Reviewed by Aug 27, 2020| Updated on
What is Classical Economics?
Classical economics is known as classical political economics. Classical economics refers to the school of thought of economics that originated in the late 18th and early 19th centuries, especially in Britain. It focused on economic growth and economic freedom, advocating laissez-faire ideas and belief in free competition.
The classical economic theory propagated the countries to move from the monarch rule to a capitalistic democracy factored with self-regulation.
Understanding the Working of Classical Economics
In general, it is believed that 'The Wealth of Nations' by Adam Smith published in 1776 marked the beginning of classical economics. The underlying argument in Smith's book was that the national income of the kingdom was the basis for calculating its wealth and not the gold in the treasury. This revenue, in turn, was based on the work of its inhabitants, efficiently coordinated by the division of labour and the use of capital reserves, favoured by one of the classical economists.
The classical economists were pragmatic liberals in terms of economic policy promoting market freedom, while they saw the state play a role in providing for the common good.
Smith admitted that there were ways in which the market is not the safest way to serve the common interest, and he took it as a given that those who are better able to afford them would bear the higher proportion of the costs serving the common good. He always warned of the dangers of monopoly and emphasized the importance of competition.
Believers in classical economics were not unified in their views or market understanding, although there were common themes in most classical literature. Majority of them favoured free trade and competition among workers and businesses. Classical economists wanted to move away from a class-based social structure in support of meritocracies.
Uses of Classical Economics
The revelations made under this school of economics focused free trade, and a theory called the 'invisible hand' being the highlight at the beginning stages of domestic and international supply and demand.
The theory states that the double and competing forces of both the demand-side and supply-side move the market to achieve equilibrium between the price and production equilibrium. Smith's studies helped support domestic trade and led to more productive and reasonable pricing in the product markets based on supply and demand.
The Fall of Classical Economics
By the 1880s and 1890s, Adam Smith's classical economics had significantly evolved and changed. But its essence remained intact. By this time, a German philosopher named Karl Marx had gained limelight for his works that criticized the classical school's policy prescriptions. Marxian economics did, however, make very few enduring contributions to economic theory.