Classical economics
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Classical economics is a school of economic thought whose major developers include William Petty, Adam Smith, David Ricardo, Thomas Malthus, and John Stuart Mill. It is seen by many as the first modern school of economic thought. Some authors, such as John Maynard Keynes expand the definition of classical economics to include Karl Marx.
Classical economists attempted to explain growth and development. They produced their "magnificent dynamics" during a period in which capitalism was emerging from a past feudal society and in which the industrial revolution was leading to vast changes in society. These changes also raised the question of how a society could be organized around a system in which every individual sought their own (monetary) gain. Why would such a society not collapse in chaos?
Classical economists reoriented economics away from an analysis of the ruler's personal interests to a class-based interest. Physiocrat Francois Quesnay and Adam Smith, for example, identified the wealth of a nation with the yearly national income, instead of the king's treasury. Smith saw this income as produced by labor applied to land and capital equipment. Once land and capital equipment are appropriated by individuals, the national income is divided up between laborers, landlords, and capitalists in the form of wages, rent, and profits.
Classical economists developed a theory of value, or price, to investigate economic dynamics. Petty introduced a fundamental distinction, that between market price and natural price, to facilitate the portrayal of regularies in prices. Market prices are jostled by many transient influences that are difficult to theorize about at any abstract level. Natural prices, according to Petty, Smith, and Ricardo, for example, capture systematic and persistent forces operating at a point in time. Market prices are always tending toward natural prices in a process that Smith analogized as like gravitational attraction.
The theory of what determined natural prices varied within the Classical school. Petty tried to develop a par between land and labor and had what might be called a land-and-labor theory of value. Smith confined a labor theory of value to a mythical pre-capitalist past. He stated that natural prices were the sum of natural rates of wages, profits, and interest. Ricardo also had what might be described as a cost of production theory of value. He criticized Smith for describing rent as price-determining, instead of price-determined. Ricardo thought the labor theory of value was a good approximation.
Some historians of economic thought see the classical theory of prices as determined from three givens: (1) The level of outputs at the level of Smith's "effectual demand", (2) technology, and (3) wages. From these givens, one can rigorously derive a theory of value. But neither Ricardo nor Marx, the most rigorous investigators of the theory of value during the Classical period, developed this theory fully. Those who reconstruct the theory of value in this manner see the determinates of natural prices as being explained by the Classical economists from within the theory of economics, albeit at a lower level of abstraction. For example, the theory of wages was closely connected to the theory of population. The Classical economists took the theory of the determinates of the level and growth of population as part of Political Economy. Since then, the theory of population has been seen as part of some other discipline than economics. In contrast to the Classical theory, the determinants of the neoclassical theory of value - (1) tastes, (2) technology, and (3) endowments are seen as exogeneous to neoclassical economics.
Classical economics tended to stress the benefits of trade. It was largely displaced by marginalist schools of thought (such as the Austrian School) who saw value to derive from the marginal utility that consumers found in a good rather than the cost of the inputs that made up the product. Ironically, considering the attachment of many classical economists to the free market, the largest school of economic thought that still adheres to classical forms is the Marxist school. This may be due to the fact that Karl Marx died before marginalist theories were widely accepted.