The Classical School: Adam Smith

Modern critics argue that Smith underestimated the potential negative impacts of self-interest, like environmental damage and inequality, which require more government oversight than he proposed.

Smith advocated for free trade, challenging mercantilist policies that heavily relied on government intervention to regulate trade and promote exports.

While Smith favored minimal government intervention, he recognized its necessity in areas like public goods, defense, and justice, sparking debates about the appropriate scope of government in economics.

North, a wealthy merchant and government official, was a prominent advocate for free trade during the mercantilist era.

North argued that trade is mutually beneficial and not a zero-sum game, where one country benefits at the expense of another.

North rejected the mercantilist idea of accumulating wealth through a surplus of exports, arguing that the goal of trade is to exchange surpluses.

North disagreed with the mercantilist belief that war and conquest enrich a nation, arguing that spending on war impoverishes a country.

North's only published work, Discourses upon Trade, appeared anonymously due to his controversial views, which contradicted prevailing mercantilist ideas.

The idea that goods and services should be exchanged freely between nations without restrictions like tariffs or quotas.

The ability of a nation to produce a good or service at a lower opportunity cost compared to other nations.

An economic theory that emphasizes accumulating gold and silver through favorable trade balances and government protection of domestic industries.

North argued that national wealth is determined by the value of goods and services produced and exchanged, not just gold and silver.

The belief that markets naturally adjust to achieve equilibrium without government intervention.

North argued that government intervention in markets often distorts the natural balance and hinders economic growth.

Dudley North's work challenged the dominant mercantilist theory of national wealth by emphasizing free trade and production.

North's ideas laid the foundation for later economists like David Ricardo and influenced the development of free trade principles.

A school of economic thought that emphasizes free markets, limited government intervention, and the self-regulating nature of the economy. It originated in the 18th century and was significantly influenced by Adam Smith's ideas.

A Scottish economist and philosopher widely considered the father of modern economics. His book, The Wealth of Nations, is a foundational work in the field.

A metaphor used by Adam Smith to describe how individuals pursuing their own self-interest, through competition in a free market, unintentionally contribute to the overall social good.

In classical economics, the pursuit of individual goals, such as profit maximization or utility maximization, which is seen as beneficial for the entire economy when combined with competition.

The specialization of tasks among workers, increasing efficiency and productivity as individuals focus on specific functions.

Adam Smith's seminal book, published in 1776, which laid the foundation for classical economics, arguing for free markets, limited government, and the benefits of self-interest.

An economic policy advocating for minimal government intervention in the market, allowing businesses to function freely with limited regulations.

Markets where prices are determined by supply and demand, driven by competition and individual choices, with minimal government intervention.

A self-regulating mechanism where a country's balance of trade is adjusted by gold flows. If a country exports more, gold flows in, raising prices and making exports less competitive, eventually leading to a balance.

The idea that increasing the money supply does not affect real economic output in the long run, only prices.

Hume argued that a country's balance of trade would be self-regulating. If a country exported more than it imported, gold would flow in, raising domestic prices and making exports less competitive, eventually leading to a balance.

Hume argued that increasing the money supply does not affect real economic output in the long run, only prices.

Hume criticized Mercantilism, arguing that wealth should be measured by the real goods and services an economy produces, not just by the accumulation of precious metals.

Hume suggested that interest rates are determined not by the quantity of money but by the quantity of savings and capital in the economy.

David Hume was a Scottish philosopher and economist who made significant contributions to classical economics, particularly in monetary theory and international trade. He argued that a country's balance of trade is self-regulating through the price-specie flow mechanism, developed ideas about the neutrality of money, and criticized mercantilist ideas.

Cantillon stressed that location affects prices and economic activities. This means the place where something is produced or sold influences its cost and how much it's bought and sold.

Cantillon argued that increasing the money supply leads to inflation. This is because more money means goods and services become more expensive.

Cantillon's model shows how money and goods move between households, businesses, and landowners. It's a simple way to understand the flow of economic activity.

Cantillon highlighted the importance of entrepreneurs and the risks they take. This challenged the idea that the government should control all trade.

Cantillon's work impacted the development of the Physiocratic school and inspired later economists like Adam Smith. His ideas on market equilibrium and processes have influenced economic thought for centuries.

Cantillon's 'Essai' is crucial because it presents comprehensive ideas about market dynamics and entrepreneurship. It's a foundation for Classical economics.

David Hume is known for his belief that knowledge should be based on experience and observation, and for his skepticism about things that cannot be proven through reason.

Hume's work in philosophy, especially his ideas on empiricism and skepticism, made him one of the most important thinkers of the Enlightenment.

The idea that changes in the money supply only affect nominal variables (like prices), not real variables (like output or employment). This concept highlights the potential for long-term neutrality of monetary policy.

A Scottish philosopher and economist who contributed significantly to the development of classical economics. He was known for his critique of mercantilism and insightful analysis of money, trade, and economic policy.

They both criticized mercantilism, a dominant economic theory of their time, which promoted state intervention and accumulating wealth through trade surpluses. They advocated for free markets and self-regulating mechanisms instead.

Their ideas paved the way for Classical economics by challenging mercantilism and emphasizing free markets, individual incentives, and the benefits of specialization and international trade.