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.
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.