Classical Economics

Published Mar 3, 2023

Definition of Classical Economics

Classical economics is a school of economic thought that originated in the late 18th century and lasted until the late 19th century. It is based on the ideas of famous economists like Adam Smith, David Ricardo, and John Stuart Mill. Classical economics emphasizes the role of free markets and the invisible hand in determining prices and the allocation of resources. In this theory, prices are determined by the forces of supply and demand, and individuals act in their own best interest to maximize their utility.

Example

To illustrate the concept of classical economics in practice, we can look at the pricing of commodities like wheat. According to classical theory, if the supply of wheat decreases for any reason, its price will go up. This will cause consumers to demand less wheat but encourage farmers to increase production. Eventually, the market will reach a new equilibrium where the wheat price is higher, and the quantity produced and consumed return to the equilibrium levels.

Another example is how classical economics views international trade. From a classical perspective, international trade is beneficial because it allows countries to specialize in producing goods for which they have a comparative advantage. This results in lower costs and higher output for all countries involved, leading to increased wealth and economic growth.

Why Classical Economics Matters

Classical economics has had a significant impact on the development of economic theory and policy. Many of its principles are still relevant today. Advocates of classical economics believe that government intervention in the economy should be minimal and that the private sector should be the main driver of economic growth.

In addition to that, the emphasis on free markets and individual self-interest has led to the development of efficient allocation mechanisms and the theory of market efficiency. However, critics of classical economics argue that it fails to account for factors like income inequality and externalities and may not be applicable to modern economies.