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What is Classical Economics?

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  • Written By: Alex Paul
  • Edited By: Jacob Harkins
  • Last Modified Date: 02 December 2016
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Classical economics is often considered to be the first school of economic thought. It was initially developed by, amongst others, Adam Smith who discussed it in a book released in 1776. Until the mid-1800s, classical economics was widely used until it was replaced by neoclassical economics. There are a number of different definitions of classical economics but it was originally used to describe the followers of economic theory created by two men called James Mill and David Ricardo along with their predecessors. Two important theories which were part of classical economics were value and monetary theory.

The first theories of classic economics were developed during a time of upheaval in Europe. The industrial revolution was beginning to take over from previous manufacturing techniques, and there were big changes in how society functioned. People such as Adam Smith were trying to understand how society could work effectively when every person was interested in increasing his or her personal wealth rather than that of the state. One of the fundamental principles that is often attributed to classical economics is that in a free market prices will be self regulating.

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A famous idea of classic economics is value theory that was used to examine the price or value of an item in a dynamic market. In value theory there are two prices — natural and market price. The natural price of an item is more stable and is affected by constant forces. Market prices can be affected by a wide range of different factors. In classical economics, market prices will always move towards the natural price. There was some debate in classical economics as to which factors affected the natural price of an object.

Monetary theory was a controversial discussion that occurred between people who believed that money should be controlled by banks and those who don’t. This is still a controversial topic in economics today and is often debated by people who believe that banks cause inflation by using too much money. People who were on the currency side of the argument believed that banks should be able to control the supply and flow of money.

Today, it is widely accepted that classical economics became neoclassical economics. Although the initial theories were developed hundreds of years ago there are a number of ideas that are still an important part of modern economics. There are, however, a number of ideas which are no longer part of modern theories.

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Mammmood
Post 5

@MrMoody - I have a very simple view of economics. Get the government out of the way, and the economy will grow.

I am not speaking as an economist or an expert, but as someone who works in the utilities industry. We are saddled with so many rules and regulations that are inhibiting our economic growth that it’s become unbearable, all the time the government insists that it wants to create new jobs.

I understand the need for clean air and other environmental concerns. If the government would let the industry address these needs, we could do so in way that satisfies government requirements in a productive way that also creates jobs. That’s just my two cents.

MrMoody
Post 4

@SkyWhisperer - The Keynesian vs classical economics debate is one that has been around for a long time and it will continue to be around for much longer.

However, I think you misrepresent the Keynesian position. More money alone does not create economic growth. It’s the availability of money plus promoting job growth through government spending in things like infrastructure related work that helps to prime the pump.

I think it’s too early to tell whether Keynes failed in his ideas. Some people argue that Keynesian economics helped to pull us out of the Great Depression, because of the investment in the massive New Deal program. Other people claim it was the second World War.

I happen to think that as of late stimulus programs haven’t been executed properly; money has been misappropriated instead of being used to create jobs. Therefore I am not ready yet to discard Keynesian economics as a viable approach to economic growth.

SkyWhisperer
Post 3

@hamje32 - I, too, believe in the free market. I do not believe in Keynesian economics, or the idea that if you flood the free market with lots of money that it will help the economy.

In my opinion, increasing the money supply does not create true stimulus. All it does is lead to inflation. I am not an economist but I think history both here and abroad are proof positive that stimulus programs do not work and that Keynesian economics is a failed system of promoting economic growth.

hamje32
Post 2

There is no greater text on classical economics, in my opinion, than Milton Friedman’s work Free to Choose.

I’ve never read a simpler, more masterful treatise on how free markets and capitalism work. It was my first text on the subject and I’ve been a believer in the free market capitalist system ever since.

One thing I distinctly remember from the book is the example that the late Dr. Friedman used about the creation of the pencil. He talked about all the different parts of the pencil and the different manufacturing processes that go into the creation of the pencil.

Each of the suppliers is working for their own self interest. Yet in the process a pencil is created and the end result is that the consumer is able to buy a much needed product at an affordable price, as dictated by market forces.

I haven’t done the example much justice, but I’ve never forgotten it.

JessicaLynn
Post 1

I don't know much about economics, but I do think it makes sense that prices would be self regulating in a free market.

For example, if someone is selling a product for way more than it's worth, if people realize it is over priced they won't buy it. Normally if people aren't buying, vendors will lower their prices. I think this is a small example of prices self regulating in the free market.

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