Classical Economics
AdvancedClassical economics is a school of economic thought, developed in the late eighteenth and nineteenth centuries, which holds that free markets tend to reach full employment on their own, with flexible prices and wages balancing supply and demand.
Classical economists, including Adam Smith, David Ricardo, Thomas Malthus and John Stuart Mill, laid the foundations of modern economics. Smith's 1776 book The Wealth of Nations described how individuals pursuing their own interests in competitive markets can benefit society, an idea often summarised as the invisible hand.
Key classical ideas include the benefits of specialization and free trade, the role of competition in setting prices, and the belief that markets are self-correcting. If there is unemployment, wages fall until employers hire the available workers. Government intervention in the economy should therefore be limited.
For example, a classical economist would expect a fall in demand to lead to lower prices and wages, restoring full employment without government action.
Classical economics was challenged by the Great Depression, which led to Keynesian economics. Many classical ideas were later revived and developed in new classical and other market-oriented schools of thought.
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