THE CLASSICAL SCHOOL

• The classical school began in 1776

when Adam Smith published his
book "An Inquiry into the Nature
and Causes of the Wealth of
Nations“.

• It ended in 1871 when Jevons,

Menger & Walras (Marginalist
School) independently published
works expounding neoclassical
theories.

• The works of classical economists

was influenced by the ideas of
physiocratic school (Quesnay &
Turgot) 105
 THE CLASSICAL SCHOOL
Discussion in this topic can
be divided into 4 parts:
• “5 major questions”
• Forerunners
– Sir Dudley North
– David Hume
• Prominent Economists
– Adam Smith
– David Ricardo
– Thomas Robert Malthus
• Other economist
– Jeremy Bentham

106
 HISTORICAL BACKGROUND
• 2 “revolutions”, one
relatively mature & the
other just beginning, were
of particular significance to
classical economic thought:

i. The scientific
revolution
ii. The industrial
revolution

107
 SCIENTIFIC REVOLUTION
• Isacc Newton set forth the
law of universal gravitation
in his book Mathematical
Principles of Natural
Philisophy (1687).

• This law explains among

other thing, the motion of
the planets.

• The revolution in science

associated with Newton &
others had three major
aspects that merit mention:
108
 SCIENTIFIC REVOLUTION
i. Scientists relied heavily on
experimental evidence.
 Newton & his contemporaries did
not believe in innate knowledge
derived from reason alone
without reliance on experience.
ii. The universe is governed by
natural laws.
iii. A static view of the universe.
 Space, time & matter are
independent of each other.
 Nothing changes over time; the
motion & relationships in the
universe continue in endless
repetition.
109
 SCIENTIFIC REVOLUTION
• Newton’s impact can be seen in
the ideas of the classical school.
• For them Newtonian science
furnished a nature fully as
effective as the earlier will of god.
• If the Divine Will had created a
mechanism that worked
harmoniously & automatically
without interference, then laissez-
faire was the highest wisdom in
social affair.
• Natural laws would guide the
economic system & the action of
people.
110
 INDUSTRIAL REVOLUTION
• Both the industrial revolution & the
classical political economy emerged
in England at the same year (1776).
• Adam Smith & his contemporaries,
living during the early stages of the
industrial revolution, could not
adequately identify the significance
of this phenomenon & the direction
its development would take.
• Such wisdom is usually displayed
through hindsight; but they were
aware of the substantial growth of
manufacturing, trade, inventions &
the division of labour.
111
 INDUSTRIAL REVOLUTION
• By 1776 England, the most industrially
efficient & powerful country in the
world, stood to benefit greatly by free
international trade.
• As English entrepreneurs became
stronger, they no longer had to rely on
government subsidies, monopoly
privileges & tariff protection.
• As with entrepreneurs becoming
sufficiently numerous to make monopoly
agreements difficult to achieve &
enforce, competition could increasingly
be relied on to ensure moderate prices &
product quality.
• A free, mobile, low-paid & hardworking
labour force was also was emerging.

112
 INDUSTRIAL REVOLUTION
Why labour received low wages?
 Classical economics encouraged
private ownership, large scale & more
capital intensive agriculture.

 This raised the productivity of farm

labour & land but also turn peasants
into wage labourers who sought
employment from landlords, merchants
& manufacturers.

 Furthermore, handicraftsmen tended to

lose their competitive advantage as the
factory system developed, driving an
increasing number of them into the
labour market as wage workers.

113
 INDUSTRIAL REVOLUTION
 A high birthrate & a falling death
rate increased the population, &
child labourers & bankrupt Irish
peasants arriving in England also
augmented the labour supply.

 Government steps to keep wages

low were therefore no longer
necessary, hence making it easier
for businessmen to subscribe to the
new doctrine of laissez-faire.

114
 MAJOR TENETS
• Minimal government involvement.
• Self-interested economic behaviour
• Harmony of interests
• Important of all economic resources &
activities.
• Economic laws.

115
 Minimal government involvement
• The best government govern the least.
• The forces of the free, competitive
market would guide production,
exchange & distribution.
• The economy was held to be self-
adjusting & tending toward full
employment without government
intervention.
• Government activity should be
confined to enforcing property rights,
providing for the national defense &
providing public education.

116
 Self-interested economic behaviour
• Self interest behaviour is basic to
human nature.
• For example:
 Producers & merchants provided
goods & services out of a desire
to make profits.
 Workers offered their labour
services to obtain wages.
 Consumer purchased products as
a way to satisfy their wants.

117
 Harmony of interests
• The classicists emphasized the
natural harmony of interest.
• By pursuing their own individual
interests, people served the best
interests of society.
• For example:
 The action of each producer who is
attempting to garner profit is restrained
by the other producers who are
likewise attempting to make money.
 Competition drives down the prices of
goods & give benefit to the society as a
whole.

118
 Important of all economic resources & activities
• The classicists pointed out that all
economic resources – land, labour,
capital & entrepreneurial ability –
as well as all economic activities –
agriculture, commerce, production
& international exchange –
contribute to a nation’s wealth.
• The mercantilists had said that
wealth was derived from
commerce.
• The physiocrats had viewed land &
agriculture as the source of all
wealth.

119
 Economic laws
• The classical school made
tremendous contributions to
economics by focusing
analysis upon explicit
economic theories or “laws”.
• For example: the law of
comparative advantage, the
law of diminishing returns,
the labour theory of value
and etc.
• The classicists believed that
the laws of economics are
universal & immutable.

120
 WHOM DID THE CLASSICAL SCHOOL
BENEFIT OR SEEK TO BENEFIT
Short run
• Merchant & industrialist achieved a
new status & dignity as promoter of the
nation’s wealth.
• However, the wage earners (labour) in
particular bore the heaviest share of
costs through long hours of work at
low pay.

Long run
• Served all society because the
application of its theories promoted
capital accumulation & economic
growth.

121
 HOW WAS THE CLASSICAL SCHOOL
VALID, USEFUL OR CORRECT IN ITS TIME
“Laissez-faire”
 Classical economics rationalized the practices
being engaged in by the enterprising people.
 It justified the overthrow of mercantilist
restrictions, which had outlived their
usefulness.
 Competition was a growing phenomenon, and
reliance upon it as the great regulator of the
economy was a tenable viewpoint.
 Governments were notoriously wasteful &
corrupt, and under the circumstances, the less
government intervention, the better.
 When industrialization was beginning,
society’s greatest need was to concentrate
resources on the maximum possible expansion
of production.
 The elevation of the private sector over public
sector served this end admirably.
122
 HOW WAS THE CLASSICAL SCHOOL
VALID, USEFUL OR CORRECT IN ITS TIME
“Self-interest economic behaviour"
&"harmony of interest"
 Classical economics gave businesspeople
respectability in a world that previously
had directed honors & income toward
the nobility.
 Entrepreneurs were assured that by
seeking profit they were serving society.

123
 WHICH TENETS OF THE CLASSICAL SCHOOL
BECAME LASTING CONTRIBUTIONS
• The classical economists gave the
best analysis of the economic
world up to their time, far
surpassing the analyses of the
mercantilists & physiocrats.

• They laid the foundation of

modern economics as a social
science & generations who
followed built upon their insights
& achievements.

124
 WHICH TENETS OF THE CLASSICAL SCHOOL
BECAME LASTING CONTRIBUTIONS
• Several of the classical “laws” are
now taught as “principles” of
economics in standard economics
textbooks.

• Tenets that became lasting

contributions include, but not
limited to, the following:
 the law of diminishing returns
 the law of comparative advantage,
 the importance of capital
accumulation to economic growth &
etc.

125
 WHICH TENETS OF THE CLASSICAL SCHOOL
BECAME LASTING CONTRIBUTIONS
• This is not to suggest that, classical
economics was without its
weaknesses & errors.

• History & subsequent economic

theorists were to show that laissez-
faire was inadequate as a public
policy to deal with, among other
things:
 economic depressions
 monopolies
 monopsony power
 external effect of private actions
 provision of goods whose benefits were
indivisible (public goods)
126
 FORERUNNERS
• This part discussed the
contributions of the
following economists as the
school forerunners:

 Sir Dudley North

 David Hume.

127
 SIR DUDLEY NORTH (1641-1691)
• Living during the height of the
mercantilist period.
• He was a wealthy merchant in
the Turkish trade who later
became commissioner of
customs & then a treasury
officials.
• North had been called the
world first prominent free
trader.
• His brief tract,"Discourses
upon trade" , was North’s only
published work appearing
anonymously in 1691.
128
 SIR DUDLEY NORTH (1641-1691)
Among North’s opinions:

 Emphasized that trade is not a one-

sided benefit to whichever country
realizes a surplus of exports but
rather is an act of mutual advantage
to both sides.
 A division of labour & international
trade would promote wealth even if
no gold or silver existed.
 Argued for laissez-faire as the way
to achieve the maximum gains from
both intra & international trade.
 Disagreed with the mercantilist
concept that war & conquest enrich
a country.
129
 DAVID HUME(1711-1776)
• Born in Scotland 12 years before
his fellow national & friend
Adam Smith.

• Entered the University of

Edinburgh at the age of 12 & left
at 15 without taking a degree.

• Later eminent as a philosopher,

Hume was twice refused a chair
in philosophy at Edinburgh
because of his skeptical spirit &
unorthodox thinking.
130
 DAVID HUME(1711-1776)
• In fact, Adam Smith was once
nearly expelled from Oxford
University because a copy of
Hume’s A Treatise of Human
Nature” was found in his room.
• Hume spent his life as a tutor to
a marquis & as a minor
government official.
• Upon retirement he return to his
inherited estate, where he wrote
prolifically.
• His fame as a historian derived
from his multivolume History
of England, which went
through numerous editions. 131
 DAVID HUME(1711-1776)
• His reputation as an economist was
established by his economic essay
in Political Discources, published
in 1752.

• Of all the forerunners of classical

economics, Hume came closest to
the ideas of Smith.

• Had he written a complete &

systematic treatise on economics,
he would have ranked near the top
as one of the founder of the
science.
132
 DAVID HUME(1711-1776)
Among Hume’s ideas:
 Price-specie-flow-mechanism
• The mercantilists wanted to promote a
surplus of exports in order to accumulate
specie.
• In the somber view of Cantillon, this tactic
was self-defeating because if more specie
were available, prices would go up &
imports would increase.
• But to pay for imports, money would be
shipped abroad, leaving poverty &
bankruptcy behind.
• Hume, like Cantillon accepted John Locke’s
quantity theory of money & analyzed the
mechanism of international equilibrium
without government intervention.

133
 DAVID HUME(1711-1776)
 International trade is a “positive sum
game”, one in which the payoffs sum
to a positive number.
• This is to be contrasted to the “zero sum
game” of the mercantilists, where the
gain to one party is exactly offset by a
loss to the other.

134