# Classical Economics: Origins, Key Theories, and Impact

![Classical Economics: A body of work on market theories and economic growth that emerged during the 18th and 19th centuries.](https://www.investopedia.com/thmb/2DYbH1Srxfp6U_pmmNXZT4l4ATQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Classicaleconomics_final-a65606f71911494dbe75801324937616.png)

*— Investopedia / Michela Buttignol*

## What Is Classical Economics?

Classical economics emerged as a foundational school of economic thought in the 18th and 19th centuries, significantly influencing Western capitalism and political freedom. Notable figures like Adam Smith, David Ricardo, and John Stuart Mill developed core theories on value, price, supply, demand, and distribution that moved economies from monarchic controls to freer market systems. This shift laid the groundwork for modern economic theories, despite later challenges from thinkers like Karl Marx and John Maynard Keynes.

### Key Takeaways

*   Classical economics emerged in the 18th and 19th centuries, characterizing market theories and economic growth during that era.
*   Adam Smith is a central figure in classical economics, advocating for free trade and the concept of the "invisible hand" in markets.
*   Classical economic theory emphasizes minimal government intervention, contrasting with Keynesian economics, which advocates for more government involvement.
*   Classical economics laid the groundwork for self-regulating democracies and capitalistic market systems, moving away from monarchical policies.
*   Though eventually replaced by Keynesianism, classical economics significantly influenced the transition to modern economic thought.

## Key Concepts of Classical Economics

Self-regulating democracies and capitalistic market developments form the basis for classical economics. Before the rise of classical economics, most national economies followed a top-down, command-and-control, monarchic government policy system. Many of the most famous classical thinkers, including Smith and Turgot, developed their theories as alternatives to the [protectionist](https://www.investopedia.com/terms/p/protectionism.asp) and inflationary policies of [mercantilist](https://www.investopedia.com/terms/m/mercantilism.asp) Europe. Classical economics became closely associated with economic, and later political, freedom.

## The Evolution and Growth of Classical Economics

Classical economic theory was developed shortly after the birth of western [capitalism](https://www.investopedia.com/terms/c/capitalism.asp) and the [Industrial Revolution](https://www.investopedia.com/terms/i/industrial-revolution.asp). Classical economists provided the best early attempts at explaining capitalism's inner workings. The earliest classical economists developed theories of value, price, supply, demand, and distribution. Nearly all rejected government interference with market exchanges, preferring a looser market strategy known as [laissez-faire](https://www.investopedia.com/terms/l/laissezfaire.asp).

Classical thinkers were not completely unified in their beliefs or understanding of markets although there were notable common themes in most classical literature. The majority favored [free trade](https://www.investopedia.com/terms/f/free-trade.asp) and competition among workers and businesses. Classical economists wanted to transition away from class-based social structures in favor of meritocracies.

## Transition From Classical to Modern Economic Theories

The classical economics of Adam Smith had drastically evolved and changed by the 1880s and 1890s, but its core remained intact. By that time, the writings of German philosopher [Karl Marx](https://www.investopedia.com/terms/k/karl-marx.asp) had emerged to challenge the policy prescriptions of the classical school. However, Marxian economics made very few lasting contributions to economic theory.

In the 1930s and 1940s, [John Maynard Keynes](https://www.investopedia.com/terms/j/john_maynard_keynes.asp), a British mathematician, more thoroughly challenged classical theory. Keynes studied under Alfred Marshall and admired Thomas Malthus. Keynes thought that free-market economies tended toward underconsumption and underspending. He called this the crucial economic problem and used it to criticize high-interest rates and individual preferences for saving. Keynes rejected [Say's Law of Markets](https://www.investopedia.com/terms/s/says-law.asp).

Keynesian economics promoted a stronger government role in economic affairs, making Keynes popular with British and American politicians. After the Great Depression and World War II, Keynesianism replaced classical and neoclassical economics as the main global economic theory.

## Classical Economics in Historical Contex

Adam Smith's 1776 book, "Wealth of Nations," highlights key developments in classical economics. His revelations centered around free trade and a concept called the "[invisible hand](https://www.investopedia.com/terms/i/invisiblehand.asp)" which served as the theory for the beginning stages of domestic and international supply and demand.

This theory of competing demand and supply forces moves markets toward price and production balance. Smith’s studies helped promote domestic trade and led to more efficient and rational pricing in the product markets based on [supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp).

## What Are the Assumptions of Classical Economics?

The central [assumption](https://www.investopedia.com/ask/answers/032515/why-do-economists-build-assumptions-their-economic-models.asp) of classical economics is that the economy is self-regulating, and that little to no government intervention is needed. If a need were to arise within an economy, classical economists might say, it would be filled by a market participant.

## Who Is a Well-Known Classical Economist?

The best-known classical economist is Adam Smith, an 18th century philosopher and author also known as a the father of modern economics. Smith wrote the influential "Wealth of Nations" text.

## What Is the Difference Between Classical and Keynesian Economics?

Classical economics was founded on an assumption that free markets can be self-regulating, and it primarily rejected the idea of significant government interference. Keynesian economics, on the other hand, calls for increasd government involvement, primarily in driving aggregate demand to buoy the economy.

## The Bottom Line

Classical economics, dominant in the 18th and 19th centuries, laid the groundwork for market theories favoring free trade and competition while minimizing government intervention. Originating as an alternative to the protectionist policies of mercantilism, classical economics emphasized self-regulating markets and economic freedom.

The theories of economists like Adam Smith emphasized the invisible hand principle, guiding markets toward equilibrium through supply and demand forces. Though eventually challenged by Keynesian economics, which advocated for increased government involvement, classical economics left an enduring impact on economic thought by promoting capitalism and political freedom.

> **Article Sources**
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> 2.  Adam Smith Institute. "[About Adam Smith](https://www.adamsmith.org/about-adam-smith)."
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> 3.  The Stanford Encyclopedia of Philosophy. "[Karl Marx](https://plato.stanford.edu/entries/marx/)."
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> 4.  The Library of Economics and Liberty. "[New Keynesian Economics](https://www.econlib.org/library/Enc/NewKeynesianEconomics.html)."
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> 5.  The Library of Economics and Liberty. "[John Maynard Keynes, 1883-1946](https://www.econlib.org/library/Enc/bios/Keynes.html)."
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> 6.  Mises Institute. "[Lord Keynes and Say's Law](https://mises.org/library/lord-keynes-and-says-law)."
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