CLASSICAL

ECONOMICS

Joaquin Trostchansky, Tomas Valiante

Context

Until the beginning of the industrial revolution and the birth of capitalism ➜
There was a certain amount of gold and silver ➜ the amount of gold and silver
the nation had was the only measure of its worth.

Mercantilism theory ( aimed to accumulate wealth by obtaining gold and silver )

- Maximize exports to earn more gold and silver

- Use barrier imports such as customs and tariffs to prevent gold and silver
from leaving the country

Government was involved in controlling the economy

Having colonies ➜ important way in which countries were able to product and
exports good ➜ to get gold and silver
Adam Smith

In 1776 the first revolution occurred, the “father” of the

classical economic thinking Adam Smith( He was a moral
filosofer from Scotland)published a book called “An inquiry
into the nature and causes of the wealth of nation”. His
observations in this books formed the basis of the theories
that we study today
What did Smith said?

Smith stated that a nation's wealth is not based on the gold

and silver it has accumulated, and he proposed that the
wealth should be based on the value of the goods and
services it produces, he said that the countries should
maximize their output in order to be wealthy.
He also contributed to the idea of specialization and division
of labour, He explain that a factory with 10 workers could
produce ten times more if they divide their work. This model
of work would increase productivity and efficiency,
increasing the profit. Another contribution he made was the
“Labour theory of value”, this theory states that the price of a
good is the sum of the value of the labour.
Other Smith contribution.

The metaphor of the “invisible hand”

He observed ➜ if private producer are left alone to decide what to
produce and how to prudence it ➜ they are guided by an invisible hand.
➜ They choose what to produced based on what consumer want.
Utility - ADAM THOUGHTS

In pursuing their own interes, Smith observed that producers also benefit
consumers ➜ Competition between producers gives them the incentive to
come up with new and cheap products ➜ They maximize the satisfaction
of consumer

This satisfaction consumer gets from consuming is called UTILITY

When producer supply the goods that give consumer the most utility ➜ It
create jobs and wealth for the nation.

ADAM THOUGHTS: An economy based on free markets and competitions

is one which leads to full employment of resources and greater prosperity
for the economy
 ADAM THOUGHTS

In the wealth of nation - showed how a country prosperity

grow through trade with other countries
By his writings and
investigations ( wealth of He said: Countries should specialize in the production of
nation ) , he promoted the
notion of free trade
goods they produce more efficiently and then import goods
other countries produce more efficiently than others ( This
was contrary to previous views under mercantilism -
government restricted imports from other countries )
Laissez Theory

Society prospers from the force of competition and the

invisible hand

Let do - term is used to referí to the capitalist economy

system where production , consumption and trade take
place in free markets
BUT…

In smith view , government responsibilities are focused in

areas id defense , education, the provision of infrastructure ,
the establishment of legal rights and the punishment of crime