Smith and Classical According to Term Paper

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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.

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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

Development of trade requires universal form of payment is the form of paper money. Such concept was called Real Bill Doctrine, which stated that "so long as a bank issues its notes only in the discount of good bills, at not more than sixty days' date, it cannot go wrong in issuing as many as the public will receive from it." (Fullarton, 1845) This monetary doctrine was widely criticized in the 19th century because in case of the mass issuing of paper money it was impossible to avoid inflation, as the real value of money was decreasing. The problem of Real Bill Doctrine is the problem of presence of enough amount of physical assets which can be equally exchanged on paper money.

Most of the follwing tenets are widley critized nowdays by Keynesian school as they have a number of defiencies, which can not solve, predict or explain certain isues faced by the modern economies inlcuding overporduction, unemployemnt or stagnation during full employemnt. So it's important to understand that the ability to study correlations within economy becomes wider if to take into consideration different and even contradictory economic theories.

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