The Structure and Principal Components of Classical Economics
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The Structure and Principal Components of Classical Economics
The Structures of Classical Economics
Classical economics was referred to as the school of thought of economics. Adam Smith and other British economists developed this school of studies after the rise of western capitalism. The focus was to enhance economic freedom and growth. This school of thought explained the demand, value, distribution, supply, and price of items. Through this, countries developed from monarchic rule to capitalistic democracies that were self-regulated. The classical school argued that markets work best when there is freedom and enhancement of small regulations from the government. The viewpoint of the classical economic school of thoughts was firmly one of the laissez-faire and had a firm belief in the effectiveness of freedom in the market to promote development in the economy.
Economists argued that for markets to develop, they should be given the freedom to work since the price mechanism acted as a muscular indirect benefit to allocate resources to where they are thoroughly exercised. The peak for classical included basing on three critical assumptions: saving-investing equality, flexibility of prices, and Say’s law. With flexible prices as the first assumption, markets could efficiently and quickly achieve equilibrium in case of any changes in markets unrestricted by market control or government rules. A firm could promptly eliminate any surplus or shortages that may have occurred, thus balancing between quantity demanded and supplied. The stability shows the firm maintained entire employment; thus, unemployment is not a problem.
As the second assumption of classical economics, Say’s law summarized that supply creates its demand in that the production of goods and services in the economic sector produces enough income to purchase all outputs. Therefore the economy is not experienced with an aggregate insufficient production and supply of goods and services. Saving-investing equality as the third assumption of the classical school of thought suggested that saving matched investment expenditure. The saving-investing equality was met through the application of flexible prices to interest rates notion in markets—another highlight for classical economic the theoretical structure. The structure viewed the macro-economy operating accumulatively regarding similar economics principles that conduct firm. The third highlight of classical economics was that the principle of the classical school of thought was quantity resource markets would achieve attain the equilibrium revealing full employment of resources was guaranteed. However, the government would give the markets freedom which would help them achieve full employment.
Government interventions would cause macro-economic problems rather than corrections. Classical economic principles helped in attaining effective and full employment of resources. Total employment was achieved through attaining equilibrium in labor markets and resources. A had neither shortage nor surplus when the equilibrium was attained. Lack of surplus would lead to unemployment. To stabilize the equilibrium, the labor price would decrease until it balances and employment was restored fully. Efficiency was achieved through comparing the prices between the one that the seller was ready to accept and the one the buyer was willing to pay for the good. The efficiency and full employment were the essential implications of classical economics. To achieve them, the government was not supposed to direct resources to the activities but leave the markets do it. This helped in attaining the equilibrium.
Principal Components of Classical Economics
One of the principle components of classical economics were liberty and freedom. Freedom and liberty were the basis of classical economics principles. The two suggested for the need to be free from difficult and unstable government intercession. Individual will prosper when they were free leading to country’s prosperity. This principle recommend that government was created by members of the nation so as to protect themselves from each other. Therefore the government was supposed to ensure minimum conflicts arise between individuals of a state. Freedom and liberty ensured that full property rights, free competition in markets and maximum mass wealth and income as well as overall economic utilizations. The only limits that were allowed on economic liberties were the ones that maintained market fluency.
Another principle component of classical economics was self-regulating of the economy. The economist believe that the economy is self-regulating and was able to attain the natural level of output. The natural level was achieved when once the economy’s resources are fully employed.in case there was rise of issues from time to time that cause fall of the economy, self-adjustment mechanism were applied to bring back the natural level of real output. The output natural level was based on two strong beliefs. This beliefs were Say’s law and flexible wages, prices and interest rates. Say’s law suggested that the economy had the capability to achieve the natural level of output. The income gained after production of a particular level of output must be able to purchase the same level of output. Some of the output was saved since it was not necessarily that it must be utilized. Saved income was not used to purchase goods and services, instead was used for other developments in the market.
Flexible wages, interest rates and prices believe that under these circumstances, the interest rates failed causing the clients to demand for their rights and the available savings were supposed to be used. Therefore funds supplied from full saving that is equal to demand by all investors would lead to total fall of the interest rates. An increased saving would lead improving investment expenditure through reducing interest rate. The economy would eventually go back to the natural level of real output. Flexibility of prices as well as that of interest rates was the self-adjusting mechanism of the classical economics that ensure the result is at its natural level. The flexibility of wages kept the labor market in equilibrium every time. Wages paid to workers will automatically decrease if the number of employees exceeds the number of workers the market demands. Classical economic, in this principle, believed that if there is the occurrence of unemployment, it was referred to as voluntary unemployment. Voluntarily unemployed workers are unemployed since they would not accept low wages. But in case they accept the low wages, the firm employs them automatically.