Ricardo, an English economist (1772-1823), from Dutch-Sephardi origins, became rich at a very young age on the stock market and devoted the rest of his life to the study of mathematics and natural sciences and, from 1799, Economics. He became known with his pamphlet “The high price of bullion” on economic issues, and ended his work with his “Principles of Political Economy and Taxation.” Ricardo took the major step in the process of deductive abstraction of what later became known as the Classical school of economics in the path initiated by Adam Smith. His theories of comparative advantage, which were firstly stated in 1815 by Col. Robert Torrents (Ricardian trade theory), rent of land (Ricardian distribution theory) and the steady state, were some of their major contributions to economic science.
Adam Smith was born in 1723. His father was a lawyer and civil servant, and during his years as a moral philosophy student at the University of Glasgow, Adam Smith developed an increasing interest in liberty, reason and free speech. He then went on to continue his studies at Oxford, where he started writing about the low quality of education in English universities. Later, he taught at Edinburgh and the University of Glasgow, where he would end up occupying the position of rector until his death, in 1790.
During his lifetime, Smith met well known philosophers such as David Hume and Voltaire and other intellectual leaders such as Benjamin Franklin, François Quesnay or A.-R.-J. Turgot, who influenced his work, helping him become the first great economist of the Classical school of economics.
“The Wealth of Nations,” which took twelve long years to write, finally published in 1776, is the foundation of modern economics. It was basically against prevailing mercantilist theories, introducing the importance of the principle of division of labour and defending free trade. Basically, Smith understood that the satisfaction of individual self-interest, limited by that of the others was the best means to achieve the greatest good for the greatest number of people. However, he supported the State’s action in justice, education, health, and in all those enterprises that private initiative was unable to address.
Physiocracy is an eighteenth-century neologism from the Greek “physis,” nature, “kratia” authority: government of nature. It is the name that François Quesnay and his followers, the Physiocrats, gave in France from 1750 to the new science that saw in nature, especially in agriculture, the source of wealth. All useful and valuable things were generated, following the immutable natural order of economic and social relations studied by political economy. The Physiocrats were popularly known as “the economists” and aroused the interest of Adam Smith in Economics. His philosophy regarding the role of government is summarized in the famous phrase: laissez faire, which basically means letting the economic equilibrium arise from free will, believing the economy to be self-regulating. The emphasis on agriculture was to despise the value of trade by not adding new value to what was created by farmers.
Physiocracy coexisted with the main doctrine at that time, mercantilism. However, physiocracy had a few differentiating characteristics, such as the fact that it developed only in France, during a shorter period than mercantilism (only between 1750 and 1780), had a major intellectual leader, Quesnay, and developed a more analytical approach and models (such as Quesnay’s Tableau Économique), giving scientific status to the study of Economics.
Physiocracy and mercantilism also had some common characteristics, mainly the fact that they studied the economy (from its very core, the natural laws) in order to understand it, but also to formulate sound economic policies. This established the study and understanding of economy as a prerequisite in order to develop economic policies.
Mercantilism is a pre-classical economic thought, according to which the prosperity of nations is reached by promoting agriculture and manufacturing. The aim is to increase exports and restrict imports, thus accumulating gold and precious metals, relevant as a sign of wealth. Bullionism, which is considered part of mercantilist theory, was specific to the monetary matters of this economic thought.
In order to implement policies recommended by the authors of this doctrine, mercantilist policymakers resorted to either prohibiting imports outright on some goods or resorting to high tariffs or quantitative restrictions. Mercantilism was the economic policy prevailing in Europe from 1500 and 1750. Although mercantilist literature was written all around Europe, the most significant texts and thoughts came from French (mainly from Physiocracy authors) and English writers.
Influenced by mercantilism and physiocracy theories, it took place from the late XVIII century to the late XIX century. It is considered that its main authors were Adam Smith, David Ricardo and John Stuart Mill, and the fourth, the unorthodox Robert Malthus, however, there is some evidence of previous contributions provided by French physiocrats and Spanish scholastics. They wrote especially about the theory of value, distribution theory and international trade.
The majority of the principles of the classical school of economics were set by Adam Smith in his work “An Inquiry into the Nature and Causes of the Wealth of Nations”, written in 1776. Smith defended free trade and free competition as the best way to make an economy grow, opposing his ideas to government intervention and the mercantilist theory that prevailed at that time.
David Ricardo developed the idea that every nation should specialize in the production of those goods in which they get an advantage towards other nations and produce it more efficiently. As for other commodities, instead of trying to be produced nationally, they should be imported.
Karl Marx studied the same matters, although with different conclusions and defending the working class, which makes him a classical economist in the eyes of some historians.
Thanks to these authors, the study of economics became more of a science, instead of just being some kind of philosophy.
Léon Walras, a French economist (1834-1910), is considered, along with W. S. Jevons and Carl Menger, a co-founder of marginalism and theory of utility. He is regarded as the founder, along with Pareto, of the Lausanne School. On his “Elements of Pure Economics”, 1874, Walras made his major contribution to economics, general equilibrium theory, on which all demands are interrelated into a coherent set of relationships.
This general equilibrium was reached by means of a “tâtonnement”, changes in price that would gradually approximate supply and demand until a steady statewas reached. A few decades later, Alfred Marshall would present a different general equilibrium theory, on which the steady state would be reached by means of changes in quantities.
Jevons was a British economist (1835-1882), who is considered, along with Carl Menger and M.-E.-L. Walras, a co-founder of marginalism and theory of utility. Jevons is the author of the book “The Theory of Political Economy”, 1871, in which he devised the concept of marginal utility, from an additive and separable utility function, although it was not measurable on cardinal terms. These studies were possible thanks to Johann H. von Thünen’s works, who was the first economist to use the word “marginal”, which meaning Jevons adopted in his works using the term “final”. He is also considered as a precursor of Econometrics for his work on business cycle, index numbers and moving averages, topics on which he used his extensive knowledge of mathematics.
Although his works on marginal utility are considered pioneer during the marginal revolution, and important for the development of neoclassical economics, Jevons considered there would be only one possible solution when considering barter exchange. However, there are infinite solutions, as was demonstrated later on by Francis Y. Edgeworth, whose indifference curves are based on Jevons’ earlier work.
Carl Menger, was an Austrian economist (1840-1921), who is considered to be, along with W. S. Jevons and M.-E.-L. Walras, a co-founder of marginalism and of the theory of utility, and was also founder of the Austrian School, where his main followers Wieser and Böhm-Bawerk were his disciples. In his “Principles of Economics”, 1871, Menger attacked as incorrect the labor theory of value, expressing his view that the factor determining the value of a good is not the amount of work nor other goods needed to produce it, but the importance we place on the basis of the satisfaction we believe that it can offer.
Marginalism is a method of analysis used in microeconomics, which seeks to explain economic phenomena through mathematical functions (production, consumption, etc..). The term “marginal” was first used by Johann H. von Thünen in his “The Isolated State”, in 1826. The Marginal revolution, which took place a few decades later, around 1870, brought the prevailing classical view of value theory to an end. Indeed, thanks to the work of three economists: W. S. Jevons, Carl Menger and M.-E.-Léon Walras. Even though these economists worked independently, they shared a few ideas which made their work the beginning of the utility theory:
–utility was measurable in cardinal units, such as monetary units;
-the utility function is additive and separable;
-they all use the Gossen’ laws.
Karl Marx was a German politician, philosopher, economist, and sociologist (1818-1883). He studied law and it was in his famous “Thesis on Feuerbach”, where he formulated the proposition that the philosopher must not be contented with the contemplation of life, but must contribute in changing it. Marx’s early contributions to Economics were as editor of the “Rheinische Zeitung”, whose radical content made him face Prussian authorities. In 1847, along with Friedrich Engels, he wrote the Communist Manifesto, true synthesis of his thinking. However, his most important work is “Capital: Critique of Political Economy”.
Although he is the one who gave name to the Classical school of Economics, and he might not be considered a part of it because of his different conclusions on theory of value, we consider he should be considered part of this school, mainly because he worked on the same issues as other classical authors.