Episode #3 of the course “Brief History of Economic Thought”
In 1776, the Scottish philosopher Adam Smith published a revolutionary text that defined a new age in economic thought. His The Wealth of Nations built on the agrarian ideas of previous economic models, incorporating the value inherent to a nation in its industrial production into a new system that has become known as the “classical economic model.” Prizing a country’s capacity for trade over the physical gold in the king’s treasury, Smith and subsequent classical economists radically shifted their focus to the flow of spending, rather than the accumulation of a few specific things of value.
With a strong focus on competition, Smith promoted the idea that markets would be self-regulating, especially if weak competitors were allowed to be eliminated from a market. However, he strongly warned against monopolies and believed that consumers needed choice between various suppliers. Smith was not opposed to a structured market with a variety of products, nor was he opposed to the idea that the cost of more expensive products should be transferred to the consumers who could freely afford them.
The classical model of economics assumes that prices and wages are flexible. Various economists have promoted how goods and services have, attain, and maintain “value” in a classic economic system, including theories based on land-and-labor, the cost of production, and wages and population. Economists that promote its ideas also believe in minimal government intervention, to allow the different international trade markets to operate on their own terms. In contemporary economics, a classical approach is still commonly promoted, especially in times of recent recession.
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