The Beliefs of the Classical Theory of Economics
The classical theory of economics dominated economic thought in the discipline's infancy, from the 1770s to the mid-1800s. The works of classical economic thinkers such as Adam Smith, David Ricardo and John Stuart Mill proved influential over time, as their books and ideas continue to be taught in college economics classes to this day. Elements of classical theory, such as the self-regulating market and a belief in limited government intervention in economic affairs, continue to influence modern-day economists and political thinkers.
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The Self-Regulating Market
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The idea that a system of self-interested individuals and firms interacting as buyers and sellers will succeed in satisfying society's needs and wants within available resources, all without the direction of a central authority, is a central belief of the classical theory of economics. Adam Smith wrote extensively about this self-regulating market system in his 1776 book, "The Wealth of Nations." The prevailing view was that nations acquired wealth not through a free market, as Smith believed, but by expanding empires and accumulating gold and other resources. For classical economists, profit-seeking activities in a market-based system creates wealth and prosperity without government direction.
Separate Spheres
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During its infancy, the discipline of economics was known as political economy, implying a connection between the political and economic spheres of life. Professors James Caporaso and David Levine, authors of "Theories of Political Economy," call the separability of state and economy a core idea of classical economic theory. For classical theorists such as Smith and Ricardo, the economy is a system based on private want satisfaction that displaces politics.
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Limited Government Intervention
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Because of their beliefs in a self-regulating market and the division between economy and state, a misconception of classical economic theory is that it sees no role for government in the economy. Although classical theory advocated limited government intervention in the economy, Smith believed government had an important role in an economy. The role of government included providing national defense, administering a system of justice and contract enforcement that allows free exchange to occur, and providing public works that the market cannot provide.
Division of Labor
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The division of labor, which Adam Smith described in "The Wealth of Nations," is another central belief of classical economic theory. The division of labor provides a means by which all citizens can participate in the market economy, helping in the production of goods and services. In exchange for their labor, citizens receive money, a medium of exchange by which they can purchase goods that satisfy their needs.
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