ClassicalEconomics

HassanKhan

August17,2015

Economics

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Economics,studyofhowhumanbeingsallocatescarceresourcestoproduce
variouscommoditiesandhowthosecommoditiesaredistributedfor
consumptionamongthepeopleinsociety.Theessenceofeconomicsliesin
thefactthatresourcesarescarce,oratleastlimited,andthatnotallhuman
needsanddesirescanbemet.Howtodistributetheseresourcesinthemost
efficientandequitablewayisaprincipalconcernofeconomists.Thefieldof
economicshasundergonearemarkableexpansioninthe20thcent.asthe
worldeconomyhasgrownincreasinglylargeandcomplex.Today,
economistsareemployedinlargenumbersinprivateindustry,government,
andhighereducationplanning).Manysubjects,suchaspoliticalscienceand
sociology,whichwereonceregardedaspartofthestudyofeconomics,have

todaybecomeseparatedisciplines,althoughthestudyofanyonegenerally
impliesaworkingknowledgeoftheothers.

AncientandMedievalPeriods

Thefirstattemptstoanalyzeeconomicproblemsappearinthewritingsofthe
ancientGreeks.Platorecognizedtheeconomicbasisofsociallifeandin
hisRepublicorganizedamodelsocietyonthebasisofacarefuldivisionof
labor.Aristotle,too,attributedgreatimportancetoeconomicsecurityasthe
basisforsocialandpoliticalhealthandsawtheownerofamiddlesizedplotof
landastheidealcitizen.RomanwriterssuchasCicero,Vergil,andVarro
gavesignificantadviceabouttheeconomicsofagriculture.Themedieval
periodwasmarkedbythedisruptionoftheflourishingcommerceofthe
ancientworld,anditseconomiclifewasdominatedbyfeudalism.Economic
writingsoftheagefocusonthejustpriceforgoodsandcriticismofusury.

Mercantilism,thePhysiocrats,andAdamSmith

Inthetransitiontomoderntimes(16th18thcent.),Europeanoverseas
expansionledtothegrowthofcommerceandtheeconomicpoliciesof
mercantilism,asystemthatinspiredasubstantialbodyofliteratureonthe
subjectofeconomicnationalism.Inthelate17thandthe18thcents.,protest
againstthegovernmentalregulationcharacteristicofmercantilismwas
voiced,especiallybythephysiocrats.Thatgroupadvocatedlaissezfaire,
arguingthatbusinessshouldfollowfreelythenaturallawsofeconomics
withoutgovernmentinterference.Theyregardedagricultureasthesole
productiveeconomicactivityandencouragedtheimprovementofcultivation.

Becausetheyconsideredlandtobethesolesourceofwealth,theyurgedthe
adoptionofataxonlandastheonlyeconomicallyjustifiabletax.

Inthe18thcent.importantworkineconomicswasdonebytheScottish
philosopherDavidHume.Hisanalysisofthenaturaladvantagesthatsome
nationsenjoyinthecultivationofcertainproductsandhisobservationsonthe
flowofcommercebecamethebasisforthetheoryofinternationaltrade.The
mostimportantworkofthe18thcent.,however,wasAdamSmithsAnInquiry
intotheNatureandCausesoftheWealthofNations(1776),whichis
consideredbymanytobethefirstcompletetreatiseoneconomics.Smith
identifiedselfinterestasthebasiceconomicforceand,throughhisanalysis
ofthedivisionoflaborandhiscomprehensivestudyofthedevelopmentof
economicinstitutionsintheWest,establishedeconomicsasamajorareaof
study.JohnMillar,afollowerofSmith,incorporatedanddevelopedthese
ideasintoahighlysophisticatedeconomicinterpretationofhistory.Smiths
theories,especiallyhisadvocacyoffreetrade,playedanimportantpartinthe
IndustrialRevolutionthentakingplaceinBritain.

Malthus,Ricardo,andMill

Oneofthemostinfluentialwritersofthe19thcent.wasThomasMalthus,
whosepredictionsthatpopulationgrowthwouldalwaystendtooutstrip
advancesinthemeansofsubsistenceearnedforeconomicsthetitlethe
dismalscience.ThemostimportanteconomisttofollowSmithwasDavid
Ricardo.Hisanalysisofrentlongremainedtheclassicaccount,whilehis
theoryoflaborvaluewaslateradoptedbysocialistsaswellasclassical
economists.RicardosironlawofwagessupplementedMalthuss

pessimisticthesisbyassertingthatwagestendtostabilizeatthesubsistence
level.JohnStuartMillwasafollowerofRicardoandcontributedtothestudy
ofinternationaltradeaswellastothestudyoftheeconomicsofindustrial
expansion.AmongcriticsoffreetradeoutsideBritainweretheGerman
FriedrichListandtheAmericanHenryC.Carey.

TheSocialistsandMarx

Theearlyexponentsofsocialism,especiallyinFrance,attackedtheideaof
thenecessityofprivatepropertyandcompetitionandwereinterestedin
revampingtheeconomicandsocialorder.AmongthosewereC.H.Saint
Simon,RobertOwen,CharlesFourier,andLouisBlanc.InGermanythe
historicalschoolaroseunderWilhelmRoscher,BrunoHildebrand,andKarl
Knies,whodoubtedtheexistenceofuniversaleconomiclawsand
emphasizedtheparticulardevelopmentofeconomicinstitutionsinindividual
nations.

ThegreatestchallengetoclassicaleconomicscamefromthefollowersofKarl
Marx.Marxscritiqueofcapitalismwasmoralandsocial,aswellas
economicbutintheexpositionoftheworkingsofthecapitalistsystemheand
hisfollowersdevelopedimportantinsightsintothestructuralweaknessesof
themarketeconomy,especiallytherecurrenceofeconomiccrises.

FurtherEvolutionofClassicalEconomics

AtthesametimeasMarxwaswriting,theprinciplesofclassicaleconomics
werebeingreformulatedandrefineditwasatthistimethattheterm

economicsreplacedthetermpoliticaleconomy,whichhadbeenused
throughthemid19thcent.Themostimportantrefinementwasthedoctrineof
marginalutility,whichassertsthatthevalueofanitemisdeterminedbythe
needforitandbyitsrelativescarcityorabundanceatanygiventimenotby
anyintrinsicorinherentworth.Theleadingtheoristsinthedevelopmentofthe
conceptwereWilliamStanleyJevonsofBritain,LeonWalrasofFrance,and
CarlMengerofAustria.IntheUnitedStates,JohnBatesClarkwasnotablein
thedevelopmentofmarginalutilitytheory,forminghisownhypothesis
regardingthedistributionofwealth.Classicaleconomicsreacheditsfullest
expressionattheendofthe19thcent.intheworkofAlfredMarshall.Marshall
usedmathematicstoperfecttheapplicationofclassicaltechniquesand
introducedimportantmodificationstothenotionsofcompetition,marginal
utility,andrent.

Keynes

SwedisheconomistKnutWicksellwasinfluentialinthedevelopmentof
monetarytheory,whichconcerneditselfwithoverallpricelevelsandinterest
ratesinaneconomy.Hisworkforeshadowedthemostimportantmodification
ofclassicalconceptsofthefreeeconomy,exemplifiedintheworkofJohn
MaynardKeynes.InhisGeneralTheoryofEmployment,Interest,and
Money(1936),Keynesopenedupawholenewrangeofinvestigationinto
businesscycles.AprincipalresultofKeynessteachinghasbeenreflectedin
governmentalattemptstocontrolthebusinesscyclebyputtingmoneydirectly
intotheeconomythepumpprimingtechnique,oftenaccompaniedbyan
unbalancedbudget,isnowapartofmostcapitalisteconomicsystems.

SinceWorldWarII

AfterWorldWarII,emphasiswasplacedontheanalysisofeconomicgrowth
anddevelopment.Westerneconomistsnotablefortheircontributionstothe
economicsofgrowthanddevelopmentincludeGunnarMyrdalofSweden,Sir
ArthurLewisofGreatBritain,andJosephSchumpeteroftheUnitedStates.

Inrecentyears,economictheoryhasbeenbroadlyseparatedintotwomajor
fields:macroeconomics,whichstudiesentireeconomicsystemsand
microeconomics,whichobservestheworkingsofthemarketonanindividual
orgroupwithinaneconomicsystem.Theuseofcomplexmathematical
techniquesandstatisticaldataineconomicforecastinghasresultedinanew
branchofeconomicsknownaseconometrics.BritisheconomistArthurPigou
wasinfluentialinthedevelopmentofwelfareeconomics,animportantbranch
ofthedisciplinethatsuggestedthataneconomicsystemwasbetterifeven
onepersonssatisfactionwasincreasedwhilenooneelseswasdecreased.

Inthe1980ssupplysideeconomics(whichseeseconomicgrowthas
essentialforimprovingthematerialhealthofsociety)wasusedasapolicy
toolbytheReaganadministration.Anothermoderneconomicschoolthatwas
influentialintheReaganyearsismonetarismmonetarists,suchasMilton
Friedman,believethatthemoneysupplyexertsadominantinfluenceonthe
economy.Inthe1990s,NobellaureateGaryBeckerextendedthescopeof
macroeconomicanalysisbyapplyingeconomicreasoningtohumanbehavior,
includingtheuseofsociology,anthropology,andotherdisciplines.Game
theoryhasalsobeenappiedtoeconomic