What is the classical economy?
Classic economics is a broad term that refers to the dominant school of thought in economics in the 18th and 19th centuries. Most consider Scottish economist Adam Smith to be the ancestor of classical economic theory. However, Spanish scholastics and French physiocrats made earlier contributions. David Ricardo, Thomas Malthus, Anne Robert Jacques Turgot, John Stuart Mill, Jean-Baptiste Say and Eugen Böhm von Bawerk are other notable contributors to the classical economy.
Key points to remember
- Classic economic theory was developed soon after the birth of Western capitalism. It refers to the dominant school of thought in economics of the 18the and 19e centuries.
- Classical economic theory has helped countries to migrate from monarch domination to capitalist democracies with self-regulation.
- Adam Smith’s 1776 publication of “Wealth of Nations” highlights some of the most significant developments in the classical economy.
Understanding the classic economy
Self-regulating democracies and capitalist market developments form the basis of the classical economy. Before the rise of the classical economy, most national economies followed a top-down system of command and control from the monarch government. Many of the most famous classical thinkers, including Smith and Turgot, developed their theories as alternatives to the protectionist and inflationary policies of mercantilist Europe. The classical economy has become closely associated with economic, then political freedom.
The rise of classical economic theory
Classic economic theory was developed soon after the birth of Western capitalism and the industrial revolution. Classical economists have provided the best first attempts to explain the inner workings of capitalism. The first classical economists developed theories on value, prices, supply, demand and distribution. Almost all of them rejected government interference in stock exchanges, preferring a more flexible market strategy called “laissez-faire” or “whatever”.
Classical thinkers were not completely unified in their beliefs or understanding of the markets, although there are notable common themes in most of the classical works. The majority were in favor of free trade and competition between workers and businesses. Classical economists wanted to move away from class-based social structures in favor of meritocracies.
The decline of classical theory
The classical economy of Adam Smith had radically evolved and changed in the 1880s and 1890s, but its core remained intact. By this time, the writings of the German philosopher Karl Marx had appeared to challenge the political prescriptions of the classical school. However, the Marxist economy has made very few lasting contributions to economic theory.
A more in-depth challenge to classical theory emerged in the 1930s and 1940s through the writings of the British mathematician John Maynard Keynes. Keynes was a student of Alfred Marshall and an admirer of Thomas Malthus. Keynes believed that market economies tended to under-consume and under-spend. He called it the crucial economic problem and used it to criticize high interest rates and individual savings preferences. Keynes also refuted Say’s market law.
The Keynesian economy argued for a more controlling role of central governments in economic affairs, which made Keynes popular with British and American politicians. After the Great Depression and the Second World War, Keynesianism had replaced the classical and neoclassical economy as the dominant intellectual paradigm among world governments.
Concrete example of classical theory in action
The exit of Adam Smith in 1776 from Wealth of Nations highlights some of the most significant developments in the classical economy. His revelations were about free trade and a concept called the “invisible hand” that was used as a theory in the early stages of domestic and international supply and demand. This theory, the dual and competitive forces on the demand side and the sales side, bring the market to balance prices and production. Smith’s studies have helped promote domestic trade and have led to more efficient and rational pricing in product markets based on supply and demand.