Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, David Ricardo, Thomas Malthus and John Stuart Mill. Sometimes the definition of classical economics is expanded to include William Petty, Johann Heinrich von Thünen, and Karl Marx. It has been suggested that History of economics be merged into this article or section. ... For other persons named Adam Smith, see Adam Smith (disambiguation). ... David Ricardo (18 April 1772–11 September 1823), a political economist, is often credited with systematizing economics, and was one of the most influential of the classical economists, along with Thomas Malthus and Adam Smith. ... Thomas Robert Malthus FRS (13 February 1766 – 23 December 1834),[1] was a political economist and British demographer. ... John Stuart Mill (20 May 1806 – 8 May 1873), British philosopher, political economist, civil servant and Member of Parliament, was an influential liberal thinker of the 19th century. ... Face-to-face trading interactions on the New York Stock Exchange trading floor. ... Sir William Petty (May 27, 1623 – December 16, 1687) was an English economist, scientist and philosopher. ... Johann Heinrich von Thünen (24 June 1783 - 22 September 1850) ranks alongside Marx as the greatest economist of the nineteeth century (Fernand Braudel). ... Karl Heinrich Marx (May 5, 1818 – March 14, 1883) was a 19th century philosopher, political economist, and revolutionary. ...

Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the beginning of classical economics. The school was active into the mid 19th century and was followed by neoclassical economics in Britain beginning around 1870. Adam Smiths first title page An Inquiry into the Nature and Causes of the Wealth of Nations is the magnum opus of the Scottish economist Adam Smith, published on March 9, 1776, during the Scottish Enlightenment. ... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ...

Classical economists attempted and partially succeeded to explain economic growth and development. They produced their "magnificent dynamics" during a period in which capitalism was emerging from a past feudal society and in which the industrial revolution was leading to vast changes in society. These changes also raised the question of how a society could be organized around a system in which every individual sought his or her own (monetary) gain. For other uses, see Capitalism (disambiguation). ... Feudalism comes from the Late Latin word feudum, itself borrowed from a Germanic root *fehu, a commonly used term in the Middle Ages which means fief, or land held under certain obligations by feodati. ... A Watt steam engine, the steam engine that propelled the Industrial Revolution in Britain and the world. ...

Classical economists reoriented economics away from an analysis of the ruler's personal interests to a class-based interest. Physiocrat Francois Quesnay and Adam Smith, for example, identified the wealth of a nation with the yearly national income, instead of the king's treasury. Smith saw this income as produced by labor applied to land and capital equipment. Once land and capital equipment are appropriated by individuals, the national income is divided up between laborers, landlords, and capitalists in the form of wages, rent, and interest. The Physiocrats were a group of thinkers who believed in an economic theory which considered that the wealth of nations was derived solely from agriculture. ... François Quesnay. ... For other persons named Adam Smith, see Adam Smith (disambiguation). ... A wage is the amount of money paid for some specified quantity of labour. ... This article does not cite any references or sources. ... For other senses of this word, see interest (disambiguation). ...

History

Central Concepts

Value Theory

Classical economists developed a theory of value, or price, to investigate economic dynamics. Petty introduced a fundamental distinction between market price and natural price to facilitate the portrayal of regularities in prices. Market prices are jostled by many transient influences that are difficult to theorize about at any abstract level. Natural prices, according to Petty, Smith, and Ricardo, for example, capture systematic and persistent forces operating at a point in time. Market prices always tend toward natural prices in a process that Smith described as somewhat similar to gravitational attraction. Market price is an economic concept with commonplace familiarity; it is the price that a good or service is offered at, or will fetch, in the marketplace; it is of interest mainly in the study of microeconomics. ... When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is...

The theory of what determined natural prices varied within the Classical school. Petty tried to develop a par between land and labor and had what might be called a land-and-labor theory of value. Smith confined the labor theory of value to a mythical pre-capitalist past. He stated that natural prices were the sum of natural rates of wages, profits (including interest on capital and wages of superintendence) and rent. Ricardo also had what might be described as a cost of production theory of value. He criticized Smith for describing rent as price-determining, instead of price-determined, and saw the labor theory of value as a good approximation. The labor theories of value (LTV) are theories in economics according to which the true values of commodities are related to the labor needed to produce them. ... In economics, the cost-of-production theory of value is the belief that the value of an object is decided by the resources that went into making it. ... The labor theories of value (LTV) are theories in economics according to which the true values of commodities are related to the labor needed to produce them. ...

Some historians of economic thought, in particular, Sraffian economists (e.g., ^[1] or ^[2]), see the classical theory of prices as determined from three givens:

1. The level of outputs at the level of Smith's "effectual demand",
2. technology, and
3. wages.

From these givens, one can rigorously derive a theory of value. But neither Ricardo nor Marx, the most rigorous investigators of the theory of value during the Classical period, developed this theory fully. Those who reconstruct the theory of value in this manner see the determinants of natural prices as being explained by the Classical economists from within the theory of economics, albeit at a lower level of abstraction. For example, the theory of wages was closely connected to the theory of population. The Classical economists took the theory of the determinants of the level and growth of population as part of Political Economy. Since then, the theory of population has been seen as part of some other discipline than economics. In contrast to the Classical theory, the determinants of the neoclassical theory value:

1. tastes
2. technology, and
3. endowments

are seen as exogenous to neoclassical economics. Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ...

Classical economics tended to stress the benefits of trade. Its theory of value was largely displaced by marginalist schools of thought (such as the Austrian School) which sees "use value" as deriving from the marginal utility that consumers finds in a good, and "exchange value" (i.e. natural price) as determined by the marginal opportunity- or disutility-cost of the inputs that make up the product. Ironically, considering the attachment of many classical economists to the free market, the largest school of economic thought that still adheres to classical form is the Marxian school. Free trade is an economic concept referring to the selling of products between countries without tariffs or other trade barriers. ... In economics, marginalism is the belief that economic value is set by the consumers marginal utility. ... The Austrian School, also known as the “Vienna School” or the “Psychological School”, is a heterodox school of economic thought that advocates adherence to strict methodological individualism. ... “Marginal revolution” redirects here. ... Opportunity cost is a central concept of microeconomics. ... Marxian economics refers to a body of economic thought stemming from the work of Karl Marx. ...

Monetary Theory

British classical economists in the 19th century had a well-developed controversy between the Banking and the Currency school. This parallels recent debates between proponents of the theory of endogeneous money, such as Nicholas Kaldor, and monetarists, such as Milton Friedman. Monetarists and members of the currency school argued that banks can and should control the supply of money. According to their theories, inflation is caused by banks issuing an excessive supply of money. According to proponents of the theory of endogeneous money, the supply of money automatically adjusts to the demand, and banks can only control the terms (e.g., the rate of interest) on which loans are made. The British Currency School was group of British economists active in the 1840s and 1850s who argued that excessive issue of banknotes was a major cause of price inflation, and believed that, in order to restrict circulation, issuers of new banknotes should be required to hold an equivalent value of... Nicholas Kaldor, Baron Kaldor (Budapest, 12 May 1908 - Papworth Everard, Cambridgeshire, 30 September 1986) was one of the foremost Cambridge economists in the post-war period. ... Milton Friedman (July 31, 1912 – November 16, 2006) was an American Nobel Laureate economist and public intellectual. ...

Debates on the definition of Classical Economics

The theory of value is currently a contested subject. One issue is whether classical economics is a forerunner of neoclassical economics or a school of thought that had a distinct theory of value, distribution, and growth. Theories of Value ask What sorts of things are good? Or: What does good mean? If we had to give the most general, catch-all description of good things, then what would that description be? When that question is answered with God, this is called Summum bonum. Many people believe... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ...

Sraffians, who emphasize the discontinuity thesis, see classical economics as extending from Willam Petty's work in the 17th century to the break-up of the Ricardian system around 1830. The period between 1830 and the 1870s would then be dominated by "vulgar political economy", as Karl Marx characterized it. Sraffians argue that: the wages fund theory; Senior's abstinence theory of interest, which puts the return to capital on the same level as returns to land and labor; the explanation of equilibrium prices by well-behaved supply and demand functions; and Say's law, are not necessary or essential elements of the classical theory of value and distribution. The neo-Ricardian school is an economic school that derives from the close reading and interpretation of David Ricardo by Piero Sraffa, and from Sraffas critique of Neoclassical economics as presented in his The Production of Commodities by Means of Commodities, and further developed by the neo-Ricardians in... In economics, Say’s Law or Say’s Law of Markets is a principle attributed to French businessman and economist Jean-Baptiste Say (1767-1832) stating that there can be no demand without supply. ...

Perhaps Schumpeter's view that John Stuart Mill put forth a half-way house between classical and neoclassical economics is consistent with this view. Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was one of the greatest 20th century economists and one of the best read. ...

Sraffians generally see Marx as having rediscovered and restated the logic of classical economics, albeit for his own purposes. Others, such as Schumpeter, think of Marx as a follower of Ricardo. Even Samuel Hollander^[3] has recently explained that there is a textual basis in the classical economists for Marx's reading, although he does argue that it is an extremely narrow set of texts. Samuel Hollander (born April 6, 1937) is a British/Canadian/Israeli economist. ...

The first position is that neoclassical economics is essentially continuous with classical economics. To scholars promoting this view, there is no hard and fast line between classical and neoclassical economics. There may be shifts of emphasis, such as between the long run and the short run and between supply and demand, but the neoclassical concepts are to be found confused or in embryo in classical economics. To these economists, there is only one theory of value and distribution. Alfred Marshall is a well-known promoter of this view. Samuel Hollander is probably its best current proponent. Alfred Marshall Alfred Marshall (July 26, 1842–July 13, 1924), born in Bermondsey, London, England, became one of the most influential economists of his time. ... Samuel Hollander (born April 6, 1937) is a British/Canadian/Israeli economist. ...

A second position sees two threads simultaneously being developed in classical economics. In this view, neoclassical economics is a development of certain exoteric (popular) views in Adam Smith. Ricardo was a sport, developing certain esoteric (known by only the select) views in Adam Smith. This view can be found in W. Stanley Jevons, who referred to Ricardo as something like "that able, but wrong-headed man" who put economics on the "wrong track". One can also find this view in Maurice Dobb's Theories of Value and Distribution Since Adam Smith: Ideology and Economic Theory (1973), as well as in Karl Marx's Theories of Surplus Value.

The above does not exhaust the possibilities. John Maynard Keynes thought of classical economics as starting with Ricardo and being ended by the publication of Keynes' General Theory of Employment Interest and Money. The defining criterion of classical economics, on this view, is Say's law.

One difficulty in these debates is that the participants are frequently arguing about whether there is a non-neoclassical theories that should be reconstructed and applied today to describe capitalist economies. Some, such as Terry Peach^[4], see classical economics as of antiquarian interest.

Literature

• Samuel Hollander - Classical Economics (Oxford: Blackwell, 1987)

Samuel Hollander (born April 6, 1937) is a British/Canadian/Israeli economist. ...

See also

• Classical general equilibrium model
• Neoclassical economics

In the classical general equilibrium model, the individual is assumed to be the basic unit of analysis and these individuals, both workers and employers, will make choices that reflect their unique tastes, objectives, and preferences. ... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ...

Notes and references

External links

• Classical economics, Encyclopædia Britannica