Classical & Neoclassical Economics: A Comparative Overview

Classical Economics

Adam Smith (1723-1790)

Key Work:

Inquiry into the Nature and Causes of the Wealth of Nations or The Wealth of Nations (1776)

Core Principles:

• Personal Freedom
• Private Property
• Private Companies
• The benefit of one is the benefit of all
• Minimal government intervention in the economy
• The invisible hand regulating the economy
• Natural order dictates minimal state intervention
• Laissez-faire, laissez-passer (let it be, let pass)

Role of Government:

• Protection against injustice and oppression
• Sustaining public institutions
• Infrastructure development

Theory of Value:

• Use value (value of goods)
• Exchange value (ability of an asset to be exchanged for others)

David Ricardo

Key Work:

Principles of Political Economy and Taxation

Core Ideas:

• Political economy laws determine wealth distribution among social classes.
• Value is determined by present and past labor (machinery).

Price of Labor:

• Natural: Determined by the means of subsistence.
• Market: Influenced by population growth.

Other Contributions:

• A society's economic system is the foundation for its political, legal, and ideological aspects.
• Critical analysis of capitalist society.
• Development of the labor theory of value.
• Theory of surplus value and exploitation.
• Focus on relationships between people, not just objects.

Neoclassical Economics

Initiator:

Hermann Heinrich Gossen (1810-1858)

Contributions of Neoclassical Economics:

• Price formation theory (supply and demand)
• General economic equilibrium theory
• Distinction between pure economics (theory) and applied economics (achieving balance)
• Theory of welfare (utility increase, increased welfare)
• Monetary theory (need for means of payment)
• Static economic theory (the economy as unchanging)
• Use of graphs to understand supply and demand
• Development of the concept of elasticity
• Study of short-term and long-term economics
• Partial equilibrium analysis

Further Developments:

• Concepts of perfect and imperfect competition
• Introduction of mathematical analysis (foundation for econometrics)
• Curves of indifference and preference
• Focus on production: maximizing revenue and reducing costs