classical economics, English school ofeconomic thought that originated during the late 18th century withAdam Smith and that reached maturity in the works ofDavid Ricardo andJohn Stuart Mill. The theories of the classical school, which dominated economic thinking in Great Britain until about 1870, focused oneconomic growth and economic freedom, stressinglaissez-faire ideas and free competition.

(Read Milton Friedman’s Britannica entry on money.)

Many of the fundamental concepts and principles of classical economics were set forth in Smith’sAn Inquiry into the Nature and Causes of the Wealth of Nations (1776). Strongly opposed to themercantilist theory and policy that had prevailed in Britain since the 16th century, Smith argued that freecompetition andfree trade, neither hampered nor coddled by government, would best promote a nation’s economic growth. As he saw it, the entire community benefits most when each of its members follows his or her own self-interest. In a free-enterprise system, individuals make a profit by producing goods that other people are willing to buy. By the same token, individuals spendmoney for goods that they want or need most. Smith demonstrated how the apparent chaos of competitive buying and selling is transmuted into an orderly system of economic cooperation that can meet individuals’ needs and increase their wealth. He also observed that this cooperative system occurs through the process of individual choice as opposed to central direction.

In analyzing the workings of free enterprise, Smith introduced the rudiments of alabour theory of value and a theory of distribution. Ricardo expanded upon both ideas inPrinciples of Political Economy and Taxation (1817). In his labour theory of value, Ricardo emphasized that the value (i.e.,price) of goods produced and sold under competitive conditions tends to be proportionate to the labour costs incurred in producing them. Ricardo fully recognized, however, that over short periods price depends onsupply and demand. This notion became central to classical economics, as did Ricardo’s theory ofdistribution, which divided national product between three social classes: wages for labourers, profits for owners of capital, and rents for landlords. Taking the limited growth potential of any national economy as a given, Ricardo concluded that a particularsocial class could gain a larger share of the total product only at the expense of another.

These and other Ricardian theories were restated by Mill inPrinciples of Political Economy (1848), a treatise that marked the culmination of classical economics. Mill’s work related abstract economic principles to real-world social conditions and thereby lent new authority to economic concepts.

The teachings of the classical economists attracted much attention during the mid-19th century. The labour theory of value, for example, was adopted byKarl Marx, who worked out all of its logical implications and combined it with the theory ofsurplus value, which was founded on the assumption that human labour alone creates all value and thus constitutes the sole source of profits.

More significant were the effects of classical economic thought onfree-trade doctrine. The most influential was Ricardo’s principle ofcomparative advantage, which states that every nation should specialize in the production of those commodities it can produce most efficiently; everything else should be imported. This idea implies that if all nations were to take full advantage of the territorialdivision of labour, total world output would invariably be larger than it would be if nations tried to be self-sufficient. Ricardo’s comparative-advantage principle became the cornerstone of 19th-centuryinternational-trade theory.