1.

The Classical School: Adam Smith

Adam Smith (1723-1790) is considered the father of classical economics, and his work
significantly shaped economic theory. His seminal book, *The Wealth of Nations* (1776),
is one of the most influential works in economics and marks the beginning of the
Classical School.
 Adam Smith (1723–1790) is the foremost figure in the Classical School of
economics, known as the "Father of Economics."
 Other major proponents include David Ricardo, Thomas Malthus, Jean-
Baptiste Say, and John Stuart Mill.
Notable Dates and Key Events:
 1776: Adam Smith published "An Inquiry into the Nature and Causes of the
Wealth of Nations", a foundational work in economics that laid the groundwork for
the Classical School.
 The Industrial Revolution (late 18th to early 19th century) marked the backdrop
of this school, shaping ideas about production, labor, and capital.
 David Ricardo's work in the early 19th century built on Smith's ideas, especially
in international trade with his theory of comparative advantage.

Main Ideas Developed by Adam Smith

1. Self-Interest and the Invisible Hand:
o Adam Smith famously argued that individuals acting in their own self-
interest contribute to the overall economic welfare of society.
o The "invisible hand" metaphor suggests that the pursuit of self-interest
unintentionally promotes the public good, as competition leads to efficient
allocation of resources.
o Quote: “It is not from the benevolence of the butcher, the brewer, or the
baker that we expect our dinner, but from their regard to their own
interest.”
2. Division of Labor:
o Smith demonstrated that dividing tasks among workers increases
efficiency, as individuals specialize in specific functions.
o His famous example of a pin factory illustrates how breaking down the
production process into simple tasks dramatically boosts productivity.
3. Laissez-Faire Economics:
o Smith advocated for minimal government intervention in the economy,
arguing that markets operate best when left to their own devices, as
competition regulates prices and ensures quality.
4. Free Markets and International Trade:
o He argued for free trade, opposing the mercantilist policies that dominated
during his time.
o He believed nations should specialize in industries where they have an
advantage and trade for goods they produce less efficiently, laying the
groundwork for the concept of comparative advantage (further
developed by David Ricardo).
5. Limited Government:
 o Smith identified three core roles for government: protecting the nation from
external threats, administering justice, and maintaining public works (like
infrastructure and education) that the private sector cannot provide
efficiently.

Origins of Key Concepts in Modern Economics

1. Supply and Demand:
o Smith touched on the concepts of supply and demand as natural
regulators of prices in the market. While his treatment was less formal
than later economists, it laid the foundation for the development of modern
microeconomic theory.
2. The Labor Theory of Value:
o Smith suggested that the value of a good could be traced back to the labor
required to produce it, a concept that influenced later economic thought,
including Marxism.
3. Economic Growth:
o Smith's insights into capital accumulation, division of labor, and innovation
contributed to early growth theory, influencing how economists think about
economic development today.
4. Wealth of Nations:
o Smith's Wealth of Nations shifted focus from gold and silver (as
emphasized by mercantilism) to productivity and the efficient allocation of
resources as the real sources of national wealth.

Critical Analysis of Historical Texts in Economics from this Period

 The Wealth of Nations is not only a treatise on economics but also a critique of
mercantilism, the dominant economic theory of Smith’s time. He dismantled the
notion that national wealth was a zero-sum game where one nation's gain was
another's loss. Instead, he argued that trade and economic interdependence
could lead to mutual benefit.
 Smith's insights into the role of self-interest and competition were
revolutionary, challenging older economic models that assumed economic actors
would or should work for the common good. However, some modern critics argue
that Smith underestimated the potential negative externalities of self-interest (e.g.,
environmental degradation, inequality) that require more government oversight
than he proposed.
 Smith’s views on free trade were a significant departure from mercantilist
policies, which relied heavily on government intervention to regulate trade and
promote exports. His ideas were instrumental in shaping modern economic
thought, moving towards liberalization and globalization, although debates about
protectionism persist today.
 Smith's role of government is another area of ongoing debate. While he
favored minimal intervention, he acknowledged the need for government
involvement in certain areas (e.g., public goods, defense, justice), which has
sparked discussions about the appropriate scope of government in economics—
questions that are still central to political and economic discourse today.
2. Sir dudley north

SIR DUDLEY NORTH (1641–1691)

- also called the world’s first prominent free trader.
- living during the height of the mercantilist period,
- struck hard at the heart of mercantilist doctrine.
- He was a wealthy merchant in the Turkish trade who later became commissioner of
customs and then a treasury official.
- In 1691 North brief tract, Discourses upon Trade,was his only published work,
appearing anonymously. Such caution was understandable in a merchant and high
government official whose views did not conform to prevailing ideas.
- Decades later his brother hinted that the publication was deliberately suppressed.
When Ricardo read a reprinted edition, he wrote: “I had no idea that any one
entertained such correct opinions, as are expressed in this publication, at so early a
period.”
- North emphasized that trade is not a one-sided benefit to whichever country that
realizes a surplus of exports but rather it is an act of mutual advantage to both sides.
Its object is not to accumulate specie but to exchange surpluses.
- Finally, North disagreed with the mercantilist concept that war and conquest enrich a
country. He wrote, “Money Exported in Trade is an increase to the Wealth of the
Nation; but spent in War, and Payments abroad, is so much Impoverishment.” By
“payments abroad” he probably meant payments made without receiving an
equivalent return of imports, as in the case of military subsidies to allies. This is an
antimercantilist view of the strongest kind, but one that itself is open to criticism: a
nation’s wealth consists of the value of services rendered in addition to the value of
domestic and imported goods that are available.

CONTRIBUTIONS AND MAIN IDEAS:

Free Trade: North was one of the earliest advocates for free trade, opposing
mercantilist policies that aimed to protect domestic industries by restricting imports. He
argued that free trade leads to greater wealth for all nations by allowing them to
specialize in goods where they have a comparative advantage.

Sir Dudley North’s Discourses upon Trade (1691) was one of the earliest calls for free
trade. He argued that trade restrictions and tariffs interfered with the natural flow of
commerce and that markets, if left free from government intervention, would operate
more efficiently and benefit all parties involved.

Impact on Modern Economics: North's advocacy for free trade laid the groundwork for
the principle of comparative advantage, later formalized by David Ricardo. The idea that
free trade allows nations to specialize in producing goods where they are most efficient
remains central to modern trade theory.
 Rejection of Mercantilism: North criticized the mercantilist idea that a nation’s
wealth was determined by the accumulation of gold and silver. Instead, he argued that
wealth came from production and trade, not from hoarding precious metals.
Self-Regulating Markets: Like later classical economists, North believed that
markets naturally regulate themselves, and that government interference often distorts
this balance.

Strengths:
1. Early Advocacy for Free Trade -North’s rejection of mercantilist policies and his
argument that free trade enhances wealth by allowing countries to specialize in what
they do best was a forward-thinking critique of government interference in markets.
2. Critique of Mercantilism -North’s critique of mercantilism, especially the idea that
national wealth is not solely defined by hoarding gold and silver, was revolutionary for
the time and helped to shift the focus of economics toward productivity and trade.
Limitations:
1. Lack of Depth in Economic Analysis - North’s work, though insightful, lacked the
theoretical depth and systematic analysis seen in later economic writings.
2. Historical Oversight -North’s belief in the self-regulating power of markets was
highly idealized and did not account for the structural issues and imbalances that could
arise from unregulated markets, such as colonial exploitation or inequalities in wealth
distribution, both of which were central to global trade at the time.

2. Richard Cantillon (1680–1734)

Birth and Early Life:
 Born: Circa 1680, Ballyheige, County Kerry, Ireland.
Richard Cantillon was of Irish descent, from a family of landed gentry. His exact
birthdate is uncertain, but he is believed to have been born around 1680. Cantillon's
family fled to France following political turmoil related to England's conquest of Ireland
under William of Orange.
Career and Economic Influence:
 Cantillon became a prominent banker and entrepreneur in France, accumulating
considerable wealth through his work with John Law’s Mississippi Company and
speculation during the financial boom and subsequent crash known as the
Mississippi Bubble in the early 1720s.
 His experience with the financial markets greatly influenced his economic thinking,
especially his views on entrepreneurship, risk, and market dynamics.
 His major work, Essai sur la Nature du Commerce en Général (Essay on the Nature
of Trade in General), written around 1730, is regarded as one of the first systematic
treatises on economic theory. Although it was published posthumously in 1755,
Cantillon’s insights predate the works of Adam Smith and other Classical
economists.
Main Contributions:
 Richard Cantillon is often considered one of the first systematic economic thinkers
and is sometimes credited as the father of modern economics. His most notable
work, "Essai sur la Nature du Commerce en Général", was published posthumously
in 1755. It contributed significantly to economic theory.
Key Ideas:
 Entrepreneurship and Market Dynamics: Cantillon was among the first to
introduce the concept of the entrepreneur as a risk-taker and key player in the
economy. He distinguished between those who earn fixed incomes (landowners)
and those who operate under uncertain conditions (entrepreneurs). This notion of
entrepreneurship is central to modern economic theory.

 Intrinsic Value and Price: Cantillon developed a theory of intrinsic value, where
value depends on the amount of land and labor used in production. This prefigured
later labor theories of value.

 Spatial Economics and Money Circulation: He emphasized the role of

geographical factors and transportation in economics, noting that location influences
prices and economic activities. Additionally, Cantillon examined the role of money in
the economy, suggesting that increases in the money supply would lead to inflation,
a key insight later developed by monetarists.

 Economic Systems and Circular Flow Model: Cantillon's ideas provided an early
version of the circular flow of income in an economy, showing how money and
goods move between households, entrepreneurs, and landlords.

Influence:
Cantillon's ideas were highly influential, especially in France. He shaped the
development of the Physiocratic school and inspired later economists, including Adam
Smith. His notion of economic equilibrium and market processes had a lasting impact
on the Classical School and modern economic thought.

Historical Context and origin of key concepts of Richard Cantillon:

 Entrepreneurship and Risk: Cantillon's focus on the role of entrepreneurs and risk in
economic systems was revolutionary, as it shifted focus from state-managed trade
to individual decision-making in markets, a hallmark of Classical and later Austrian
economic thought. The labor theory of value and circular flow models trace back to
Cantillon.

Critical Analysis of Historical Texts:

 Cantillon’s "Essai sur la Nature du Commerce en Général" is pivotal because it
introduces comprehensive ideas about market dynamics and entrepreneurship that
 were further developed in Classical economics. Cantillon’s theories predate Adam
Smith’s work but are less well-known due to the posthumous nature of his
publication and the fragmented preservation of his texts.

3. David Hume (1711–1776)

Birth and Early Life:
 Born: May 7, 1711, Edinburgh, Scotland.
 David Hume was born into a moderately wealthy family. He attended the University
of Edinburgh at the age of 12, where he initially studied law but developed a keen
interest in philosophy and literature. Although he never completed his formal degree,
Hume’s self-education led him to become one of the most influential philosophers of
the Enlightenment.
Philosophical and Economic Work:
 Philosophy: Hume is best known for his work in philosophy, particularly his
empiricism and skepticism. His major philosophical works include A Treatise of
Human Nature (1739–40) and An Enquiry Concerning Human Understanding
(1748). Hume emphasized the role of experience in shaping human knowledge and
was critical of rationalist metaphysical claims.

 Economic Contributions: Hume's economic ideas are mostly found in Political

Discourses (1752), a collection of essays. He also discussed economic subjects in
Essays, Moral and Political (1741-1742). Despite his philosophical focus, Hume
made significant contributions to economics, particularly in monetary theory and
international trade.
Main Contributions:
David Hume, a Scottish philosopher and economist, contributed significantly to the
development of classical economics through his essays on commerce, money, and
interest. His economic ideas are primarily found in his works "Political Discourses"
(1752) and essays like "Of the Balance of Trade". Although better known for his
philosophy, Hume's economic writings were influential, particularly on monetary theory
and international trade.

Key Ideas:
 Price-Specie Flow Mechanism: One of Hume's most important contributions to
economics was his formulation of the price-specie flow mechanism. He argued that
a country's balance of trade would be self-regulating. If a country exported more
than it imported, gold would flow in, raising domestic prices and making exports less
competitive, eventually leading to a balance. This idea helped to refute the
mercantilist belief that accumulating gold was always beneficial.

 Monetary Theory: Hume developed early ideas about the neutrality of money,
arguing that increasing the money supply does not affect real economic variables
like output in the long run but only influences prices. This theory would later be a
key tenet of Classical and later monetarist economics.
 Critique of Mercantilism: Hume was a vocal critic of mercantilist ideas, particularly
the belief that nations should hoard gold and maintain trade surpluses. He argued
that wealth should not be measured by the accumulation of precious metals but by
the real goods and services an economy produces.

 Interest Rates and Savings: Hume suggested that interest rates were not
determined by the quantity of money but by the quantity of savings and capital in the
economy, a view that influenced later Classical economists like Adam Smith.

Influence:
 David Hume’s economic ideas deeply influenced Classical economists, particularly
Adam Smith. His work on trade and monetary theory provided a strong foundation
for the Classical School's later emphasis on free markets and the benefits of
international trade.

Historical Context and Key Concepts:

Origins of Key Concepts:

 Hume’s price-specie flow mechanism and early insights into monetary neutrality laid
the groundwork for later developments in international economics and
macroeconomics.
 Critique of Mercantilism: Both Cantillon and Hume were critical of mercantilism, the
dominant economic theory of their time, which emphasized state intervention and
accumulation of wealth through trade surpluses. Their arguments for market
equilibrium and self-regulating mechanisms helped shape the free-market ideas that
defined Classical economics.
 Hume’s economic essays provide one of the earliest coherent critiques of
mercantilism, emphasizing the importance of trade and monetary policy in shaping
economies. His "Political Discourses" challenged prevailing orthodoxy and laid the
intellectual groundwork for future Classical economists.

Both economists played crucial roles in the evolution of economic thought, and their
works continue to be studied for their profound insights into market dynamics,
international trade, and monetary policy.
GROUP MEMBERS:
Justine Labsan
Ivylyn Aloy
Charles Kurt Matthew Roquero

REFERENCE:

Brue, s.L. and Grant, R.R. (2013), The Evolution of Economic Thought, 8 th edition,
Cengage
Brewer, A. (1992). Richard Cantillon: Pioneer of Economic Theory. Routledge.
Murphy, A. E. (1986). Richard Cantillon—Entrepreneur and Economist. Oxford
Economic Papers, 38(1), 208–226.
[Link]
Cantillon, R. (1755). Essai sur la nature du commerce en général [Essay on the
Nature of Trade in General]. (H. Higgs, Trans.). Macmillan, 1931. (Original work
published posthumously in 1755).
Hume, D. (1752). Political discourses. A. Kincaid & A. Donaldson.