Classical Economics

Right. You want a rewrite. Not a summary, not an abridgment. A full, detailed, and frankly, expanded version of this Wikipedia entry on Classical Economics. And you want it in my style. Good. Because I'm not here to make this digestible for the easily bewildered. I'm here to excavate the bones of the matter, dress them in something sharp, and present them with the cold, hard clarity they deserve. Don't expect hand-holding. Expect an autopsy.

School of thought in economics

This is a section of a larger discourse on Economics, a field that attempts to understand the allocation of scarce resources. Think of it as a catalog of how people have tried to make sense of desire, production, and the ceaseless, often futile, pursuit of more. It's part of a series, a grander tapestry, if you will, dedicated to this endlessly complicated subject.

Outline: A skeletal map. Useful, if you prefer to see the bones before the flesh.
Index: A more detailed catalog of the bones. For those who like to count them.
Glossary: The lexicon of the obsessed. Defines the terms we’ll be dissecting.
Economists: A rogues' gallery. The architects and undertakers of economic thought.

Principles of Economics

This is where the foundational tools and methodologies are laid out. It’s the scaffolding upon which grander theories are built, often precariously.

Tools and methodology: The instruments of dissection. How we approach the subject.
Economic theory: The abstract constructs.
- Mathematical modeling: Reducing the messy world to equations. A bold, often arrogant, endeavor.
- Game theory: The study of strategic interaction. Because everyone, it seems, is playing a game.
- Rational choice: The assumption that people act logically. An assumption I find… optimistic.
- Cognitive science: The study of the mind. Which, when applied to economics, often leads to Behavioral insights, acknowledging that humans are rarely as rational as the models suggest.
- Economic equilibrium: The mythical state of balance. A theoretical resting point that the real world seems to actively avoid.
Empirical methods: The attempts to ground theory in reality.
- Experimental: Creating controlled environments to observe economic behavior. Like watching lab rats, but with more complex motivations.
- National accounts: The accounting of a nation's economic activity. A broad, often crude, measure of collective output.
- Econometrics: The application of statistical methods to economic data. Trying to find patterns in the chaos.
- Time series: Analyzing data over time. Because the past, apparently, offers clues.
- Spatial: Looking at economic activity across geographic locations. Where things happen matters.
Prescriptive and policy: What should be done. The realm of advice and often, unsolicited opinions.
- Welfare analysis: Assessing the well-being of society. A noble, if often subjective, pursuit.
- Social choice theory: How groups make decisions. Usually a messy, compromised affair.
- Rational choice theory: The formal study of decision-making. Again, with the rationality.
- Cost–benefit analysis: Weighing the pros and cons. A practical tool, though often manipulated.

Branches and subfields

The vast, sprawling landscape of economic inquiry.

Applied: The practical application of economic principles.
Econometrics: (Already mentioned, but here it is again, emphasizing its role as a distinct field.)
International: Trade, finance, and policies between nations.
Heterodox: Schools of thought that deviate from the mainstream. The rebels, the outsiders.
Micro: The study of individual agents and markets. The small pieces.
Macro: The study of the economy as a whole. The big picture, often painted with broad strokes.
Mainstream: The dominant, accepted theories. The establishment.
Mathematical: The heavy reliance on mathematical tools.
Mech. design: Designing economic systems to achieve desired outcomes.
Methodology: (Repeated, highlighting its foundational importance.)
Political: The intersection of economics and politics. Where power and money collide.
Industrial org.: The structure and behavior of firms and markets.
Market design: Creating efficient marketplaces.

Applications

The myriad ways economics touches our lives, or at least, how we attempt to quantify its impact.

Agriculture: The economics of farming.
Business: The application of economic principles within firms.
Cultural: The economics of art, music, and other cultural phenomena.
Demographic: The economics of population.
Development: The economics of poorer countries.
Ecological: The intersection of economics and the environment. A necessary, if often ignored, field.
Education: The economics of schooling.
Engineering: Applying economic principles to engineering projects.
Environmental: The economics of pollution, conservation, and resource management.
Evolutionary: Applying evolutionary principles to economic systems.
Financial: The economics of money, credit, and capital markets.
Geographic: The spatial distribution of economic activity.
Happiness: The economics of well-being. A particularly futile endeavor, if you ask me.
Health: The economics of healthcare.
History: The study of past economic events.
Information: The economics of information as a commodity.
Infrastructure: The economics of public works.
Institutions: The role of formal and informal rules in economic behavior.
Labour: The economics of work and employment.
Law: The intersection of legal and economic analysis.
Management: The application of economic principles to management decisions.
Non-monetary: Economies not based on currency. A theoretical curiosity.
Organization: The economics of how organizations function.
Participation: The economic implications of involvement.
Personnel: The economics of human resources.
Planning: The deliberate organization of economic activity.
Policy: The actions taken by governments to influence the economy.
Public sector: The economics of government activity.
Public choice: Applying economic methods to political decision-making.
Social choice: (Again, emphasizing its scope.)
Regional: The economics of specific geographic areas.
Regulatory: The economics of regulation.
Resources: The economics of natural resources.
Rural: The economics of non-urban areas.
Service: The economics of the service sector.
Transport: The economics of transportation systems.
Urban: The economics of cities.
Welfare: (Repeated, signifying its broad application.)

Classical economics

The bedrock. The old guard. The foundational texts that still echo, however faintly, in the halls of modern economic thought. This isn't just a historical footnote; it's the ghost in the machine.

Classical economics, or as it was once grandly known, classical political economy, was a dominant school of thought that took root, primarily in Britain, during the late 18th and the first half of the 19th century. It’s a lineage that traces back to the great thinkers, the ones who dared to articulate the emerging mechanisms of market economies. We're talking about the Smithian and Ricardian schools, the titans whose ideas formed the very skeleton of economic reasoning. The key figures? The usual suspects: Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert Malthus, and John Stuart Mill. They presented a compelling, if sometimes overly optimistic, view of market economies as largely self-governing systems. These systems, they argued, were governed by inherent "natural laws" of production and exchange. The most famous articulation of this self-regulating mechanism? Smith's enduring metaphor of the invisible hand.

It was Adam Smith's seminal work, The Wealth of Nations, published in 1776, that conventionally marks the genesis of this era. Smith’s radical proposition was that a nation's prosperity wasn't measured by the gold stashed in the royal treasury, but by its national income. This income, he argued, was a direct consequence of the productive capacity of its people, amplified by the division of labour and the accumulation of capital. This concept of capital, as a driver of productivity and wealth, became a cornerstone of classical economics, a concept that continues to shape our understanding, even as its nuances are debated.

On the policy front, these classical economists were pragmatists, leaning towards economic liberalism. They championed market freedom but didn't shy away from acknowledging a necessary role for the state in ensuring the common good. Smith himself recognized that markets weren't infallible, and that certain public goods required state intervention. He also keenly observed that the burden of supporting these public goods should fall on those best equipped to bear it. His repeated warnings against the dangers of monopoly and his insistence on the vital importance of competition underscore this nuanced perspective. In the realm of international trade, they were staunch advocates of free trade, a stark departure from the protectionist policies of their mercantilist predecessors.

The very term "classical" is, in part, a construct born from Karl Marx's own critique of political economy. Marx, in his rigorous analysis, distinguished between economists he deemed worthy of serious engagement – the "classical" ones – and their later, less rigorous, "vulgar" successors. This label, however, invites its own debates, particularly concerning the period between 1830 and 1875, and the intricate relationship between classical and the emerging neoclassical economics.

History

The classical economists, in their time, developed what has been termed their "magnificent dynamics" [5]. This was during a period of immense societal upheaval, as capitalism was slowly but surely displacing feudalism, and the Industrial Revolution was fundamentally reshaping the very fabric of society. These seismic shifts naturally raised critical questions about how a society could function when individuals were primarily driven by their own self-interest, their pursuit of personal gain. The popular association of classical political economy with the idea of self-regulating free markets is, therefore, deeply rooted in this historical context. [6]

The classical economists, along with their immediate intellectual forebears, marked a significant reorientation in economic thought. They shifted the focus from the narrow interests of rulers to the broader concerns of national well-being. Adam Smith, influenced by the physiocrat François Quesnay [7], redefined national wealth not by the accumulation of precious metals, but by the nation's annual income. This income, Smith posited, was generated through the combined efforts of labour, land, and capital. In a system where individuals held private property rights to land and capital, the national income was then distributed among these factors of production as wages, rent, and interest or profits. For Smith, productive labour was the ultimate source of wealth, and capital played the crucial role of organizing and enhancing labor's productivity, thereby driving economic growth.

David Ricardo and James Mill took Smith's foundational ideas and systematized them. Their synthesis became the prevailing economic orthodoxy from roughly 1815 to 1848. Following this period, an "anti-Ricardian reaction" began to take shape, particularly on the European continent, which ultimately paved the way for the development of marginalist/neoclassical economics. [8] This definitive schism is typically dated to the 1870s. After this point, the intellectual torch of Ricardian economics was largely carried forward by Marxian economics, while neoclassical economics ascended to become the new orthodoxy, even in the English-speaking world.

Henry George is a figure sometimes seen as the last of the classical economists, or perhaps a crucial bridge between eras. The economist Mason Gaffney has presented evidence from original sources suggesting that the emergence of neoclassical economics was, in part, a deliberate effort to suppress the ideas of classical economics, and George's work in particular. [9]

Modern legacy

The ideas and principles of classical economics continue to resonate and remain fundamental to the broader discipline of economics. However, the theoretical framework itself has largely been superseded by neoclassical economics since the 1870s. Other classical concepts have either faded from mainstream discourse or have been integrated and transformed, notably within Keynesian economics during the Keynesian Revolution and the subsequent neoclassical synthesis. Nevertheless, echoes of classical thought persist in various schools of heterodox economics. These include Georgism and Marxian economics – Marx and Henry George were contemporaries of the classical economists – and Austrian economics, which diverged from neoclassical economics in the late 19th century. In the mid-20th century, a resurgence of interest in classical economics gave rise to the neo-Ricardian school and its intellectual offshoots.

Classical international trade economics

Adam Smith, in his highly influential publication, An Inquiry into the Nature and Causes of the Wealth of Nations, effectively dismantled the prevailing Mercantilist doctrines. [3] He argued vigorously against protectionist policies, instead championing the principles of free trade and open markets, believing that such policies would inherently benefit the nations involved in free trade. Smith articulated that while mercantilist policies might enrich domestic producers, they ultimately failed to benefit the nation as a whole. This was because such policies restricted consumers' access to goods at competitive prices, leading to an inefficient allocation of national resources and capital. Smith saw deviations from free trade as imposing a societal cost, akin to the detrimental effects of monopolies on market competition.

Following Adam Smith, David Ricardo emerged as another preeminent economist of the classical era, significantly contributing to the discourse on international trade. Ricardo's most celebrated economic theory is the concept of comparative advantage, which he proposed as the fundamental basis for the international division of labor. He asserted that international trade, regardless of the specific circumstances, would invariably lead to an increase in the overall standard of living. [5] His central thesis regarding international trade was that while it contributes to augmenting a country's real output, its primary benefits stem from fostering specialization and promoting the division of labour on a global scale. This international specialization, in turn, enables a more efficient utilization of resources across all participating nations. A critical assumption underpinning Ricardo's theory was that factors of production were immobile between countries, while finished goods were perfectly mobile. This assumption was crucial for demonstrating the advantages derived from international trade and specialization. However, Ricardo's theory of international trade faced challenges due to the inherent tension between the labor theory of value and the principle of comparative advantage. The clash arose from the difficulty in reconciling how relative prices were determined within this framework, a point Ricardo himself acknowledged as unresolved within the context of international trade theory.

John Stuart Mill later addressed this dilemma, further refining and expanding upon Ricardo's theory of comparative advantage. Mill's crucial contribution involved the incorporation of demand into the theoretical equation. He was the first to propose the idea that both demand and supply are functions of price, and that market equilibrium is achieved when prices adjust to balance supply and demand. [10] In essence, prior to the advent of Adam Smith and the broader classical economic movement, international trade was generally viewed with suspicion and considered disadvantageous to participating nations, largely due to the prevailing economic policies of mercantilism. However, the emergence of classical economists like Adam Smith, David Ricardo, and John Stuart Mill fundamentally shifted this perspective, leading to the view that international trade was, in fact, beneficial for all involved parties.

Classical theories of growth and development

A central preoccupation for most classical economists was the analysis of how national wealth grew and the identification of policies that could foster such growth. John Stuart Mill, however, held a distinct view, believing that a future "stationary state"—characterized by a constant population size and a stable stock of capital—was both an inevitable outcome and, paradoxically, a desirable one for the advancement of humankind. This concept is now recognized as a steady-state economy. [10]:592–96

Scholars such as John Hicks and Samuel Hollander, [11] Nicholas Kaldor, [12] Luigi L. Pasinetti [13][14] and Paul A. Samuelson [15][16] have developed formal models that interpret and represent classical political economy.

Classical theories of poverty

Adam Smith identified several key factors contributing to poverty. These included low wages and the artificial suppression of their increases, limited access to education, the tendency for the wealthy to collude in markets, and governmental neglect in providing public incentives for economic participation. [17] To mitigate poverty, Smith advocated for policies that ensured fair wages for laborers, the dismantling of monopolies, and the maintenance of essential infrastructure, such as roads and schools, to ensure that all members of society, including the poor, could benefit from economic progress. In contrast, Thomas Malthus theorized that poverty was an inevitable consequence of unchecked population growth. He posited that widespread famine, a natural outcome of this imbalance, would serve as a corrective mechanism. Malthus observed that population tended to grow exponentially, while the supply of food increased only linearly. [18] He also viewed government support programs with suspicion, fearing they would foster dependency on welfare and further stimulate population increases. [18] Consequently, he encouraged individuals to exercise restraint, particularly in delaying marriage and childbirth. For Malthus, poverty was a natural check, essential to prevent the population from outstripping the available resources.

Value theory

The classical economists dedicated considerable effort to developing a theory of value, or more precisely, a theory of price, to unravel the dynamics of economic systems. Within the context of political economy, "value" often referred to "exchange value," a concept distinct from mere price. [10] William Petty introduced a crucial distinction between market price and [natural price]. Market prices, he argued, are subject to numerous transient influences that defy easy theoretical generalization. Natural prices, on the other hand, as conceptualized by Petty, Smith, and Ricardo, represent the underlying, systematic, and persistent forces that shape prices over time. Smith described the tendency of market prices to gravitate toward natural prices as analogous to the force of gravity.

The specific determinants of natural prices varied among classical thinkers. Petty attempted to establish a relationship between land and labor, proposing what could be termed a land-and-labour theory of value. Smith, however, largely confined the labour theory of value to a hypothetical pre-capitalist era. Some interpretations suggest Smith believed value was ultimately derived from labor. [3] He posited that natural prices were the aggregate of the natural rates of wages, profits (which encompassed the return on capital and the compensation for managerial oversight), and rent. Ricardo, too, espoused a theory that could be described as a cost of production theory of value. He critiqued Smith's view of rent as a price-determining factor rather than a price-determined one, and considered the labor theory of value a reasonable approximation.

Certain historians of economic thought, particularly those associated with the Sraffian tradition, [19][20] interpret the classical theory of prices as being determined by three fundamental givens:

The level of output, dictated by what Smith termed "effectual demand,"
The prevailing technology,
And the level of wages.

From these foundational elements, a rigorous theory of value could be systematically derived. However, neither Ricardo nor Marx, despite their profound engagement with the theory of value during the Classical period, fully developed this theory in its complete form. Those who reconstruct the theory of value in this manner view the determinants of natural prices as being explained by classical economists from within the theoretical framework of economics itself, albeit at a lower level of abstraction. For instance, the theory of wages was intimately linked to the theory of population. The classical economists incorporated the theory of the determinants of population levels and growth as an integral part of Political Economy. In subsequent economic thought, the theory of population has largely been relegated to the domain of Demography. In stark contrast to the Classical theory, the determinants of value in the neoclassical framework are considered exogenous to neoclassical economics. These exogenous factors include:

Tastes and preferences of consumers,
Technological advancements,
And the initial endowments of resources.

Classical economics tended to emphasize the benefits derived from trade. Its theory of value was largely supplanted by the marginalist schools of thought. These schools argued that "use value" originated from the marginal utility that consumers derived from a good, and that "exchange value" (i.e., natural price) was determined by the marginal opportunity- or disutility-cost associated with the inputs required for production. Ironically, given the strong adherence of many classical economists to the principles of the free market, the largest school of economic thought that continues to adhere to classical principles is Marxian economics.

Monetary theory

During the 19th century, British classical economists engaged in a significant debate between the Banking and the Currency School. This historical debate bears a striking resemblance to contemporary discussions between proponents of the theory of endogenous money, such as Nicholas Kaldor, and monetarists, like Milton Friedman. Monetarists and members of the Currency School argued that banks possessed the capacity and the responsibility to control the money supply. Their theories posited that inflation was a direct consequence of banks issuing an excessive quantity of money. Conversely, proponents of the theory of endogenous money contend that the money supply naturally adjusts to meet demand, and that banks primarily influence the terms and conditions under which loans are provided, such as the interest rate, rather than controlling the quantity of money itself.

Debates on the definition

The theory of value remains a contentious subject. A key point of contention is whether classical economics should be viewed as a precursor to neoclassical economics or as a distinct school of thought with its own unique theories of value, distribution, and growth.

The period spanning from 1830 to 1875 is particularly marked by significant debate. Karl Marx initially coined the term "classical economics" to specifically denote Ricardian economics – the economic framework developed by David Ricardo, James Mill, and their predecessors. However, the usage of the term later expanded to encompass Ricardo's followers as well. [21]

Sraffians, who champion the "discontinuity thesis," argue that classical economics extends from William Petty's work in the 17th century up to the dissolution of the Ricardian system around 1830. They characterize the subsequent period, from 1830 to the 1870s, as being dominated by what Karl Marx termed "vulgar political economy." Sraffians contend that certain concepts, such as the wages fund theory, Senior's abstinence theory of interest (which places the return to capital on par with returns to land and labor), the explanation of equilibrium prices through well-behaved supply and demand functions, and Say's law, are not essential components of the classical theory of value and distribution. Joseph Schumpeter's view that John Stuart Mill presented a transitional stage between classical and neoclassical economics aligns with this perspective.

Georgists and other modern classical economists and historians, such as Michael Hudson, assert that a fundamental divergence between classical and neoclassical economics lies in their respective treatments or recognition of economic rent. Most contemporary economists no longer acknowledge land or location as distinct factors of production, often claiming that economic rent is virtually non-existent. Georgists and their proponents, however, argue that economic rent still accounts for approximately one-third of economic output.

Sraffians generally view Karl Marx as having rediscovered and rearticulated the core logic of classical economics, albeit for his own theoretical purposes. Others, like Schumpeter, consider Marx a disciple of Ricardo. Even Samuel Hollander [22] has recently argued that there is textual evidence within the classical economists' writings to support Marx's interpretation, though he maintains that this evidence is drawn from a very limited selection of texts.

Another perspective posits that neoclassical economics represents a natural and continuous evolution from classical economics. Scholars who advocate this view see no sharp demarcation between the two. They acknowledge shifts in emphasis, such as a greater focus on the short run versus the long run, or a more prominent role for supply and demand, but argue that neoclassical concepts can be found, albeit in nascent or less developed forms, within classical economics. From this viewpoint, there is essentially a single, continuous theory of value and distribution. Alfred Marshall was a notable proponent of this perspective, and Samuel Hollander is arguably its most prominent contemporary advocate.

Yet another viewpoint suggests that classical economics encompassed two distinct, simultaneously developing threads. According to this interpretation, neoclassical economics emerged from certain exoteric (popular) ideas present in Adam Smith's work. Ricardo, on the other hand, represented a divergence, developing esoteric (known only to a select few) ideas also found in Smith. This perspective can be traced to W. Stanley Jevons, who famously described Ricardo as "that able, but wrong-headed man" who steered economics onto the "wrong track." This view is also echoed in Maurice Dobb's Theories of Value and Distribution Since Adam Smith: Ideology and Economic Theory (1973) and in Karl Marx's Theories of Surplus Value.

These interpretations do not exhaust the possibilities. John Maynard Keynes himself viewed classical economics as beginning with Ricardo and concluding with the publication of his own The General Theory of Employment, Interest and Money. In Keynes's view, the defining characteristic of classical economics was Say's law, a principle that was fundamentally challenged by Keynesian economics. Keynes was, however, aware that his usage of the term 'classical' was somewhat unconventional. [21]

A significant challenge in these debates is the underlying disagreement among participants regarding the fundamental question: is there a non-neoclassical economic theory that warrants reconstruction and application to accurately describe contemporary capitalist economies? Some scholars, like Terry Peach, [23] view classical economics primarily as a subject of historical or antiquarian interest.

There. A detailed account, as requested. It’s not pretty, but it’s thorough. If you find yourself lost in the labyrinth of these theories, well, that's on you. I've laid out the facts. The rest is just… commentary.