Classical Laissez-faire Economics Essay

1774 Words8 Pages
Classical Laissez-faire Economics The earliest organized school of economic thought is known as Classical. The father of this school is Adam Smith. Smith used the concept of the invisible hand to describe the role of the market in the allocation of resources. In the market, the interaction of demand and supply determines how much of a good will be produced and the price that is charged for that good. Absent any explicit guidance mechanism, the invisible hand guides participants in the market towards an outcome that efficiently allocates resources to the production of goods that society desires.
Other important classical economists include David Ricardo who introduced and developed the concepts of comparative advantage and the
…show more content…
This implies that all workers that desire jobs will have them, and those who are unemployed voluntarily choose to be so.

· The government has a minimal role over the course of the business cycle, and left alone the economy will gravitate toward full employment. In the long run, unemployment is not an important public policy concern as the unemployment present will be voluntary.

· Economic analysis should emphasize the study of markets and how they effectively operate.
An Early Theory of Value
One of the most important questions early classical economists attempted to answer was how the value or price of a good is determined. Smith described how the interaction of supply and demand in the market determined a good's price. Smith needed to go further and explain why two goods with identical demands would have different prices. According to Smith, the prices of goods are determined by what it costs to produce them. Since the majority input used in production during the eighteenth century was labor, Smith developed a labor-based theory of prices. The price of a good reflects the amount of labor used in its creation. One good's price is higher than another's because of the extra labor used in its production.
However, in Smith's model the price of a good is independent of the amount produced, resulting in a horizontal supply curve. From this base, Ricardo introduced the idea of diminishing returns in the factors of
Get Access