A monument in honor of Adam Smith, associated with classical economics.
Classical economics is often considered the first school of economic thought. It was initially developed by, among others, Adam Smith, who discussed it in a book released in 1776. Until the mid-1800s, classical economics was widely used until it was replaced by neoclassical economics. There are several different definitions of classical economics, but it was originally used to describe the followers of economic theory created by two men named James Mill and David Ricardo, along with their predecessors. Two important theories that were part of classical economics were the theory of value and the theory of money.
The first theories of classical economics were developed during a time of turmoil in Europe. The industrial revolution was beginning to replace previous manufacturing techniques and there were major changes in how society works. People like Adam Smith were trying to understand how society could function effectively when each person was interested in increasing his personal wealth, not the state’s. One of the fundamental principles often attributed to classical economics is that, in a free market, prices will self-regulate.
A famous idea from classical economics is value theory, used to examine the price or value of an item in a dynamic market. In value theory, there are two prices – natural price and market price. The natural price of an item is more stable and is affected by constant forces. Market prices can be affected by a wide range of different factors. In classical economics, market prices will always move towards the natural price. There was some debate in classical economics about what factors affected the natural price of an object.
Monetary theory was a controversial discussion that took place between people who believed that money should be controlled by banks and those who did not. This is still a controversial topic in economics today and is often debated by people who believe that banks cause inflation by using too much cash. People who defended the monetary argument believed that banks should be able to control the supply and flow of money.
Today, it is widely accepted that classical economics has become neoclassical economics. Although the initial theories were developed hundreds of years ago, there are a number of ideas that are still an important part of modern economics. There are, however, several ideas that are no longer part of modern theories.