Understanding various facets of Classical Economics
That is why economics has become an infinite science. Classical thinking was opposed, and as a result the Keynesian thinking came to the forefront, and then came the neo-classical thought and then the neo-Keynesian thinking.
IF WE take a historical perspective of the development of economic thought, we find that there have been many controversies that have emerged, but these controversies have been positive in the sense that they helped the science of economics to go ahead.
The classical period of economics ranges from Adam Smith’s Wealth of Nations (published in 1776) to John Stuart Mill’s Principals of Political Economy of 1848, and was dominated by the work of David Ricardo. The French Physiocrats had laid stress on the position of agriculture in the economy, claiming that this sector was the source of all economic wealth. Adam Smith rejected this view and drew attention to the development of manufacturing and the importance of labour productivity. Ultimately labour was the true measure of value. Ricardo took up this idea and propounded the theory of relative prices based on costs of production in which cost played the dominant role, although he accepted that capital costs were an additional element. Capital had an important role, not only by improving labour productivity, but also by enabling labour to be sustained over the period of waiting before work bore fruits in consumable output. This was the idea of the wages fund. Wages were dependent on two forces: (1) the demand for labour, derived from the availability of capital, or savings, to finance the wage bill; and (2) the supply of labout, which was fixed in the short run, but not in the long run was dependent on the standard of living. The latter was related to the level of subsistence. This was not regarded as merely the basic necessities required to keep the workers alive and to reproduce themselves. It was determined by custom, and was accepted to be increasing as real living standards improved. Malthus in history of population pointed to the need for restraint because of the presumption that there was a natural tendency for the growth of population to outstrip agricultural output. Ricardo analyzed the implication of the productivity of land at the margin of cultivation. The Physiocrats and Adam Smith had attributed agricultural rent to the natural fertility of the soil, but Ricardo refuted this. Rent existed because of the poor fertility of the final increment of land taken under cultivation. Because of competition, profits and labour costs must be the same everywhere and therefore a surplus must spruce to all land that was more fertile than that on the margin. This surplus was rent. The presumption of competition was the foundation of classical economics. The classical economists believed that, although individuals were each motivated by self-love and personal ambition, free competition ensured that community as a whole benefited. As a consequence they concluded government interference should be kept to a minimum. They gave little attention to macroeconomic problems such as the trade cycle. Most of the classical economists accepted J.B.Say’s law of markets, the gist of which purported to maintain the impossibility of any severe economic recession. Arising from an overall deficiency in aggregate demand, Malthus disputed this. He argued that increased savings would not only lower consumption but would also increase output, through increased investment. However, his view was not accepted. The classical economists, including Malthus, held a theory in which savings equated with investment through changes in the rate of interest. They continued to influence economists in many countries. J.S. Mills’s book was used as a school text until end of the 19th century. Alfred Marshall in his Principles of Economics of 1890 assimilated the old classical economics with the marginalism of Jevons, Menger and Walras. The great controversy which raged in the years of the Great depression on the 1930s between the neo-classical economists and the advocates of deficit spending on public works, was when the classical macro-economic theory gave way to the new economic revolution set in train by J.M. Keynes.
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