What are 'Classical Economics'
Classical economics is a broad term that refers to the dominant economic paradigm of the 18th and 19th centuries. Scottish Enlightenment thinker Adam Smith is commonly considered the progenitor of classical theory, although earlier contributions were made by the 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 around top-down, command-and-control government policies. Many of the most famous classical school 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, as well as 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 attempt 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, giving rise to the French phrase "laissez-faire," or "let it be."
Classical thinkers were not completely unified in their beliefs or understanding of markets, though 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 major breakthrough in classical economist occurred in 1825, when English merchant Samuel Bailey popularized the subjective utility 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 neoclassicals 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 rose in challenge to the policies prescriptions of the classical school, 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, and thought 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 believed he 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 WWII, Keynesianism had replaced neoclassical economics as the dominant intellectual paradigm among world governments.