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.

  1. Keynesian Economics

    Keynesian economics is an economic theory of total spending in ...
  2. Labor Theory Of Value

    An economic theory that stipulates that the value of a good or ...
  3. Ethereum Classic

    Ethereum Classic is a decentralized, blockchain-based distributed ...
  4. Accelerator Theory

    The accelerator theory is an economic theory whereby as demand ...
  5. Jean-Baptiste Say

    A French classical, liberal economist and scholar. Jean-Baptiste ...
  6. Market Economy

    An economic system in which economic decisions and the pricing ...
Related Articles
  1. Trading

    Giants Of Finance: John Maynard Keynes

    This rock star of economics advocated government intervention at a time of free-market thinking.
  2. Insights

    The History of Economic Thought

    Economics is a vital part of every day life. Discover the major players who shaped its development.
  3. Investing

    How Influential Economists Changed Our History

    Find out how these five groundbreaking thinkers made contributions to financial theory that crossed over into many aspects of social history as well.
  4. Insights

    Adam Smith: The Father of Economics

    Adam Smith is renowned as "The Father of Economics" for his work in pioneering ideas such as free trade and GDP.
  5. Insights

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  6. Insights

    Why Can't Economists Agree?

    There are many reasons why economists can be given the same data and come up with entirely different conclusions.
  7. Investing

    Explaining the Liquidity Preference Theory

    According to the liquidity preference theory, investors demand interest in return for sacrificing their liquidity.
  1. What is the difference between Keynesian and Neo-Keynesian economics?

    Learn how Neo-Keynesianism, which was developed in the post-war period, departs from classical Keynesian theory and how they ... Read Answer >>
  2. How does disposable income influence the marginal propensity to consume (MPC)?

    Learn about the relationship between disposable income and marginal propensity to consume in the classic Keynesian consumption ... Read Answer >>
  3. What economic measures can be taken to encourage free enterprise?

    Learn about the types of economic policies that support free market capitalism, as espoused by thinkers in the classical ... Read Answer >>
  4. What does the term 'invisible hand' refer to in the economy?

    Discover and understand the concept of the "invisible hand" as explained by Adam Smith, considered the founder of modern ... Read Answer >>
  5. How can a government balance the stimulating effects of increased spending with the ...

    Read about some of the problems with analyzing the impact of government spending, both in terms of stimulus multipliers and ... Read Answer >>
  6. What's the difference between agency theory and stakeholder theory?

    Learn how agency theory and stakeholder theory are used in business to understand common business communication problems ... Read Answer >>
Hot Definitions
  1. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  2. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  5. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center