Classical Economics in the World Today - Essay Example

A significant law that contributes to the classical school of thought is Say’s law. This law states that the supply of a commodity would produce its demand in the market. This law of economics goes against the arguments of Keynes. When sold, a firm's average amount of production would generate an average income that would be close to or equal to the amount needed to purchase the whole produce (Meltzer 201-256). William Petty, a classical economist, generated ways to provide a distinction in definition and application between natural and market prices to regulate the prices of goods.

In this school of thought, as described by Smith and Ricardo, realistic prices would be constant in the market no matter the forces that may try to change them. The market prices would tend to tilt to the honest prices. That is, the actual prices would act like a constant price for an item, and the market price tries to balance the demand and supply in the market. On the other hand, Petty decided to relate these two price concepts by telling them to land and labour (Backhouse 158-201).

However, Adam Smith describes natural prices as the total amount of wages, rent paid, and the sum of the profits that an investor eventually gathers. The concepts Smith used in his definition of natural prices revolved around the influence of labour in the economy. Ricardo, on the hand, viewed the report in a different direction. He used the cost of production as the primary definition of realistic prices. According to him, labour is the primary determiner of prices in the economy, as opposed to Smith’s use of rent as the primary determiner (Backhouse 56-89).

In the classical school of thought, there is a controversy on the concepts of Currency and Banking. Milton Friedman, a monetary economist, argues that banks should be responsible for controlling the flow of money in the economy. Inflation in the economy is because of the failure of the banking system to maintain the supply of money in the economy. Similarly, other economists think that the demand in the market would adjust according to the store of cash in the market. As others blame the banking system for inflation and other factors in the market, the advocators of endogenous money believe that the bank does not have much power to control the money supply but instead can generate rules and terms that govern borrowing and leasing out loans to the public (Meltzer 12-25).

The definition and concepts of classical economics depend on the theory of value. The report would vary from economist to economist. However, the images usually have a relationship between the description of the market and natural prices.