CLASSIC MODEL: CHARACTERISTICS, REPRESENTATIVES, ADVANTAGES - ECONOMY - 2025

The classical model of economics is an economic school of thought. According to this model, the economy has a fairly free fluidity; Prices and salaries are adjusted according to the ups and downs of the market standard, as well as the variation in the demand for goods and services.

characteristics

The classical economists had as their main focus the analysis and development of policies capable of increasing the wealth of a nation. Based on this, various authors have developed theories within the classical model that were widely used by economists before the Great Depression.

Theory of value

Classical economists developed a theory to explain the price of certain objects within the dynamic environment of the economy. However, this concept applies only to the market area; other types of economics (such as politics) use "value" to refer to the usefulness of certain negotiations, beyond the price of objects.

According to this theory and its development, there are two types of values: the market price of an object and the natural price.

Market prices are affected by a number of values ​​and influences, which are difficult to study in depth given their ambiguous nature. On the other hand, the natural price identifies the external forces that affect the value of an object at a certain point in history.

Both prices are related to each other. The market price of any object is usually similar to its natural price. This process was originally described by Adam Smith in his book The Wealth of Nations.

There are several interpretations of this theory developed by Smith. From this, the idea was generated that the value of an object is linked to the work that its creation has required. In fact, this is partly the basis of the argument made by other leading economists, such as William Petty and David Ricardo.

Monetary theory

This theory arises from the differences that existed between English economists during the 19th century. The differences between banking and currency were openly argued, but no clear conclusions were drawn. Monetary theory takes a different approach depending on the economist who studies it.

For example, those who proposed the endogenous money theory (which argues that money does not have its value according to what the bank establishes, but based on other economic variables) faced monetarists, who belonged to another type of belief called the "School of currency".

According to monetarists, banks can and should be the ones who control the flow of money in a country. If banks control the flow of money correctly, inflation can be avoided.

According to this theory, inflation occurs as a consequence of an excessive printing of money by the banks themselves; if they are given control, this evil can be evaded.

On the other hand, those who propose the theory of endogenous money claim that the amount of money that is needed is adjusted automatically, according to the demands of a given population. Banks would not remain as controllers of the economy, but as decision-makers of the amount of loans that can be given to people.

Implications for communism

Karl Marx used the theory of value to explain the advances of his communist theory. In fact, the labor theory of value developed by the sociologist is one of the most important characteristics of the classical model of economics.

According to Marx, value was not generated from supply and demand, nor from the quantity of products available in a market. Instead, the value of a product is given by the human labor that is required for its manufacture. Therefore, human labor determines how valuable a product is within a market.

However, the labor theory of value does not work to identify the value of a specific product. Marx (and even Ricardo himself, who also theorized about it) explained that the theory serves to understand the general value of a series of goods or the added value of goods, not that of a specific good at any given time.

Representatives

Adam smith

Adam Smith was a Scottish economist, who became one of the most important figures in the history of economics. The development of his book, whose full name was An Investigation of the Nature and Causes of the Wealth of Nations (1776), represented the creation of the first system of political economy in the world.

Smith is seen as a philosopher whose writings on economic activity have become the cornerstone for the development of future theories of economics, on a world scale. This largely aided in a significant development of politics and social organization.

His book is seen as much more than an explanation of the economic system. His work can be compared with other of his philosophical works in which he himself explained the moral and governmental philosophy.

Viewed from this point of view, his economics book represents several ideas that are the product of thousands of years of human evolution.

David Ricardo

David Ricardo was a British economist who made a fortune working as a stockbroker in England in the late 18th and early 19th centuries. His inspiration was precisely the work of Smith, which excited him to study more fully the development of the world economy.

When he turned 37 he wrote his first article on economics, beginning a career as an economist that lasted 14 years (until the day of his death). In 1809 he published a controversial article in which he claimed that the cause of inflation in the United Kingdom was the excessive printing of notes by the bank.

Ricardo was not only one of the main classical economists, but he was also one of the first exponents of the branch of this model known as monetarism.

Jean-Baptiste Say

"JB Say" was a French economist who became famous for his classical theory of markets. According to Say, supply is the main source of demand: as long as there is something to buy, there will be people willing to obtain goods.

This economist attributed world economic depressions to overproduction. According to their law of the market, the reason these depressions exist is due to the lack of production in some markets and the excess of others. According to his theory, balances should be resolved automatically; his theory was attached to the classical ideas of economics.

Advantage

The main advantage of the classical model of the economy was the free vision of the market. Although this theory fell into the background after the Keynesian model revolution in the 1930s, several economists who advocate a free market adhere to the principles of the classical model.

It should be noted that the Keynesian model displaced the classic and is the main method by which the economy is governed today.

The rules of the classic model were pretty good. In fact, the norms presented by the main exponents of this model, as Ricardo and Smith did in their works, are the main advantages of the vision of this school of economic thought.

Disadvantages

The classical model did not serve to promote the economic concept of “aggregate demand”. Unlike the Keynesian model, developed by John Maynard Keynes in the third decade of the last century, it is difficult to analyze the pronounced potholes of an economy if the classical model is used.

Furthermore, classical ideas have various contradictions and ambiguities present in their theory. Although the norms put forward by its most important economists are correct, they have conceptual errors that do not allow to explain all the phenomena of the economy.

This became clear when the Great Depression occurred worldwide, beginning with the United States. The Keynesian model emerged precisely to explain why great economic depressions occur. Study more accurately the total expenses in an economy and how they affect inflation.

The classical model did not take into account that an economy could work better if the demand system was emphasized.

References

1. Classical Economics, Investopedia, (nd). Taken from investopedia.com
2. Classical Economics, Encyclopaedia Britannica, 2018. Taken from britannica.com
3. Adam Smith, Encyclopaedia Britannica, 2018. Taken from britannica.com
4. David Ricardo, JJ Spengler for Encyclopaedia Britannica, 2017. Taken from britannica.com
5. JB Say, Encyclopaedia Britannica, 2014. Taken from britannica.com
6. Classical Economics, Wikipedia in English, 2018. Taken from wikipedia.org
7. Keynesian Economics, Investopedia, (nd). Taken from investopedia.com
8. Classical Economics: Good or Bad? M. Skousen for The Foundation for Economic Education, 1996. Taken from fee.org