THE CLASSICAL SCHOOL

1776-1871
 What Was the Historical Background
of the School?
Two revolutions influenced the classical economic
thought: the scientific revolution (Isac Newton, 1687)
and industrial revolution (1760-1820)
 What Was the Historical Background
of the School?
• Classical school was dated at 1776 when Adam Smith
published his book “The Wealth of Nation” and ended
in 1871 when Stanley Jevons and Carl Menger
published their work called Neoclassical theory.
• England was in the early stages of industrial revolution.
There were substantial growth of manufacturing, trade,
inventions and the division of labor
• England was the most efficient and powerful country in
the world and could afford free trade without fear of
foreign competition.
 What Was the Historical Background
of the School?
• Entrepreneurs became stronger, they no longer
had to rely on government subsidy, monopoly
preveledges and tariff protection. Monopoly
agreement was difficult to achieve and enforce.
Competition could establish moderate prices and
good quality products.
• Wages could be kept low enough through the
working of free market economy. Abundant labor
supply came from aggriculture, handycraftmen,
high birth rate and migrants from Ireland.
 What Were the Major Tenets of the
School?
• The first principle of classical school was laissez faire:
government is best which governs least. The forces of free,
competitive market guide production, exchange and
distribution. The economy tend toward full employment
without government intervention.
• Assumed that self interested behavior is basic to human
nature. Producers and merchats provided goods and
services out of the desire to make profits; workers offered
their labor services to obtain wages and consumers
purchased products as a way to satisfy their wants
• Emphasized the existence of harmony of interest: by
seeking his or her own interests, each individual serves the
best interest of the society.
 What Were the Major Tenets of the
School?
• The mercantilist said that the wealth was derived from
commerce; the physiocrats saw agriculture as the
source of wealth while classical school regarded
commerce, agriculture and industry as productive.
• The classical school provided a method of analysing the
economy and the economic laws that operate within
it. they believed that the laws of economics are
universal. Examples: the law of comparative advantage,
the law of diminishing returns, Say’s law, labor theory
of value etc.
 What Were the Major Tenets of the
School?
• They believed in individual’s innate desire to
accumulate wealth as an end in itself. Hard
work and limited consumption were the
means to increase one’s capital that promote
maximum economic growth.
• Look at the economy as a whole– the
macroeconomic approach.
Whom Did the School Benefit or Seek
to Benefit?
• It serves businessmen, especially industrialists
who achieved a new status and dignity as the
promoter of the nation’s wealth. It created
political, social and economic climate that
promoted industry, trade and profit.
• In the long run, classical economics served all
society because the application of its theories
promoted capital accumulation and economic
growth.
 How Was the School Valid, Useful,
or Correct in Its Time?
• Competition was then a rising phenomenon and
reliance on it as a regulator of the economy was a
tenable viewpoint. Government was often wasteful
and corupt. Under such circumstance, the less
government intervention, the better.
• Feudal land laws were abolished and land could served
as security for credit that enabled landowners to invest
in agriculture or industry.
• When industrialization was beginning, the society’s
greatest need was to concentrate resources on the
maximum possible expansion of production.
 How Was the School Valid, Useful,
or Correct in Its Time?
• The market was enlarged not only by freer
international trade, but also by promoting an urban
labor force.
• Subsistence farmers would consume much of their own
product and bought little in the market. The urban
laborers, though they might be compelled to reduced
their consumption below that of subsistence farmers,
would sill buy much more in the market. The food
supply was absorbed into the monetary urban sector
and the merchants and processor came between the
farmer and the consumer.
 Which Tenets of the School Became
Lasting Contributions?
• The harmony of interest theory could no longer be
defended when the concentration of wealth produced
great disparity in the bargaining power among individuals.
• Health laws became more necessary with the growth of
cities.
• Their prediction that rents would rise and rate of profit
would fall belittling future technological change.
• But, their emphasis on the division of labor, gains from
international trade and economic development are still
basically compatible with the goals of modern society.
• Their labor theory of value was latter led to socialist
doctrines.