Classical economics

7th April 2021

Classical economics, also defined as Political economy, is the mainstream economics of the XVIII and XIX centuries. Its father is the Scottish philosopher Adam Smith (1723 - 1790), but it has been supported by several other important figures such as Jean-Baptiste Say, Thomas Robert Malthus, and David Ricardo. Karl Marx may be included in this group, too, since he used the Classical school’s tools even if he criticized it.

These scholars lived in the age of industrial Capitalism (1750s-1900s). Profit was entrepreneurs’ primary focus since they needed capital to buy the very expensive machinery which was the hallmark of that period.

The amount of money ($M$) invested in machinery and to pay workers to produce a certain commodity ($C$) is smaller than the final value ($M^{\prime}$):

\[M \rightarrow C \rightarrow M^{\prime}\]

Not being able to ensure that $M^{\prime} > M$ led to exploitation of workers, which, associated to a growing population, resulted in low wages.

Such conditions set the background for the development of classical economic theories, that show some common fundamental ideas:

  1. an interest in growth and development, which were believed to culminate in a stationary state, meaning a state where the economy would only reproduce itself and ending up in a context of zero growth, hence a pessimistic view on the capability of capitalism to continue to provide growth in the long term.
  2. a focus on the cost of production as the main factor influencing the price, therefore the value of goods should at least match the cost sustained by entrepreneurs.
  3. the concern on on the distribution of income among labor, land and capital in the form of, respectively, wages, rents and profits; it was thus important to study the fairness of the capitalistic system.

!Adam Smith



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