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Classical economics or classical political economy 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).
A school of thought, or intellectual tradition, is the perspective of a group of people who share common characteristics of opinion or outlook of a philosophy, discipline, belief, social movement, economics, cultural movement, or art movement.
Economics is the social science that studies the production, distribution, and consumption of goods and services.
The Kingdom of Great Britain, officially called Great Britain, was a sovereign state in western Europe from 1 May 1707 to 1 January 1801. The state came into being following the Treaty of Union in 1706, ratified by the Acts of Union 1707, which united the kingdoms of England and Scotland to form a single kingdom encompassing the whole island of Great Britain and its outlying islands, with the exception of the Isle of Man and the Channel Islands. The unitary state was governed by a single parliament and government that was based in Westminster. The former kingdoms had been in personal union since James VI of Scotland became King of England and King of Ireland in 1603 following the death of Elizabeth I, bringing about the "Union of the Crowns". Since its inception the kingdom was in legislative and personal union with Ireland and after the accession of George I to the throne of Great Britain in 1714, the kingdom was in a personal union with the Electorate of Hanover.
Adam Smith's 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.
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith. First published in 1776, the book offers one of the world's first collected descriptions of what builds nations' wealth, and is today a fundamental work in classical economics. By reflecting upon the economics at the beginning of the Industrial Revolution, the book touches upon such broad topics as the division of labour, productivity, and free markets.
The division of labour is the separation of tasks in any system so that participants may specialize. Individuals, organizations, and nations are endowed with or acquire specialized capabilities and either form combinations or trade to take advantage of the capabilities of others in addition to their own. Specialized capabilities may include equipment or natural resources in addition to skills and training and complex combinations of such assets are often important, as when multiple items of specialized equipment and skilled operators are used to produce a single product. The division of labour is the motive for trade and the source of economic interdependence.
In economics, capital consists of assets that can enhance one's power to perform economically useful work. For example, in a fundamental sense a stone or an arrow is capital for a hunter-gatherer who can use it as a hunting instrument, while roads are capital for inhabitants of a city.
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.
Economic liberalism is an economic system organized on individual lines, meaning that the greatest possible number of economic decisions are made by individuals or households rather than by collective institutions or organizations. It includes a spectrum of different economic policies but its basis is on strong support for a market economy and private property in the means of production. Although economic liberals can also be supportive of government regulation to a certain degree, they tend to oppose government intervention in the free market when it inhibits free trade and open competition.
In philosophy, economics, and political science, the common good refers to either what is shared and beneficial for all or most members of a given community, or alternatively, what is achieved by citizenship, collective action, and active participation in the realm of politics and public service. The concept of the common good differs significantly among philosophical doctrines. Early conceptions of the common good were set out by Ancient Greek philosophers, including Aristotle and Plato. One understanding of the common good rooted in Aristotle's philosophy remains in common usage today, referring to what one contemporary scholar calls the "good proper to, and attainable only by, the community, yet individually shared by its members." The concept of common good developed through the work of political theorists, moral philosophers, and public economists, including Thomas Aquinas, Niccolò Machiavelli, John Locke, Jean-Jacques Rousseau, James Madison, Adam Smith, Karl Marx, John Stuart Mill, John Maynard Keynes, John Rawls, and many other thinkers. In contemporary economic theory, a common good is any good which is rivalrous yet non-excludable, while the common good, by contrast, arises in the subfield of welfare economics and refers to the outcome of a social welfare function. Such a social welfare function, in turn, would be rooted in a moral theory of the good. Social choice theory aims to understand processes by which the common good may or may not be realized in societies through the study of collective decision rules. And public choice theory applies microeconomic methodology to the study of political science in order to explain how private interests affect political activities and outcomes.
International trade is the exchange of capital, goods, and services across international borders or territories.
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.
Karl Marx was a German philosopher, economist, historian, sociologist, political theorist, journalist and socialist revolutionary.
Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory, a theory that has come under considerable question in recent years.
The classical economists produced their "magnificent dynamics"during a period in which capitalism was emerging from feudalism and in which the 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.
Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system and competitive markets. In a capitalist market economy, decision-making and investments are determined by every owner of wealth, property or production ability in financial and capital markets, whereas prices and the distribution of goods and services are mainly determined by competition in goods and services markets.
Feudalism was a combination of legal and military customs in medieval Europe that flourished between the 9th and 15th centuries. Broadly defined, it was a way of structuring society around relationships derived from the holding of land in exchange for service or labour. Although derived from the Latin word feodum or feudum (fief), then in use, the term feudalism and the system it describes were not conceived of as a formal political system by the people living in the Middle Ages. The classic definition, by François-Louis Ganshof (1944), feudalism describes a set of reciprocal legal and military obligations among the warrior nobility revolving around the three key concepts of lords, vassals and fiefs.
The Industrial Revolution, now also known as the First Industrial Revolution, was the transition to new manufacturing processes in Europe and the United States, in the period from about 1760 to sometime between 1820 and 1840. This transition included going from hand production methods to machines, new chemical manufacturing and iron production processes, the increasing use of steam power and water power, the development of machine tools and the rise of the mechanized factory system. The Industrial Revolution also led to an unprecedented rise in the rate of population growth.
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.
Adam Smith was a Scottish economist, philosopher and author as well as a moral philosopher, a pioneer of political economy and a key figure during the Scottish Enlightenment, also known as ''The Father of Economics'' or ''The Father of Capitalism''. Smith wrote two classic works, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The latter, often abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. In his work, Adam Smith introduced his theory of absolute advantage.
François Quesnay was a French economist and physician of the Physiocratic school. He is known for publishing the "Tableau économique" in 1758, which provided the foundations of the ideas of the Physiocrats. This was perhaps the first work attempting to describe the workings of the economy in an analytical way, and as such can be viewed as one of the first important contributions to economic thought. His Le Despotisme de la Chine, written in 1767, describes Chinese politics and society, and his own political support for constitutional despotism.
In economics, economic rent is any payment to an owner or factor of production in excess of the costs needed to bring that factor into production. In classical economics, economic rent is any payment made or benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities. In the moral economy of neoclassical economics, economic rent includes income gained by labor or state beneficiaries of other "contrived" exclusivity, such as labor guilds and unofficial corruption.
Ricardo and 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 those of 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 Georgism and 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.
Analyzing the growth in the wealth of nations and advocating policies to promote such growth was a major focus of most classical economists. However, 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. 592–96:
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 political economy.
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:
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 and conditions (e.g., the rate of interest) on which loans are made.
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", as 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 view that 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 Hollanderhas 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 this view. 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 non-standard.
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.
David Ricardo was a British political economist, one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill.
The labor theory of value (LTV) is a heterodox theory of value that argues that the economic value of a good or service is determined by the total amount of "socially necessary labor" required to produce it.
Piero Sraffa was an influential Italian economist who served as lecturer of economics at the University of Cambridge. His book Production of Commodities by Means of Commodities is taken as founding the neo-Ricardian school of economics.
In economics, the cost-of-production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the factors of production and taxation.
The iron law of wages is a proposed law of economics that asserts that real wages always tend, in the long run, toward the minimum wage necessary to sustain the life of the worker. The theory was first named by Ferdinand Lassalle in the mid-nineteenth century. Karl Marx and Friedrich Engels attribute the doctrine to Lassalle, the idea to Thomas Malthus's An Essay on the Principle of Population, and the terminology to Goethe's "great, eternal iron laws" in Das Göttliche.
In classical economics, Say's law, or the law of markets, is the claim that the production of a product creates demand for another product by providing something of value which can be exchanged for that other product. So, production is source of demand. In his principal work, A Treatise on Political Economy, Jean-Baptiste Say wrote: "A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value." And also, "As each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase."
Use value or value in use is a concept in classical political economy and Marxian economics. It refers to the tangible features of a commodity which can satisfy some human requirement, want or need, or which serves a useful purpose. In Karl Marx's critique of political economy, any product has a labor-value and a use-value, and if it is traded as a commodity in markets, it additionally has an exchange value, most often expressed as a money-price.
A theory of value is any economic theory that attempts to explain the exchange value or price of goods and services. Key questions in economic theory include why goods and services are priced as they are, how the value of goods and services comes about, and—for normative value theories—how to calculate the correct price of goods and services.
On the Principles of Political Economy and Taxation is a book by David Ricardo on economics. The book concludes that land rent grows as population increases. It also presents the theory of comparative advantage, the theory that free trade between two or more countries can be mutually beneficial, even when one country has an absolute advantage over the other countries in all areas of production.
The tendency of the rate of profit to fall (TRPF) is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Capital, Volume III. Economists as diverse as Adam Smith, John Stuart Mill, David Ricardo and Stanley Jevons referred explicitly to the TRPF as an empirical phenomenon that demanded further theoretical explanation, yet they each differed as to the reasons why the TRPF should necessarily occur.
Ronald Lindley Meek, also known as Ron Meek, was a Marxian economist and social scientist known especially for his scholarly studies of classical political economy and the labour theory of value. During the 1960s and 1970s, his writings had a strong influence on the Western academic discussion about Marx's economic theory.
In the history of economic thought, a school of economic thought is a group of economic thinkers who share or shared a common perspective on the way economies work. While economists do not always fit into particular schools, particularly in modern times, classifying economists into schools of thought is common. Economic thought may be roughly divided into three phases: premodern, early modern and modern. Systematic economic theory has been developed mainly since the beginning of what is termed the modern era.
Ricardian economics are the economic theories of David Ricardo, an English political economist born in 1772 who made a fortune as a stockbroker and loan broker. At the age of 27, he read An Inquiry into the Nature and Causes of Wealth of Nations by Adam Smith and was energized by the theories of economics.
Ricardian socialism is a branch of classical economic thought based upon the work of the economist David Ricardo (1772–1823). The term is used to describe economists in the 1820s and 1830s who developed a theory of capitalist exploitation from the theory developed by Ricardo that stated that labor is the source of all wealth and exchange value. This principle extends back to the principles of English philosopher John Locke. The Ricardian socialists reasoned that labor is entitled to all it produces, and that rent, profit and interest were not natural outgrowths of the free market process but were instead distortions. They argued that private ownership of the means of production should be supplanted by cooperatives owned by associations of workers.
Anwar M. Shaikh is a Pakistani American heterodox economist in the tradition of classical political economy.
Throughout modern history, a variety of perspectives on capitalism have evolved based on different schools of thought.
The terms neo-Marxian, post-Marxian and radical political economics were first used to refer to a distinct tradition of economic theory in the 1970s and 1980s that stems from the Marxian economic thought. Many of the leading figures were associated with the leftist Monthly Review School.
The Cambridge capital controversy, sometimes called "the capital controversy" or "the two Cambridges debate", was a dispute between proponents of two differing theoretical and mathematical positions in economics that started in the 1950s and lasted well into the 1960s. The debate concerned the nature and role of capital goods and a critique of the neoclassical vision of aggregate production and distribution. The name arises from the location of the principals involved in the controversy: the debate was largely between economists such as Joan Robinson and Piero Sraffa at the University of Cambridge in England and economists such as Paul Samuelson and Robert Solow at the Massachusetts Institute of Technology, in Cambridge, Massachusetts.
Marxian economics, or the Marxian school of economics, is a heterodox school of economic thought. Its foundations can be traced back to the critique of classical political economy in the research by Karl Marx and Friedrich Engels. Marxian economics comprises several different theories and includes multiple schools of thought, which are sometimes opposed to each other, and in many cases Marxian analysis is used to complement or supplement other economic approaches. Because one does not necessarily have to be politically Marxist to be economically Marxian, the two adjectives coexist in usage rather than being synonymous. They share a semantic field while also allowing connotative and denotative differences.
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