Classical Economics Overview
Classical economics is a British economic philosophy from the 18th and 19th centuries. It promotes economic growth, freedom, free markets, and competition.
Classical economics encouraged countries to change from monarchies to self-regulating capitalist democracies.
Classical Economics Functionality
Adam Smith, founder of classical economics, wrote “The Wealth of Nations” in 1776, asserting that a nation’s wealth depends on its income, not its gold reserves. This income is determined by efficient labor division and optimal capital use. Smith introduced the “invisible hand” theory, suggesting that individual self-interest leads to social benefit via supply and demand.
David Ricardo built on Smith’s ideas in his 1817 “Principles of Political Economy and Taxation.” He developed the “theory of distribution” and the “labor theory of value,” which states that a good's value is proportional to the labor necessary to create it. The distribution theory explains how national income is divided between workers, capitalists, and landlords.
John Stuart Mill, another classical economist, refined classical theories in his 1848 “Principles of Political Economy.” He discussed topics like population, taxation, international trade, and socialism.
Adam Smith's 1776 "The Wealth of Nations" is a significant classical economics work. It proposed the "invisible hand" concept, explaining how markets self-regulate through buyer-seller interactions. Smith argued that free trade results in efficient, fair pricing based on product market supply and demand. His ideas advanced domestic trade and formed the basis for contemporary economic theory.