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The Classical School

The classical school of economics emerged during the 1770s, and for more than a century influenced economic thinking and economic policies in Europe and the Americas. The origin of the classical school can be traced to Adam Smith, the founder of modern economics. In The Inquiry into the Nature and Causes of the Wealth of Nations (1776), Smith described the undercurrents of the classical school, including the conviction that free markets allocate resources in the fairest and most efficient manner, that government intervention in the economy obstructs prosperity, and that competition creates opportunities for enterprising businesses and individuals. Other key classical economists included Jean Baptiste Say, David Ricardo, Thomas Malthus, and John Stuart Mill.

The free market ideas of the classical economists put them in conflict with the mercantilists and their allies, who clung tenaciously the prevailing system of government preferences and regulations designed to benefit the wealthy classes. The American rebellion against the British crown in 1776, the same year that The Wealth of Nations was published, caused many people to question the wisdom of mercantilism and sparked interest in Smith's alternative route to national wealth.

The classical economists believed that establishing self-regulating markets, rather than government intervention, was the most rational path to national wealth. In The Wealth of Nations, Smith also argued that the pursuit of one's own self-interest was the best and surest path toward a prosperous economy. Smith observed, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”[1] It is not surprising that the classical school adopted the laissez-faire doctrine from the physiocrats—a doctrine that opposed most forms of government interference in business activity and supported economic freedom in competitive markets.

Classical economists supported free trade in international markets. Free trade occurs when trade barriers such as tariffs and import quotas are eliminated. In addition, free trade requires the removal of government subsidies to domestic industries and the end of other assistance to domestic firms. The less coddling of firms by the government, the more productive they would necessarily become. In short, free trade sought to level the playing field for foreign and domestic producers to compete for consumers' dollar votes. Later, David Ricardo expanded on Smith's support of free trade by introducing the theory of comparative advantage. Ricardo argued that different countries were endowed with different resources and, thus, these countries should specialize in the production of goods best

PRIMARY DOCUMENT: Adam Smith Describes the Division of Labor

[I]n the way in which this business [the production of pins] is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands. . . . I have seen a small manufactory of this kind where ten men only were employed. . . . Those ten persons . . . could make among them upwards of forty-eight thousand pins each day. . . . But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day.

In every other art and manufacture, the effects of the division of labour are similar to what they are in this very trifling one.

An Inquiry Into the Nature and Causes of the Wealth of Nations, Adam Smith

suited to their resources. He supported regional specialization to encourage the efficient use of resources and to develop cooperative trade relationships among countries.

Classical economists saw a direct connection between worker productivity and a rising standard of living for the people. Smith argued that higher worker productivity could be accomplished through a division of labor, particularly in manufacturing enterprises. A division of labor requires that the tasks workers perform be broken down into smaller, more specialized functions within a plant. It is also dependent on the use of advanced capital goods and the effective management of wage laborers. In The Wealth of Nations, Smith explained the benefits of a division of labor in the production of pins, as shown in the above passage.[2]

Some classical economists shunned Smith's optimism, and took a dimmer view of the world's economic future. Thomas Malthus, for example, argued that population growth would soon outpace economic growth and food production, a situation later economists referred to as the Malthusian trap. Malthus predicted a decline in the human condition marked by poverty and misery for the masses mainly because “the power of population is indefinitely greater than the power of the earth to produce subsistence for man.”[3] It is no wonder that economics, in some quarters, was referred to as the dismal science! Later classical economists, such as John Stuart Mill, also questioned the fairness of free markets, particularly in the area of income distribution. By the mid-1800s, Mill and others observed the inhumanity of sweatshop working conditions for the growing urban working class and concluded that some government interventions might be required to correct economic injustices.

  • [1] Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Chicago: Henry Regnery Company, 1953), 25.
  • [2] Ibid., 9–10.
  • [3] Thomas Robert Malthus, An Essay on the Principle of Population (New York: W. W. Norton, 1976), 20.
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