CLASSICAL SCHOOL OF THOUGHT

History of Economic Thought

The word "economics" is derived from oiko-nomikos, which

means skilled in Household Management.

Economics is the quantitative and qualitative study on the

allocation, distribution and production of economic resources. Key Economic Questions: How do we decide what to produce with our limited resources? How do we ensure stable prices and full employment of our resources? How do we provide a rising standard of living both for ourselves and for future generations?
Toward answers to these questions we have Mainly Two

economic schools of thoughts i.e. Classical and Keynesian.

Each school takes a different approach to the economic study of

monetary policy, consumer behavior and government spending. A few basic distinctions separate these two schools.

Classical School of Thought

The Classical School of economics was developed about

1750 and lasted as the mainstream of economic thought until the late 1800s. Main Contributors to the classical school of thought: Adam Smith [1723-1790] is recognized as the originator of Classical Economics. He is often referred to as the founding father of economics. He wrote The Wealth of Nations (1776) in which he termed the markets and price mechanism the invisible hand. David Ricardo, Karl Marx, Alfred Marshall, Thomas R. Malthus,

Main Contribution of Classical School of Thought (i.e. Books)

Adam Smith [1723-1790, founder] Theory Of

Moral Sentiments (1759), Wealth Of Nations (1776)

David Ricardo [1772-1823], On The Principles Of

Political Economy And Taxation (1817)

Thomas Malthus [1766-1834], An Essay On The

Principle Of Population (1789), Principles of Political Economy (1820), The Measure of Value (1823), Definitions in Political Economy (1827)

Basic Theory
Classical economic theory is rooted in the concept of

a laissez-faire economic market. A laissez-faire--also known as free--market requires little to no government intervention. It also allows individuals to act according to their own self interest regarding economic decisions. This ensures economic resources are allocated according to the desires of individuals and businesses in the marketplace.
Classical

economics uses the value theory to determine prices in the economic market. Value is determined based on production output, technology and wages paid to produce the item.

Basic Theory
The Classical Theory is based on the automatic

assumption of "of "Self Equilibration" or Self Correction tendency of the economic forces i.e. Invisible Hands. Adam smith was of the idea that common mutual interest of buyers and sellers in the market will lead to auto correction of market. to the classical economist the economy will operate at its full employment level of output for two main reasons: first one is Say's market law which states that Supply Creates its own Demand and Second is that Prices and Wages are fully flexible so always there will be full-employment level of Output.

According

Basic Theory
Belief of classical economists in the self-correcting

mechanism of an economy leaded them to assume that there will be no unemployment in the economy because: Whenever there is unemployment in an economy, it is usually a temporary disequilibrium because it is an equilibrium caused by excess labor available at the current wage rate.
In the beautiful free world of classical economics, no

human intervention is required to lead the capital markets to equilibrium as well. If the economy does not follow the last assumption and shows a mismatch in savings and investments, the classical economists provide the evergreen solution - do nothing, it is temporary and will correct itself.

Basic Theory
Thomas

Robert Malthus used the idea of diminishing returns to explain low living standards. Population, he argued, tended to increase geometrically(vertically) , outstripping the production of food, which increased arithmetically(horizontally) . The force of a rapidly growing population against a limited amount of land meant diminishing returns to labor. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.