Classical economics or classical political economy (also known as
liberal economics) 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).
The Wealth of Nations
The Wealth of Nations in 1776 is usually considered to
mark the beginning of classical economics. 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.
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. 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.
1.1 Modern legacy
2 Classical theories of growth and development
3 Value theory
4 Monetary theory
5 Debates on the definition
6 See also
9 Further reading
10 External links
The classical economists produced their "magnificent dynamics"
during a period in which capitalism was emerging from feudalism and in
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.
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.
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. 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
Henry George in particular.
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
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.
Classical theories of growth and development
Analyzing the growth in the wealth of nations and advocating policies
to promote such growth was a major focus of most classical economists.
John Stuart Mill
John Stuart Mill believed that a future stationary state of a
constant population size and a constant stock of capital was both
inevitable, necessary and desirable for mankind to achieve. This is
now known as a steady-state economy. :592–596
John Hicks & Samuel Hollander, Nicholas Kaldor, Luigi L.
Pasinetti, and Paul A. Samuelson have presented formal
models as part of their respective interpretations of classical
Classical economists developed a theory of value, or price, to
investigate economic dynamics. In political economics, value usually
refers to the value of exchange, which is separate from the price.
William 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.
The theory of what determined natural prices varied within the
Classical school. Petty tried to develop a par between land and labour
and had what might be called a land-and-labour theory of value. Smith
confined the labour theory of value to a mythical pre-capitalist past.
Others may interpret Smith to have believed in value as derived from
labour. 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 labour theory of value as a good approximation.
Some historians of economic thought, in particular, Sraffian
economists, see the classical theory of prices as determined
from three givens:
The level of outputs at the level of Smith's "effectual demand",
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 Demography. In contrast to the Classical theory,
the determinants of the neoclassical theory value:
are seen as exogenous to neoclassical economics.
Classical economics tended to stress the benefits of trade. Its theory
of value was largely displaced by marginalist schools of thought 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.
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 endogenous
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
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.
The period 1830–75 is a timeframe of significant debate. Karl Marx
originally coined the term "classical economics" to refer to Ricardian
economics – the economics of
David Ricardo and
James Mill and their
predecessors – but usage was subsequently extended to include the
followers of Ricardo.
Sraffians, who emphasize the discontinuity thesis, see classical
economics as extending from 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",
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 labour; 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. Perhaps Schumpeter's
John Stuart Mill
John Stuart Mill put forth a half-way house between
classical and neoclassical economics is consistent with this view.
Georgists and other modern classical economists and historians such as
Michael Hudson argue that a major division between classical and
neo-classical economics is the treatment or recognition of economic
rent. Most modern economists no longer recognize land/location as a
factor of production, often claiming that rent is non-existent.
Georgists and others argue that economic rent remains roughly a third
of economic output.
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 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.
Another 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
Samuel Hollander is probably its best current proponent.
Still another 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 his own General Theory of Employment
Interest and Money. The defining criterion of classical economics, on
this view, is
Say's law which is disputed by Keynesian economics.
Keynes was aware, though, that his usage of the term 'classical' was
One difficulty in these debates is that the participants are
frequently arguing about whether there is a non-neoclassical theory
that should be reconstructed and applied today to describe capitalist
economies. Some, such as Terry Peach, see classical economics as
of antiquarian interest.
Classical general equilibrium model
Perspectives on capitalism
^ a b c Smith, Adam (1776) An Inquiry into the Nature and Causes of
The Wealth of Nations. (accessible by table of contents chapter
titles) AdamSmith.org ISBN 1-4043-0998-5
^ Pearce, David W., ed. (1992). The MIT Dictionary of Modern
Economics. MIT Press. pp. 61–62.
^ Baumol, William J. (1970) Economic Dynamics, 3rd edition, Macmillan
(as cited in Caravale, Giovanni A. and Domenico A. Tosato (1980)
Ricardo and the Theory of Value, Distribution and Growth, Routledge
& Kegan Paul)
^ O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics:
Principles in Action. Upper Saddle River, New Jersey 07458: Pearson
Prentice Hall. p. 395. ISBN 0-13-063085-3.
^ Screpanti and Zamagni (2005), pp. 100-104.
^ Gaffney, Mason (2006). The corruption of economics (PDF). London:
Shepheard-Walwyn in association with Centre for Incentive Taxation.
^ a b Mill, John Stuart (2009) . Principles of Political Economy
(PDF contains full book) (1st ed.). Salt Lake City, UT: Project
^ Hicks, John and
Samuel Hollander (1977) "Mr. Ricardo and the
Moderns", Quarterly Journal of Economics, V. 91, N. 3 (Aug.): pp.
^ Kaldor, Nicholas (1956) "Alternative Theories of Distribution",
Review of Economic Studies, V. 23: pp. 83–100
^ Pasinetti, Luigi L. (1959–60) "A Mathematical Formulation of the
Ricardian System", Review of Economic Studies: pp. 78–98
^ Pasinetti, Luigi L. (1977) Lectures on the Theory of Production,
Columbia University Press
^ Samuelson, Paul A. (1959) "A Modern Treatment of the Ricardian
Economy", Quarterly Journal of Economics, V. 73, February and May
^ Samuelson, Paul A. (1978) "The Canonical Classical Model of
Political Economy", Journal of Economic Literature, V. 16: pp.
Krishna Bharadwaj (1989) "Themes in Value and Distribution:
Classical Theory Reppraised", Unwin-Hyman
^ Pierangelo Garegnani (1987), "Surplus Approach to Value and
Distribution" in "The New Palgrave: A Dictionary of Economics"
^ a b The General Theory of Employment,
Interest and Money, John
Maynard Keynes, Chapter 1, Footnote 1
Samuel Hollander (2000), "Sraffa and the Interpretation of Ricardo:
The Marxian Dimension", "History of Political Economy", V. 32, N. 2:
^ Terry Peach (1993), "Interpreting Ricardo", Cambridge University
Mark Blaug (1987). "classical economics," The New Palgrave Dictionary
of Economics, v. 1, pp. 414–45.
_____ (2008). "British classical economics," The New Palgrave
Dictionary of Economics, 2nd Edition. Abstract.
Samuel Hollander (1987). Classical Economics. Oxford: Blackwell.
Ernesto Screpanti and
Stefano Zamagni (2005). An Outline of the
History of Economic Thought. Oxford University Press.
Cochrane, James L. (1970). "Classical Macroeconomics". Macroeconomics
Before Keynes. Glenview: Scott, Foresman & Co. pp. 23–42.
Skousen, Mark (2008). "Classical Economics". In Hamowy, Ronald. The
Encyclopedia of Libertarianism. Thousand Oaks, CA: SAGE; Cato
Institute. pp. 71–73. doi:10.4135/9781412965811.n47.
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