What is classical economics?
Classical economics claims that markets work best on their own, without government interference. It is a school of economic thought that was exemplified by Adam Smith’s writings in the 18th century that claims that any changes in supply will eventually be matched by adjustments in demand – so that the economy, if left to find its own way, always moves towards equilibrium.
Apart from the Scotsman Adam Smith (1723-1790), known today as the ‘Father of modern economics’, classical economics was also developed by the French economist and businessman Jean-Baptiste Say (1767-1832), British political economist David Ricardo (1772-1823), British cleric and scholar Rev. Thomas Robert Malthus (1766-1834), and British philosopher, political economist and civil servant John Stuart Mill (1806–1873).
Many writers were more convinced by Adam Smith’s idea of free markets than protectionism, which was widely accepted and practiced at the time. A protectionist government tries to limit imports by imposing quotas, tariffs, and other barriers.
Classical economics developed during a period in which capitalism was emerging from feudalism, and in which the industrial revolution was completely transforming the structure of society.
Market equilibrium is reached when demand for a good or service is the same as supply. Classical economics preceded neo-classical economics, which became popular during the second half of the 19th century.
Classical economics started with a book
Adam Smith’s book ‘An Inquiry into the Nature and Causes of the Wealth of Nations‘, published in 1776, is considered by academic economists today as the birth of classical economics.
Smith’s influential book’s main message was that a nation’s wealth is not based on gold, but rather trade. Smith claimed that when two parties freely agree to exchange things of value, because they can both see a profit in the transaction, total wealth increases.
German philosopher, economist, and revolutionary socialist Karl Marx (1818-1883) was the first to use the term ‘classical economics’ when he described early economists like Adam Smith and his followers.
Classical economics does not believe the state should intervene, but suggests that there are areas where the market is not the best way to serve the public good – one example is education. Smith believed that a greater proportion of the costs of these public goods or services, such as education, should be paid for by those with more money. This is where modern libertarian economists differ.
The ‘invisible hand’ of classical economics
Classical economists claim that markets generally are able to self-regulate, when free of coercion.
Smith referred to a metaphorical ‘invisible hand’ which guides markets toward their natural equilibrium. When a product is scarce there will be strong incentives within the economy to raise production. If, on the other hand, there is a surplus, people will be incentivized to produce less of it.
In a free market, buyers can choose between several different suppliers. Companies which do not compete effectively are allowed to fail, and new ones will come to the scene. Smith stressed the importance of competition and repeatedly warned of the dangers of monopoly.
Famous classical economists of the 18th and 19th centuries.
Keynesian versus classical economics
Keynesian economics, which emerged in the 1930s, contrasts with classical economics. Keynesian economists support deficit spending, controlling the money supply, and a graduated income tax to combat recession and wealth inequality.
Classical economists reject Keynesian economics. They insist that state intervention exacerbates recessions. They blame the Great Recession that followed the 2008 global financial crisis on government interference in the economy. They warn that America’s future is in jeopardy unless it changes course.
Classical economists say the prices of goods and wages should be freely determined by the market. They claim that supply can create its own demand, i.e. production will create enough income to purchase goods. They give the Model T Ford – a car produced by the Ford Motor Company from 1908 to 1927 – as an example of this idea. The Model T is generally regarded as the first affordable automobile.
The massive impact of Adam Smith’s book
Adam Smith’s ‘The Wealth of Nations’ was enormously influential from the moment it was published. By the 1790s it was being read all over.
The British Prime Minister William Pitt had already read it in college. The founders of the United States, especially Thomas Jefferson and James Madison were very much influenced by it and were looking to it for guidance as the shaped the new country.
By the time of the French Revolution it was extremely important in France, and also in Germany.
It was the book to read, not only when governments wanted to know what to do about the economy, but also what governments should do in general.
Economics professors today in the US, UK, and much of the rest of the world use material in Smith’s book in their teaching.
Many philosophy professors today say that Smith provided quite a remarkable model of how philosophy and social sciences could be brought together.
Many economists refer to economies with the minimum of government intervention, where all participants compete on a level playing field as open markets.