Classical economics

Classical economics or classical political economy is a school of thought in economics that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert Malthus, and John Stuart Mill. These economists produced a theory of market economies as largely self-regulating systems, governed by natural laws of production and exchange (famously captured by Adam Smith's metaphor of the invisible hand).

Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the beginning of classical economics.[1] The fundamental message in Smith's book was that the wealth of any nation was determined not by the gold in the monarch's coffers, but by its national income. This income was in turn based on the labor of its inhabitants, organized efficiently by the division of labour and the use of accumulated capital, which became one of classical economics' central concepts.[2]

In terms of economic policy, the classical economists were pragmatic liberals, advocating the freedom of the market, though they saw a role for the state in providing for the common good. Smith acknowledged that there were areas where the market is not the best way to serve the common interest, and he took it as a given that the greater proportion of the costs supporting the common good should be borne by those best able to afford them. He warned repeatedly of the dangers of monopoly, and stressed the importance of competition.[1] In terms of international trade, the classical economists were advocates of free trade, which distinguishes them from their mercantilist predecessors, who advocated protectionism.

The designation of Smith, Ricardo and some earlier economists as "classical" is due to Karl Marx, to distinguish the "greats" of economic theory from their "vulgar" successors. There is some debate about what is covered by the term classical economics, particularly when dealing with the period from 1830–75, and how classical economics relates to neoclassical economics.

History

The classical economists produced their "magnificent dynamics"[3] during a period in which capitalism was emerging from feudalism and in which the Industrial Revolution was leading to vast changes in society. These changes 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 political economy is popularly associated with the idea that free markets can regulate themselves.[4]

Classical economists and their immediate predecessors reoriented economics away from an analysis of the ruler's personal interests to broader national interests. Adam Smith, following the physiocrat François Quesnay, identified the wealth of a nation with the yearly national income, instead of the king's treasury. Smith saw this income as produced by labour, land, and capital. With property rights to land and capital held by individuals, the national income is divided up between labourers, landlords, and capitalists in the form of wages, rent, and interest or profits. In his vision, productive labour was the true source of income, while capital was the main organizing force, boosting labour's productivity and inducing growth.

Ricardo and James Mill systematized Smith's theory. Their ideas became economic orthodoxy in the period ca. 1815–1848, after which an "anti-Ricardian reaction" took shape, especially on the European continent, that eventually became marginalist/neoclassical economics.[5] The definitive split is typically placed somewhere in the 1870s, after which the torch of Ricardian economics was carried mainly by Marxian economics, while neoclassical economics became the new orthodoxy also in the English-speaking world.

Henry George is sometimes known as the last classical economist or as a bridge. The economist Mason Gaffney documented original sources that appear to confirm his thesis arguing that neoclassical economics arose as a concerted effort to suppress the ideas of classical economics and those of Henry George in particular.[6]

Modern legacy

Classical economics and many of its ideas remain fundamental in economics, though the theory itself has yielded, since the 1870s, to neoclassical economics. Other ideas have either disappeared from neoclassical discourse or been replaced by Keynesian economics in the Keynesian Revolution and neoclassical synthesis. Some classical ideas are represented in various schools of heterodox economics, notably Georgism and Marxian economics – Marx and Henry George being contemporaries of classical economists – and Austrian economics, which split from neoclassical economics in the late 19th century. In the mid-20th century, a renewed interest in classical economics gave rise to the neo-Ricardian school and its offshoots.