What is classical economics?
A school of thought in economics that emerged in Britain in the 18th and 19th centuries is known as classical economics or classical political economics. It emphasized economic growth and economic freedom, supporting free market ideas and free competition.
The classical economic theory encouraged countries to transition from the rule of kings to a capitalist democracy with self-regulation.
How does classical economics theory work?
Adam Smith is considered the founder of classical economics and the author of “The Wealth of Nations,” published in 1776. He argued that the wealth of a nation depends not on its gold reserves but on its national income, which is determined by the efficient division of labor and the optimal use of capital. He also introduced the theory of the “invisible hand,” which means that the self-interest of individuals leads to the social good through the market forces of supply and demand.
David Ricardo expanded on Smith’s ideas and developed the “theory of distribution” and the “labor theory of value” in his book “Principles of Political Economy and Taxation,” published in 1817. The labor theory of value states that the value of a good is proportional to the labor required to produce it. The theory of distribution explains how the national income is divided among three social classes: workers, capitalists, and landlords.
John Stuart Mill was another influential classical economist and the author of “Principles of Political Economy,” published in 1848. He refined and modified some classical theories and addressed issues such as population, taxation, international trade, and socialism.
Example
The Wealth of Nations, published by Adam Smith in 1776, is a landmark work in classical economics. It introduced the idea of the "invisible hand," which describes how the market balances itself through the interaction of buyers and sellers. Smith argued that free trade leads to more efficient and fair pricing based on supply and demand in the product markets. His insights helped advance domestic trade and laid the foundation for modern economic theory.