Smith and classical economics

Smith and Classical

According to Smith, what areas of economic life was a legitimate domain of the state, and why? How has this domain expanded over the last 100 years and why?

Adam Smith is often considered to be the father of modern economical thought as most of his ideas and theories laid into the basics of modern economical relations of market and state. The ideas of Adam Smith were very progressive for his epoch, when there was an obvious domination of Great Britain and France in the system of world trade. Smith had developed the idea of economical freedom in order to provide the most possible freedoms for trade so that natural competition will productive forces into equilibrium. According to Smith's ideas artificial restrictions were on the way of capital flows. Smith was the first economist who found out the most essential relations in political economy of free capitalist markets and their correlation with state: laws of production, goods exchange, price and money movements and circulation, laws of cost and price. Smith ideas of labour division, which he proposed in order to eliminate domestic boundaries and stimulate commodity, market growth and growth of production were realized on practice in the twentieth century as well as his other recommendations.

Among the most accurate Smith's ideas was the idea of relationship of government and monopolies, relationship to principles of laissez faire and policy of mercantilism. Smith was against monopolization of economy and state subsidizing of certain branches of national economies, as economic freedom according to his ideas would lead to the optimisation of production and minimization of costs. Smith's ideas on monopolies and their influence on national economies have found reflection in modern anti-trust state regulations and excise-duties on certain goods. The failure of economical planning and was brightly proved on the example of centralized economies of former Warsaw pact members as under the conditions of free market their goods appeared to be not competitive, which led to deep economical crisis.

In the twentieth century when it became obvious that markets and national economies are often restrained by domestic economical limitations and policies of protectionism it became obvious that the only way out was elimination of national import restriction and balanced system of foreign trade regulations, which would create the most favourable conditions for trade of all participants. In the early twentieth century a number of European countries didn't impose tariffs on imported goods, which were not produced domestically. Later, of course such policies were revised and fixed tariffs were introduced. The main merit of Adam Smith in the scope of modern political economy was accuracy of his predictions about the benefits of free trade. His ideas that state has to stimulate legislative basis in order to promote liberalization of economy and market were proved on the examples of world monetary systems, international systems of crediting and loans, World Bank and economic unions (in Americas, Europe and Asia). Today the economy of the whole world is based on the regulations of international organizations, which are created to provide market equilibrium. Economic organizations regulate and balance energy resources prices and develop the set of rules for the most beneficial goods exchange (such as WTO or OPEC).

2)If you were asked to summarize all the central tenets of Classical Economic

Thought, what would that be? Write an essay outlining what you consider to be the 6 or so most essential aspects of classical economic thought.

Classical economists succeeded in developing basic concepts of political economy, which defined the laws of production and consumption development; economic relations, which are resulted by such activities. The founders of modern political economy Smith, Ricardo and Marx defined the processes and conditions of long cycles in development of economies, especially the issue of surplus distribution. Principles of free and comparative consumption, which were developed by Smith, Ricardo and later supplemented by works of Say and Marshall, laid into the fundamentals of modern political economy and modern international market regulations.

The main tenets of classical economics thought are the following:

According to Say's law, surplus also creates demand. Prices on goods behave the following way: value of produced commodities is always equal to the whole expenditures spent on commodities. Say developed a theory outlining three major production factors: land, labor and capital. On the base of natural order, under conditions of economical freedom with no interfering flexible prices and wages with a very beneficial exchange of any sort of labor products on market are achieved. Say's law points that there is no need in interference into state economy. Under such conditions production (supply) will result in growth of consumption (demand), so that production will create extra profits and benefits for consumption. The importance of this law is obvious nowadays as nearly all the countries are trying to create the most favourable conditions for economy's freedom that will guarantee its self-regulation without penetration from the side of government.

Free markets are in equilibrium, supply always is equal to demand

Capital and labor are major factors in price forming, as both of them create value. Both, labor and capital get equal compensation in production, which sets logical basics for representation of labor-capital relations in the form of mathematical equations.

Value of commodity drives from marginal utility of commodity, from what customers found good in the commodity, but not from the cost of expenditures spent on the production of this particular product