The classical theory of economics, which dominated in the 18th and early 19th centuries, laid

the foundation for much of modern economics. Sometimes referred to as laissez faire
economics, classical theory emphasized growth, free trade, and competition, as free from
government regulation as possible. Under classical thought, when individuals pursue their own
interest, society as a whole benefits.

Classical economics, English school of economic thought that originated during

the late 18th century with Adam Smith and that reached maturity in the works
of David Ricardo and John Stuart Mill. The theories of the classical school, which
dominated economic thinking in Great Britain until about 1870, focused on economic
growth and economic freedom, stressing laissez-faire ideas and free competition.

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.

School of economic thought which stresses that economies function most efficiently if everyone
is allowed to pursue his or her self interest, in an environment of free and open competition.
Based on the ideas of eighteenth and nineteenth century British economists from Adam Smith
(1723-90) through to Alfred Marshall (1842-1946). Also called classical school of economics.
See also new classical economics and neo classical economics.

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.

FEATURE

Classical economic theory argues for the self-regulating market. Under this viewpoint, the
concern for profit ensures that society’s resources are used in the most beneficial manner,
without direction by government.
BENEFIT

Under classical economics, the self-regulating market transforms a seemingly chaotic process
of buying and selling among consumers and producers into an orderly system of transactions
that meets individual needs and increases national wealth.

ROLE

Under classical economics, the role of government is to provide national defense, a system of
justice that includes enforcement of contracts and a system of public works, including
infrastructure and education.

Feature

Classical economics gave rise to neoclassical economic thought in the late 19th century.
Neoclassical built on Classical ideas, giving them greater mathematical support and precision.