, restrain the growth of government welfare policies and public employment). The term "social conservative" is often used to describe those conservatives who believe the government should actively promote social and moral, usually traditional, values, and regulate immoral conduct. They are more likely to support prayer in school and oppose abortion, same-sex marriage, and flag burning. The term "libertarian" is used to describe individuals who favor government non-interference in both economic and moral matters.
Modern liberals believe the government should actively intervene in the economy to correct market failures and promote fair outcomes (e.g., higher minimum wages, higher taxes on the wealthy, more regulations protecting worker safety, and the environment). However, the government should refrain from interfering in an individual's social or moral choices (e.g., pro-choice, zealous advocacy of separating church and state, and less harsh penalties for "consensual crimes" such as smoking marijuana). Conservative and liberal are both ideal types. Voters tend to fall somewhere between the two or appear to be closer to one or the other depending on the issue in question. As a generalization, however, Republicans are more likely to be conservatives and Democrats are more likely to be liberals.
Liberalism, or what we might now refer to as "classical liberalism" to distinguish it from today's usage of the term, emerged as a reaction to Europe's decaying feudal order in the 17th and 18th centuries. The rising urban business class, sometimes called the bourgeoisie, sought increased political influence to match their growing economic and social power. Momentum for change accelerated as political philosophers, developing ideas of natural rights and the social contract, began to articulate an ideology that rejected hereditary privilege and fit the political aspirations of these growing political actors. These ideas were profoundly influenced by two major movements in Western civilization. The first movement was the Protestant Reformation and its notion that a person has an individual relationship with the divine. The second movement was the Enlightenment with the assumption that the world has a natural order that individual reason can discover and understand independently of faith, a rationalist philosophy.
Classical liberalism holds that there are certain natural rights of which no government, elected or otherwise, may deprive its citizens. This is an important distinction. Governments do not give rights to their citizens. Rights belong to citizens because they are inherent in the natural order or granted by God Almighty (take your pick). John Locke, a political theorist of the 18th century identified three such basic rights, "life, liberty, and property." Thomas Jefferson memorably plagiarized Locke's idea in the Declaration of Independence when he wrote that all men share certain inalienable rights, among them "life, liberty, and the pursuit of happiness." Given the political and economic interests of its beneficiaries, classical liberalism places a very strong emphasis on the individual's right to property. This ideology is thus a natural favorite for proponents of a capitalist economic system. A capitalist economy allocates economic decisionmaking to individuals meeting in free markets. In such a system individuals, rather than the state, are the predominant owners of property. This highlights another key aspect of classical liberalism: its clear suspicion of centralized political power and its earnest advocacy of limited government. You may recall another famous phrase credited to that prolific phrase-turner, Thomas Jefferson: "That government is best which governs least."
This emphasis on limited government is notable in three particulars. First, classical liberalism is hostile to government interference in the marketplace. It was a reaction against the repressive medieval guild system of trades and the heavy-handed state policy of mercantilism, typified under France's economic minister, Colbert. Adam Smith, a Scottish political economist, invoked the metaphor of an invisible hand to describe how individual selfishness in an unregulated economy actually promotes the public good. More bluntly, big government is bad for business and prosperity. Second, the classical liberal tradition emphasizes separation of church and state (though not always the wall of separation endorsed by some modern constitutional scholars). The emerging business elites who embraced classical liberalism were often Protestants and victims of persecution or discrimination by Catholic, Anglican or other state churches. State control of religious practice was bad for business and, more fundamentally, a matter best left to individual conscience. They saw proof for these points in the apocalyptic bloodshed of Europe's Thirty Years War, a war waged in the name of religion.
Third, while the classical liberal tradition celebrates civil society (associations of individuals and institutions outside of government control) and charitable giving to the poor, it rejects the proposition that the state is responsible for the welfare of society's less fortunate, whether the poor or ill. This is a notable difference between classical liberalism and socialism. It is inclined to see an individual's fate as the outcome of his or her individual decisions, good or bad. It is relatively optimistic about an individual's capacity for self-transformation and accents individual responsibility. It is skeptical of theories emphasizing environmental determinism (the idea that individuals are severely limited by the social conditions into which they are born). The cliché maxim that someone should "pull himself up by his own bootstraps" is a reflection of the liberal ideal. Thus concerning the cardinal value of equality, it embraces equality of opportunity but rejects equality of results. Classical liberalism is adverse to the welfare state. In conclusion, classical liberalism is a political ideology grounded in the notion of individualism and limited government, with a large helping of property rights on the side. It demands formal political and legal equality, but does not require or even expect social and economic equality.