Classical economics can be regarded as the origin from which modern economics has stemmed. The study first gained attention when Adam Smith started preaching it.
Although it had existed for ages, the establishment of economics as a field of study only happened after Adam Smith revolutionized the subject. Today, we’ll discuss how he changed the subject and gave birth to a concept we know as classical economics.
This article will primarily focus on three matters: the definition, history, and criticisms of classical economics. So buckle in, economics nerds, we’re in for a fun ride.
Definition of Classical Economics
If you’re here, chances are you’ve already read my article on economics so I won’t be wasting any time defining it again. It is crucial to what economics is however so if you have not read said article, please go ahead and give it a peek, otherwise you may find this article very confusing.
Classical economics is the school of thought on economics that prevailed in the western world during the 18th and 19th centuries. This school of thought primarily promotes free-market economics, strongly believing in the “invisible hand” (Don’t worry, we’ll get to that shortly) and opposed the ideas about economists pushed by monarchists during that time period, particularly Mercantilism ( Read my article on economics if you want to know about mercantilism.) Let’s take a look at a couple of basic concepts of classical economics next.
Core Ideas And Theories Of Classical Economics
These are a few fundamentals of classical economics that need to be understood in order to truly grasp what Adam Smith preached.
The invisible Hand
You’ve probably heard of this before. Arguably Smith’s most famous discovery, this theory totally changed the way people looked at the economy. So what is this invisible hand?
Smith suggested that the market was controlled by a couple of invisible forces. These forces were demand and supply. Together, they form the iconic “hand” that pulls the strings in every market.
The concept had always existed but was never given an official name. The closest mainstream concept was Laisezz-Faire, meaning let go in french, this was a teaching that promoted a refrain from government intervention in France back in the 17th century, much like classical economics.
Adam Smith brought the idea to Britain and gave it a proper definition and name. He explained the phenomenon to the general public in the simplest way, which is why it quickly gained traction and is still considered one of the most important economic theories of all time.
Adam Smith believed that the invisible hand was a fair unbiased distributor in most goods. However, he correctly predicted the existence of monopolies.
Monopolies are companies that dominate the market, often being sole providers of a good. They are very bad for the economy as they limit choice and charge incredibly high prices as they don’t have any competition.
For this reason, he heavily stressed the importance of competition in an economy. He said that economies needed it to function properly and accurately theorized that without it, monopolies would form.
Minimal Government Intervention
Adam Smith also suggested the government provided common goods or public goods. These were goods like lampposts or park benches that benefited everyone in the economy so there was no financial gain for the maker.
Without the profit opportunity, no one would intentionally bear the cost. This is why Smith said that the government should concur these costs for the betterment of the society rather than expect a profit-seeking company to take on losses. That would be really unwise.
Classical economics questioned how we price goods and services. This was never really analysed deeply before the pioneers of classical economics critiqued the concept.
The theory of value is exactly that. How do we put a price on a good or a service? What is the criteria for a good or service to carry a specific price tag? Classical economists gave us a set of factors that determine this price:
- The labour wages
- The demand for the good
- The technology
These three factors are what govern the natural price of a good. The keyword here is the natural price. It is important to keep in mind that the market price may be completely different as there are several other factors playing to determine what the sellers charge.
The natural price is the true value of a good rather than just what the sellers are charging as opposed to the market price. However, Adam Smith argued that market price would never stray too far from the natural price, as there was a force pulling them closer, similar to gravity.
Monetary theory is a very popular ideology that stemmed from classical economics. It is quite different in practice, however, it still strongly supports the idea of the invisible hand.
This theory suggests that banks control all the money supply as they provide and carry most of the money circulating throughout the economy.
Monetarists argue that the current system causes overprinting of money as the government has no idea how much money is needed and they do not directly issue loans or carry the money that people save. This also forces out hidden economies as all money is controlled by banks.
Now that we know a few of the core ideas and concepts of the subjects, let’s take a deep dive into the history of the subject. We can do that by taking a look at the minds that shaped this intricate ideology.
The History of Classical Economics
Classical economics changed the entire world as we know it and it heavily impacted everything we know about economics today. It can be argued that this was the first mainstream economics.
Rather than learning about the subject itself, let’s get to know about the pioneers of classical economics and what important theories and ideas they brought to the table.
The Forefathers of Classical Economics
Classical economics is a simple concept to us today but back in the day, people were incredibly conservative and not open to change, until these gentlemen changed the world view that is.
And it all began with one man…
Although he was not the first one to teach the ideas of classical economics, he is certainly the man responsible for bringing it to the public eye. The influential Scottish philosopher and author is said to be “The Father of Economics” and for good reason too.
His books, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776), are considered the earliest literary works on modern economics. These books revolutionized the subject as a whole and are often remembered as legendary masterpieces.
An Inquiry into the Nature and Causes of the Wealth of Nations (1776) is often shortened to The Wealth of Nations. This was his magnum opus. What’s magnum opus? It’s the work that defines one’s career.
The reason why The Wealth of Nations defines such an illustrious career is because of the astonishing number of theories and hypotheses the book contains. Almost all of which are studied and analysed to this day.
These ideas and theories include but are not limited to the invisible hand, the theory of absolute advantage, division of labour and methods of long-term sustainable economic growth. Without these crucial concepts, our understanding of the subject would perhaps decrease manyfold.
These discoveries and his strong criticism of mercantilism is the reason why many people cite him as one of the greatest economists of all time and many even consider him to be the first true economist in history.
So who did inspire Smith? Say hello to Monsieur Colbert. The French statesmen was never an economist. His only role in economics was to control the finances of France under King Louis XIV.
So why do I mention him? Remember Laissez-Faire? The fancy french economic system that is considered the archetype of classical economics. This was his invention per se.
In collaboration with local businessmen headed by M. Le Gendre, he developed an attitude to leave the economy to the merchants rather than constantly regulating their business. He didn’t help them either, he simply let them be. Thus, the system was named Laisezz-Faire, literally meaning let go.
His methods and techniques were obviously successful as he served as the first minister of state from 1661 all the way to 1683. He wasn’t fired. The man literally died engulfed in his work. His work was his religion and it showed with his immense success and undeniable influence on modern society.
Say what you want about the French. They know their economics. See what I did there?
Anyway, this man is arguably one of the most important free thinkers of all time and he is a vital figure in classical economics.
Perhaps his biggest impact was Say’s law, although people say he didn’t discover it, he was certainly the one who popularized the law in the western world with his book, .Traité d’économie politique, roughly translated to A Treatise on Political Economy. But what is this famous law?
Say’s law or the law of markets that production of a particular good or service creates demand for another one. How? When you sell something, you receive money for that sale. The money you receive is later used to buy other goods and services. This theory is widely accepted and credited with increasing our understanding of markets greatly.
There are a couple criticisms however:
- Everyone in the economy may decide to save that money rather than spend it.
- Excessive supply or a glut is not uncommon. In this case, the production doesn’t lead to a sale and there is no demand created.
This theory and many others made Jean-Bapiste Say one of the biggest advocates of entrepreneurship. He is often regarded as one of the most important men in the rise of entrepreneurship.
Thomas Robert Malthus
The english cleric, scholar and economist is often referred to as one of the most influential freethinkers of his time. But you must be wondering what made him this popular?
Malthusian trap and Malthusian catastrophe are two of his most famous theories and for good reason too. Both those theories talk about the dangers of a growing population and how it is inevitable. Let’s start with the Malthusian trap.
In his book, An Essay on the Principle of Population, he concluded that when people have a higher standard of living, they tend to…well procreate. This leads to a sharp rise in population and thus their living standards fall again. This phenomenon is known as the Malthusian trap or malthusian spectre.
Malthusian catastrophe is the effect of the Malthusian trap, so to say. In the same book, he theorized that if agricultural production could not meet the population growth, there would be a nationwide famine due to the ensuing food shortages.
These two ideas and his strong backing for technological advancement are a few of the reasons why he is seen as one of the greatest economists of his time. Now that we’ve taken a look at a few of the biggest supporters of classical economics and their ideas molded the subject we know and study today. Let’s view a couple of its biggest critics and their criticisms.
The Criticisms Of Classical Economics
Like all other subjects, this school of thought has several strong opposers and many fair criticisms. Let’s try and analyse the most important of those critiques and the critics who pointed them out
The Critics Of Classical Economics
These men were people who changed the way we looked at economics as a subject. It is safe to say classical economics was the only format of economics that was widely accepted and practiced other than mercantilism before these freethinkers questioned this way of thinking.
Although Marxian economics is a completely different concept, in fact it is literally the opposite. It would be unwise not to mention him
In fact, he is the one who named the subject “classical economics.” His main criticism of leaving it to the market forces to decide how wealth was distributed.
As the father of socialism, he obviously had a problem with this. He pointed out that the system was unfair to the working class and the government should certainly step in to help them.
This is another reason why many consider classical economics to be the birthplace of capitalism as leaving it to the market forces is the same as leaving it to the private actors in the society.
John Maynard Keynes
We discussed his life and ideas in detail in my article about Keynesian economics so I’ll keep it short. If you want to know more, you can check that article out.
He suggested that the government played a bigger role as fiscal expenditure, like building bridges or bus stations, would increase the total demand in the society. Again, this is a very brief explanation of his thought, that article covers this in much greater detail.
These two men brought up excellent suggestions and their criticisms allowed us to create neoclassical economics which can be considered the modern economics we study today. But that’s a topic for another day.
I hope this article taught you a thing or two about classical economics. This is arguably the origin for the economics we study today so it is very important to know this properly if you wish to study the subject further.I would like to end by quoting Adam Smith:
“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”
Classical economics heavily relied on charity and the kindness of people to beat out the income disparity. Even though we’ve edged towards a fairer system, we should still practice such morals to this day and try to give as much as we can.