What is ‘Classical Economics’?
Classical economics is a broad term that refers to the dominant school of thought for economics in the 18th and 19th centuries. Scottish economist Adam Smith is commonly considered the progenitor of classical theory although earlier contributions were made by Spanish scholastics and French physiocrats. Other important contributors to classical economics include David Ricardo, Thomas Malthus, Anne Robert Jacques Turgot, John Stuart Mill, Jean-Baptiste Say and Eugen Böhm von Bawerk.
Breaking Down ‘Classical Economics’
Prior to the rise of the classical school, most national economies were based on top-down, command-and-control government policies. Many of the most famous classical thinkers, including Smith and Turgot, developed their theories as alternatives to the protectionist and inflationary policies of mercantilist Europe. Classical economics became closely associated with economic, and later political, freedom.
Rise of the Classical Theory
The classical theory developed shortly after the birth of western capitalism. Many historians date the rise of capitalism to the breakdown of serf-based labor in England and the creation of the first joint stock company in 1555. After capitalism gave birth to the Industrial Revolution, public intellectuals offered competing theories about its causes and consequences. Classical economists provided the best early attempts at explaining capitalism’s inner workings.
The earliest classical economists developed theories of value, prices, supply, demand and distribution. Nearly all rejected government interference with market exchanges preferring a looser market strategy known as “laissez-faire,” or “let it be.”
Classical thinkers were not completely unified in their beliefs or understanding of markets although there were notable common themes in most classical literature. The majority favored free trade and competition among workers and businesses. Classical economists wanted to transition away from class-based social structures in favor of meritocracies.
One breakthrough in classical economics occurred in 1825, when English merchant Samuel Bailey popularized the subjective theory of value. The 1870s witnessed the so-called “marginalist revolution,” which completely overturned Smithian value theory. Thereafter, classical schools split into competing factions, notably, the neoclassical and the Austrians.
Decline of the Classical Theory
The classical economics of Adam Smith had drastically evolved and changed by the 1880s and 1890s, but its core remained intact. By that time, the writings of German philosopher Karl Marx had emerged to challenge the policy prescriptions of the classical school; however, Marxian economics made very few lasting contributions to economic theory.
A more thorough challenge to classical theory emerged in the 1930s and 1940s through the writings of British mathematician John Maynard Keynes. Keynes was a student of Alfred Marshall and admirer of Thomas Malthus. Keynes thought that free market economies tended toward underconsumption and underspending. He called this the crucial economic problem, and used it to criticize high interest rates and individual preferences for saving. Keynes also refuted Say’s Law of Markets.
Keynesian economics advocated for a much larger role for central governments in economic affairs, which made Keynes popular with British and American politicians. After the Great Depression and World War II, Keynesianism had replaced neoclassical economics as the dominant intellectual paradigm among world governments.