Classical economics is widely regarded as the first modern school of economic thought. The history of economic thought deals with different thinkers and theories in the field of Political economy and Economics from the ancient world to the present Its major developers include Adam Smith, David Ricardo, Thomas Malthus and John Stuart Mill. Adam Smith ( baptised 16 June 1723 – 17 July 1790) was a Scottish moral philosopher and a pioneer of Political economy. David Ricardo (18 April 1772 &ndash 11 September 1823 was an English political economist, often credited with systematizing economics and was one of the most influential Thomas Robert Malthus FRS (13 February 1766 – 23 December 1834 was an English political economist and demographer who expressed views John Stuart Mill (20 May 1806 &ndash 8 May 1873 British Philosopher, political economist, civil servant and Member of Parliament, was an influential Sometimes the definition of classical economics is expanded to include William Petty, Johann Heinrich von Thünen, and Karl Marx. Economics is the social science that studies the production distribution, and consumption of goods and services. 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) was a prominent nineteenth century economist.

Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the beginning of classical economics. An Inquiry into the Nature and Causes of the Wealth of Nations is the Magnum opus of the Scottish economist Adam Smith. The school was active into the mid 19th century and was followed by neoclassical economics in Britain beginning around 1870. Neoclassical economics is a term variously used for approaches to Economics focusing on the determination of prices outputs and income distributions in markets

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. Capitalism is the Economic system in which the Means of production are owned by private Persons and operated for Profit and where Feudalism, a term first used in the early modern period (17th century in its most classic sense refers to a Medieval Europe Political system composed The Industrial Revolution was a period in the late 18th and early 19th centuries when major changes in agriculture manufacturing and transportation had a profound effect on the 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.

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. The physiocrats were a group of Economists who believed that the wealth of nations was derived solely from the value of land Agriculture or land development François Quesnay ( June 4, 1694 - December 16, 1774) was a French Economist of the Physiocratic school Adam Smith ( baptised 16 June 1723 – 17 July 1790) was a Scottish moral philosopher and a pioneer of Political economy. 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. A wage is a compensation workers receive in exchange for their labor. Economic rent is the difference between what a Factor of production is paid and how much it would need to be paid to remain in its current use Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets

Contents 1 History 2 Central Concepts 3 Value Theory 4 Monetary Theory 5 Debates on the definition of Classical Economics 6 Literature 7 See also 8 Notes and references 9 External links

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 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 Factor prices are the prices that the Factors of production of a finished item attract 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.

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. The labor theories of value (LTV are theories in Economics according to which the values of Commodities are related to the labor needed to 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. In Economics, the cost-of-production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into 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 values of Commodities are related to the labor needed to

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 is a term variously used for approaches to Economics focusing on the determination of prices outputs and income distributions in markets

Classical economics tended to stress the benefits of trade. Free trade is a system in which the trade of goods and services between or within countries flows unhindered by government-imposed restrictions 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. Marginalism is the use of Marginal concepts within Economics. The Austrian School, also known as the “ Vienna School ” or the “ Psychological School ” is a heterodox school of economics that advocates In Economics, the marginal utility of a good or of a service is the Utility of the specific use to which an agent would put a given increase e. natural price) as determined by the marginal opportunity- or disutility-cost of the inputs that make up the product. Opportunity cost or economic opportunity loss is the value of a product forgone to produce or obtain 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. Note Marxian economics is not restricted to Marxist economics as it includes the economic thought of those inspired by Marx's works who do not identify with

Monetary Theory

British classical economists in the 19th century had a well-developed controversy between the Banking and the Currency school. The British Currency School was a group of British economists active in the 1840s and 1850s who argued that the excessive issuing of Banknotes was a major cause of Price This parallels recent debates between proponents of the theory of endogeneous money, such as Nicholas Kaldor, and monetarists, such as Milton Friedman. Nicholas Kaldor Baron Kaldor ( Budapest, 12 May 1908 - Papworth Everard, Cambridgeshire, 30 September 1986) was one of the foremost Milton Friedman (July 31 1912 November 16 2006 was an American Nobel Laureate Economist and Public intellectual. 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.

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. Neoclassical economics is a term variously used for approaches to Economics focusing on the determination of prices outputs and income distributions in markets

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 neo-Ricardian school is an economic school that derives from the close reading and interpretation of David Ricardo by Piero Sraffa, and from Sraffa's 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. Abstinence Theory of Interest asserts that the Money used for Lending purposes is the money not used for Consumption - which means earning Interest 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

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 &ndash January 8, 1950) was an Economist and Political scientist born in

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. Alfred Marshall (born 26 July 1842 in Bermondsey, London, England, died 13 July 1924 in Cambridge Samuel Hollander is probably its best current proponent. 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)

See also

• Classical general equilibrium model
• Neoclassical economics

Notes and references

External links

• Classical economics, Encyclopædia Britannica

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