Importance of Classical Economics

Classical economics is a school of thought in economics that flourished primarily in Britain. It was developed shortly after the birth of western capitalism and reflected the dominant school of thought for economics in the 18th and 19th centuries. Its main thinkers were Adam Smith, Jean Baptiste Say, David Ricardo and John Stuart Mill.

Classical economists believed that free markets will regulate themselves if they are left alone. They believed that markets would find their own equilibrium without any intervention by individuals or the government.

The markets would be open to all competitions and be free from the government’s intervention, this would enable individuals to pursue their self interests. Workers could create their own demands for goods and services and use their wages to buy other goods.

They believed that the market should be free to find its own levels of supply and demand. Prices would fluctuate according to the demand of consumers. The market will regulate any shortages and surpluses of goods and services.

Classical Economists did not favour government spending because they believe, that the market will regulate itself and does not require any intervention through higher government spending

Higher government spending, which would mean borrowing from other countries, could result in debt and inflation, and that's not something classical economists favoured.

Classical supporters also believed that the economy will always seek full employment of resources.

According to them, the Long Run Aggregate Supply curve (or LRAS) is inelastic. Basically saying that supply of any commodity, in the long run, will not move since any fluctuation or deviation will correct itself. One of the reasons for this is that an economy seeks full employment of resources, due to this no additional resources can be used to increase supply and therefore it cannot change. In the long run, a rise in aggregate demand will lead only to higher inflation (AD>AS) and will have no effect on GDP.

In one of our earlier articles called "Government spending and the broken window fallacy" we have already disregarded the theory that hopes that the market will regulate itself and proved how important government intervention is for a country to get out of recession.

Most classical economic principles have been disregarded or redefined as ‘Neo classical economics’, and very few theories by such old economists stand true today.

Why was it so important then?

• Classical economic theory helped countries to migrate from monarchic rule to capitalistic democracies with self-regulation.

• Adam Smith’s 1776 release of the Wealth of Nations highlights some of the most prominent developments in not only classical economics but also the subject as a whole.

• Classical Economics helped quantify and explain value, price, supply, demand, and distribution, this helped immensely in forming policy and making business decisions

• Classical economics was eventually replaced with more updated ideas, such as Keynesian economics, which called for additional government intervention.

With classical economists coming into the picture, it helped quantify daily problems and made it possible to solve them in a more ‘mathematical’ way. Although it wasn’t perfect, it led to the beginning and the evolution of the subject into several branches such as behavioural economics. It also sparked important debates that lead to revolutions in the field of economics.