Classical EconomistsThe first modern school of economic thought is classical economics, which included some of the most famous economists all the time. The major contributors of classical economies are Adam Smith, David Ricardo, Thomas Malthus, and John Stuart Mill and it expanded to Karl Marx. L.H. Haney Said “ The Wealth of Nations soon gained more or less of ascendency in the leading countries and the followers are mostly to be classed as members of the classical school.” Classical economists reversed the ancient thoughts and they analyzed economics from the perspective of national interest instead of landlords or ruler’s personal interest. They have a limited idea about the economic elements, their thoughts about the national income only confined to wage, rent, and profit. Most of the classical economist's ideas associated with the free markets, capitalism, and the long-run analysis of economic development. The main characteristics of classical economic thoughts are, laissez-faire, perfect competition, and inductive methods. They believe that markets can solve all the economic problems if they are left alone and they prefer the smallest role for the government.
Major ContributionsTo investigate the economic dynamics, classical economists established a theory of value or price. Adam Smith argued that price determined by the uses of labor and said labor is the real indicator of determining the price. Adam Smith introduced the concept of user price and exchange price, and later David Ricardo distinguished these concepts. Adam Smith and David Ricardo discussed the natural price, which is somewhat different than the market price because they realized some of the other costs associated with the production process rather than labor. Market price always tends towards the natural price that similar to some fashion of attraction. In later Marshall formulated the concept of the natural price using the idea of classical Economists.
Most of the classical economists talked about the theory of distribution that is the most important contribution of this modern era. Adam Smith did not discuss directly the theory of distribution but we got an idea about it from his discussion of wage, rent of land, and profit. According to his own word
“The produce of labor constitutes the natural recompense or wage of labor. In this original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labor belongs to the labor. He has neither landlord or master to share with him.”
Classical economists categorized the economy as the production and distribution of wealth, and they also believe that the division of labor and specialization induce economic development because it increases the skills and productivity of labor. In addition, it reduces wastage time and labor, and promote to invent new technologies, which increases productivity.
Capital Accumulation is the central concept of classical economists and capital formation plays a key role in the development process. The increase of production depends on the increase in investment and positive investment increases production. Stagnant of capital accumulation can create stationary of economy, so capital should not be fixed. David Ricardo classified the capital as fixed and current capital. According to Ricardo capital can increase in two ways such as reduction of consumption or increase in income. Malthus also emphasized on capital accumulation, he said it increases wealth and amount of productive labor that widen the production. Classical economists emphasized on taxation system to encourage investment and they suggest a tax structure, which is favorable to capital accumulation and investment. Mercantilists support trade protection but classical economics focuses on free trade and emphasized the importance of the gain from trade. Adam Smith supports free trade focusing on absolute cost advantage and he said international trade encourages the division of labor that enlarges the size of the market. Later David Ricardo, Thomas Malthus, and John Stuart Mill renovate the idea of international trade.
In addition classical economists stressed on the theory of rent, the theory of wage, the theory of population, and monetary theory. Ricardo successfully separated the rent from profit and wages and showed how the increase n wages redistributed a larger and larger share of the net product from profit to rent. The most well-known theory of the population is the theory is the Malthusian theory and he also discussed the effective demand. In the cases of macro macro-economy, the classical economist presumed that the economy would always return to the full employment level in the long run through an automatic self-correcting mechanism.
Discussion Theory of Population by Thomas Malthus and inequality of Capitalism according to Karl Marx are surprises me most. Malthus's prediction is that the population increases faster than food production. Population increases in a geometric rate unless prevented by powerful check, and food production increase only at an arithmetic rate. His prediction is true for most developing countries, third world countries still suffering from the extreme pressure of population. Karl Marx pointed out that there is inequality in capitalism because it creates discord between the working class and the capitalist. He argued that capitalist economic arrangement is responsible for creating inequality of the social classes.
Capitalist exploited their laborers by denying them a fair share of profits and make it legal and morally accepted through property rights. This modern world economy is dominated by capitalists and capital is concentered towards up from the bottom. Benefits from economic growth have not been evenly distributed in most emerging economies. As a result, income inequality has risen further in every decade. According to world inequality report the top 1% earners have captured twice as much of that growth as the 50% poorest individual. The Marxist theory of imperialism is the most surprising topic in this modern world. The big multinational companies have exported their capital to colonies and exploited labor classes.