Classical Political Economy

References

• Classical Economics Wikipedia Article

Related

• Market Economy
• • A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand. The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of capital and the factors of production.
• Factor Market
• • In economic, a factor market is a market where factors of production are bought and sold. Factor markets allocate factors of production, including land and capital, and distribute income to the owners of productive resources, such as wages, rents, etc.
• Productive Labor
• • Labor that adds to the value of the subject upon which it is bestowed - Adam Smith
• Steady-State Economy
• • A steady-state economy is an economy made up of a constant stock of physical wealth (capital) and a constant population size. In effect such an economy does not grow in the course of time. The term usually applies to a national economy.
• Theory of Value
• • In economics, economic value is a measure of the benefit provided by a good or service to an economic agent, and value for money represents an assessment of whether financial or other resources are being used effectively in order to secure such benefit.
• Labor Theory of Value
• • The labor theory of value (LTV) is a theory of value that argues that the exchange of value of a good or service is determined by the total amount of socially necessary labor required to produce it. The contrasting system is typically known as the subjective theory of value.
• Subjective Theory of Value
• • The subjective theory of value (STV) is an economic theory for explaining how the value of goods and services are not only set but also how they can fluctuate over time. The contrasting system is typically known as the labor theory of value.
• British Banking School
• • The British Banking School was a group of 19th century economists from the United Kingdom who wrote on monetary and banking issues. The school arose in opposition to the British Currency School. They argued that currency issue could be naturally restricted by the desire of a bank depositors to redeem their notes for gold.
• British Currency School
• • The British Currency School was a group of British economists, active in the 1840s and 1850s, who argues that the excessive issuing of banknotes was a major cause of price inflation. They believed that, in order to restrict circulation, issuers of new banknotes should be required to hold an equivalent value of gold as a reserve.

Notes

Classical Economics, classical political economy, or Smithian economics is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinks 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).

• 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 labor and the use of accumulated capital, which became one of classical economics' central concepts.
• They were pragmatic liberalism, advocating the freedom of the market, though they saw a role for the state in providing for the common good.
• Smith acknowledged that the market does not always serve the common good, and he took it as a given that costs supporting the common good should be borne by those best able to afford them. They were advocators of free trade.

History

• Adam Smith, following the physiocrats, identified the wealth of a nation with the yearly national income, instead of that of the ruler. He saw income as produced by labor, land, and capital, With property rights to land and capital held by individuals, the national income is divided up between laborers, landlords, and capitalists in the form of wages, rent, and interest or profits. In his vision, productive labor was the true source of income, while capital was the organizing force.
• Ricardo and James Mill systematized Smith's theory. Their ideas became economic orthodoxy in the period 1815-1848, after which an anti=Ricardian reaction took shape, especially in Europe, which became marginalist/neoclassical economics.
• Henry George is sometimes known as the last classical economist. Some argue that neoclassical economics arose as a concerted effort to suppress the ideas of Henry George.
• Classical economics and many of its ideas remain fundamental in economics, though the theory itself has yielded, since the 1870s, to neoclassical economics.

Classical International Trade Economics

• Adam Smith refuted Mercantilist thought with his An Inquiry into the Nature and Causes of the Wealth of Nations
• He thought that mercantilist policies would benefit domestic producers but not the country because it prevents consumers from buying products at competitive process, therefore directing cashflow inadequately. Smith believed that deviating from free trade costs society in a similar manner to how monopolies negatively affect competition in a market.
• Ricardo's most famous economic theory was the theory of competitive advantage as the foundation of the international division of labor. He argued that international trade would increase the standard of living. His main idea on international trade was that wile it does add to real output produced in a country, the main benefits are derived from the encouragement of specialization and the division of labor on an international scale, leading to a more effective use of resources in all countries involved.
• • One of Ricardo's greatest assumptions and observations was that the factors of production are immobile between countries while finished goods are perfectly mobile.
• John Stuart Mill introduced demand and was the first to promote the idea that demand and supply are functions of price, and the market equilibrium is where price is adjusted to where there is equilibrium between supply and demand.
• The classical economists reversed the perception of international trade from negative to positive.

Classical Theories of Growth and Development

• 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.

Value Theory

• 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 price.
• William Petty introduced a distinction between market price and natural price.
• • Market prices are jostled by many transient influences that are difficult to theorize about at any abstract level.
  • Natural prices capture systematic and persistent forces operating at a point in time.
  • • The theory of what determined natural prices varied within the Classical school.
  • Market prices always tend towards natural prices in a process that Smith described as somewhat similar to gravitational attraction.
• Some historians see the classical theory of prices as determined from:

1. The level of outputs at the level of Smith's effectual demand
2. technology, and
3. wages

• In contrast to the Classical theory, the following determinants of the neoclassical theory of value are seen as exogenous to neoclassical economics:

1. tastes
2. technology
3. endowments

• The largest school of economic thought that still adheres to classical form in terms of theory of value is the Marxian school.

Monetary Theory

• British classical economists in the 19th century had a well-developed controversy between the Banking and the Currency School.
• According to monetarists and members of the currency school, banks should control the 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, like the rate of interest, on which loans are made.

Debates on the Definition

• 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 has a distinct theory of value, distribution, and growth.