THE CLASSICAL SCHOOL: FORERUNNERS

The Classical School of economics, which emerged in the 18th century, laid the
foundation for modern economic thought. It emphasized the role of markets in
determining wealth and efficiency through the mechanism of supply and demand.
The forerunners of this school included early thinkers who laid down some of the key
ideas later developed by classical economists.
1. Richard Cantillon (1680-1734)
Cantillon is often considered one of the precursors of classical economics. His
work, *Essai sur la Nature du Commerce en Général* (Essay on the Nature of Trade
in General), published posthumously in 1755, is considered a foundational text.
Cantillon introduced the idea of the "entrepreneur" and described how entrepreneurs
assume risk in the economy. He also analyzed the nature of economic exchange, the
role of money, and the causes of price fluctuations.
2. François Quesnay (1694-1774)
Quesnay, a leader of the Physiocrats, a group of French economists, developed
the *Tableau Économique* (Economic Table) in 1758, a model showing how goods
and money flow through the economy. Quesnay and the Physiocrats advocated for a
system called *laissez-faire*, meaning minimal government intervention in the
economy, a key idea that would be adopted by classical economists.
3. David Hume (1711-1776)
A Scottish philosopher and economist, Hume was an important figure in shaping
economic thought. In his 1752 essays, "Of Money" and "Of Interest," he developed
the quantity theory of money, which explains the relationship between the amount of
money in circulation and inflation. Hume also discussed the concept of free trade
and international economic relations.
These early thinkers established ideas about market forces, government intervention,
and money, which became crucial to the development of classical economics.
Adam Smith: Father of the Classical School
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.
Key Contributions of Adam Smith:
1. The Invisible Hand
Smith introduced the concept of the "invisible hand," suggesting that individuals, by
pursuing their own self-interest, inadvertently contribute to the public good. This
metaphor illustrated how market forces, when left free from government interference,
guide resources to their most productive uses.
2. Division of Labor
Smith emphasized the importance of the division of labor in improving productivity.
In *The Wealth of Nations*, he famously used the example of a pin factory to
illustrate how dividing production tasks among specialized workers leads to greater
efficiency. This idea laid the groundwork for modern discussions of labor
specialization and productivity.
3. Free Markets and Laissez-Faire
Smith was a proponent of free markets, advocating for minimal government
interference in economic activities. He believed that when markets are allowed to
operate freely, they naturally regulate themselves through competition and supply
and demand. This laid the foundation for the *laissez-faire* philosophy, which argued
against heavy state control of economic affairs.
4. The Theory of Value and Wealth
Smith distinguished between *value in use* (the utility of a good) and *value in
exchange* (the ability of a good to be traded). He argued that the wealth of a nation
is measured not by its accumulation of gold or silver but by the productive capacity of
its economy.
5. Role of Government
While Smith advocated for a limited role for the government, he did not believe in
complete laissez-faire. He recognized three essential government functions:
protecting society from invasion (defense), administering justice (law and order), and
maintaining public works and institutions (infrastructure), which could not be
effectively provided by the private sector.
Legacy of Adam Smith
Adam Smith’s work became the foundation of classical economics and influenced a
broad range of disciplines, including political science and moral philosophy. His ideas
about free markets, competition, and the benefits of self-interest formed the bedrock
of economic liberalism and continue to influence economic thought to this day.
By synthesizing ideas from earlier thinkers and contributing original insights, Adam
Smith provided a comprehensive framework for understanding how economies
operate. His belief in the power of free markets and competition remains central to
many modern economic theories and policies.

FORERUNNERS

SIR DUDLEY NORTH

- Sir Dudley North (1641–1691), 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.
- Sir Dudley North has been called the world’s first prominent free trader.
- 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.

RICHARD CANTILLON
- Richard Cantillon (1680?–1734) was born in Ireland.
- He spent many years in Paris, becoming a wealthy banker and a successful
speculator in stocks and foreign currencies.
- In 1734 Cantillon was robbed and murdered and his house was set afire, probably
by a cook he had dismissed ten days earlier.
- His only book, Essai sur la Nature du Commerce en Général, was written between
1730 and 1734 and published in French in 1755. Cantillon himself may have
translated it from his English manuscript, which was never found.
- Cantillon predated the physiocrats in two ways. First, he used the term
entrepreneur and emphasized the role of this figure in economic life.
Businesspeople, Cantillon said, commit themselves to definite payments in
expectation of uncertain receipts; this risk taking is remunerated by profit, which
competition tends to reduce to the normal value of the entrepreneurs’ services.
Second, writing a generation before Quesnay constructed his Tableau
Economique, Cantillon stated:

“Cash is therefore necessary, not only for the Rent of the Landlord ... but also for the
City merchandise consumed in the Country.... The circulation of this money takes
place when the Landlords spend in detail in the City the rents which the Farmers
have paid them in lump sums, and when the Entrepreneurs of the Cities, Butchers,
Bakers, Brewers, etc. collect little by little this same money to buy from the Farmers
in lump sums Cattle, Wheat, Barley, etc.”

- Cantillon developed a theory of value and price. His emphasis on the role of land
and labor, on supply and demand, and on the fluctuations of price around intrinsic
value makes him a direct forerunner of classical economics.

DAVID HUME
- David Hume (1711–1776) was born in Scotland twelve years before his fellow
national and friend, Adam Smith.
- Hume entered the University of Edinburgh at the age of twelve and left at fifteen
without taking a degree.
- Later, eminent as a philosopher, Hume was twice turned down for an Edinburgh
philosophy chair due to his unconventional and skeptic mindset. Adam Smith was
actually on the verge of being expelled from Oxford University once it was
discovered that his room included a copy of David Hume's A Treatise of Human
Nature.
- Hume worked for most of his life as a minor government officer and as a tutor to a
marquis. He moved back to his inherited estate after retiring, where he wrote a
great deal. His multivolume History of England, which saw several editions, made
him famous as a historian; his economic studies in Political Discourses, which was
published in 1752, solidified his status as an economist. Of all the forerunners of
classical economics, Hume came closest to the ideas of Smith. Had he written a
complete and systematic treatise on economics, he would have ranked near the
top as one of the founders of the science
- Hume’s greatest contribution as an economist was in presenting what has since
been called the price specie-flow mechanism. The mercantilists wanted to promote
a surplus of exports in order to accumulate specie.
- In the somber view of Cantillon, this tactic was self-defeating because if more
specie were available, prices would go up and imports would increase. But to pay
for the imports, money would be shipped abroad, leaving poverty and bankruptcy
behind; therefore, the government should prevent an excess of money.

ADAM SMITH
- Adam Smith (1723–1790), the kindly, brilliant founder of the classical school, was
born in the seaport and manufacturing town of Kirkcaldy, Scotland. His father,
comptroller of customs in the town, died before his son was born. Margaret
Douglas Smith provided a home for her son until her death in 1784, in her ninetieth
year.
- Young Smith attended Glasgow College at fourteen years of age; he later studied
moral and political science and languages at Balliol College, Oxford. He then
returned to his mother’s home to continue independent study for two years. After
that Smith moved to Edinburgh, where he gave lectures on rhetoric and literature.
- He was elected professor of logic at Glasgow College in 1751, and in the following
year he was given the chair of moral philosophy, which he held for nearly twelve
years.
- In 1759, he published The Theory of Moral Sentiments, after which his lectures
concentrated less on ethical doctrines and more on jurisprudence and political
economy.
- In 1776, Smith published An Inquiry into the Nature and Causes of the Wealth of
Nations, which he had begun in France ten years earlier. Its fame was immediate,
and it established Smith’s reputation forever.
- Shortly before he died in 1790, most of his unpublished manuscripts were
destroyed according to his wish and without explanation.
The Classical School of Economics emerged in the late 18th and early 19th
centuries, focusing on the idea that free markets can regulate themselves, primarily
through supply and demand. Some of the forerunners of the Classical School, their
MAIN IDEAS, and contributions are:

1. Adam Smith (1723–1790)

 The Invisible Hand: Smith argued that individuals, by pursuing their own self-
interest, inadvertently contribute to the overall good of society. This led to the
concept of market self-regulation.Adam Smith first introduced the concept in The
Wealth of Nations (1776). He argued that individuals, acting in their own self-
interest, unintentionally contribute to the collective good of society.
Modern Economics: The invisible hand is a fundamental concept in market
economies, leading to the belief that markets can allocate resources efficiently
without much government intervention. It laid the groundwork for the development of
neoclassical economics and the modern notion of market equilibrium.
 Division of Labor: Increased productivity through specialization in tasks, which
leads to economic growth. In The Wealth of Nations, Smith described the
benefits of dividing labor into specialized tasks, leading to greater efficiency and
productivity.
Modern Economics: Smith’s idea is a key concept in modern production theory,
particularly in industrial economics and organizational management. The division of
labor is crucial to understanding how firms operate and how economies of scale are
achieved in production processes today.
 Laissez-faire: Smith advocated minimal government intervention in the economy,
except in cases of protecting property, ensuring justice, and providing public
goods.Smith and Ricardo both emphasized the importance of free markets and
minimal government intervention. Smith’s laissez-faire doctrine advocated for the
self-regulating nature of markets, while Ricardo supported the removal of
barriers to trade.
Modern Economics: These ideas laid the foundation for market liberalism, which
continues to influence modern economic thought. Free-market principles are central
to policies such as deregulation, tax cuts, and privatization, which are often pursued
in contemporary economies based on the belief that they enhance growth and
efficiency.

2. Sir Dudley North (1641–1691)

 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.

3. Richard Cantillon (1680–1734)

 Entrepreneurship: Cantillon was one of the first to recognize the entrepreneur
as a key player in the economy, someone who assumes risk and organizes
production to profit from changing market conditions.Cantillon, in his Essai sur la
Nature du Commerce en Général (1730), was one of the first economists to
describe the role of the entrepreneur. He saw the entrepreneur as someone who
takes on risk by buying at known prices and selling at uncertain ones, playing a
crucial role in the coordination of production and distribution.
Impact on Modern Economics: Cantillon’s understanding of the entrepreneur as a
key economic agent laid the foundation for modern theories of entrepreneurship and
innovation. His focus on risk-taking and market uncertainty remains central to
discussions about the role of entrepreneurs in driving economic growth.
 Intrinsic Value of Goods: He proposed that the value of goods is determined by
the labor and resources that go into producing them, an early precursor to the
labor theory of value.
Circular Flow of Income: Cantillon described the economy as a circular flow, where
money circulates between producers and consumers, a concept later expanded by
classical economists.
 Price Determination: He recognized the importance of supply and demand in
setting prices, emphasizing that prices are not just a function of production costs
but also of market conditions.
 Circular Flow of Income: Cantillon was one of the first to describe the economy
in terms of a circular flow of income, where money moves between producers
(firms) and consumers (households). This was an early attempt to model the
interdependencies in the economy.
Impact on Modern Economics: The circular flow concept is a core element of
today, used to explain how money and goods circulate through an economy. It laid
the foundation for later macroeconomic models, including Keynesian theories of
national income determination.
4. David Hume (1711–1776)
 Price-Specie Flow Mechanism: Hume developed the theory that trade
imbalances would self-correct through changes in the money supply. If a country
runs a trade surplus, it will accumulate gold, leading to inflation, making its
exports less competitive, and thus balancing trade over time. Conversely, a trade
deficit would deflate prices and make the country's exports more competitive. In
his essays on economics (1752), David Hume introduced the price-specie flow
mechanism, explaining how trade imbalances self-correct. He argued that when
a country runs a trade surplus, it accumulates gold (specie), leading to inflation.
Higher prices would reduce the country’s competitiveness, while other nations
would see lower prices, leading to a natural balance of trade.
Impact on Modern Economics: This idea is foundational for modern international
economics. Hume’s mechanism anticipated the development of balance of payments
theory and laid the intellectual groundwork for understanding how exchange rates
and trade flows adjust in a global economy.
 Criticism of Mercantilism: Like other classical thinkers, Hume rejected
mercantilist ideas, particularly the notion that wealth consists primarily of
accumulating gold and silver. He argued that a nation's wealth is based on its
production and trade capacity.
 Empiricism in Economics: Hume believed that economic theories should be
grounded in empirical observation rather than abstract reasoning, contributing to
the development of the scientific method in economics.

Historical Texts in The Classical School - Forerunners

Adam Smith (1723–1790)
 The Wealth of Nations (1776) Smith wrote during the early stages of
industrialization, and while his observations were pertinent for an economy
dominated by small enterprises and manual labor, many of his ideas about
laissez-faire and the harmony of interests appear inadequate for today’s complex,
globalized economies.
Strengths:
1. Market Dynamics and Self-Interest - His insights into the dynamics of
competition, division of labor, and productivity were profound in the context of
the burgeoning Industrial Revolution.
2. Empirical Observations - Smith’s ideas were grounded in empirical
observations of the economic practices of his time, especially in his detailed
analysis of the pin factory, which exemplified the advantages of division of
labor.
Limitations:
 1. Underestimation of Market Failures: - Smith assumed that the pursuit of
self-interest naturally aligns with societal benefit, but modern critiques point
out instances where self-interest leads to market failures like monopolies,
externalities (e.g., pollution), and income inequality, issues that Smith only
minimally addressed.
2. Over-reliance on Laissez-faire - Smith advocated for minimal government
intervention but failed to anticipate the extent to which unregulated markets
could lead to exploitation and destabilization.
Sir Dudley North (1641–1691)
 Discourses upon Trade (1691) North wrote during a period dominated by
mercantilist thought, and his ideas were a reaction against this. However, his
advocacy for laissez-faire policies did not fully anticipate the complexities of
international trade or the rise of powerful multinational enterprises that could
manipulate markets, challenges that emerged more fully in later centuries.
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.
Richard Cantillon (1680–1734)
 Essai sur la Nature du Commerce en Général (1730) Cantillon wrote during a
time of expanding global trade and colonialism, and his work focused heavily on
the economic structures and dynamics of Europe’s mercantile and land-based
economies. His ideas about entrepreneurship were innovative but reflected a
European market heavily dependent on land ownership and colonial expansion,
concepts that evolved as industrial economies emerged.
Strengths:
1. Entrepreneurship and Risk -Cantillon’s identification of the entrepreneur
as a central figure in the economy was one of his greatest contributions.
 2. Economic Modeling and the Circular Flow - Cantillon’s description of the
circular flow of income, where money circulates between different sectors of
the economy, foreshadowed later developments in macroeconomic theory.
Limitations:
1. :Incomplete Development of Theory -While Cantillon introduced many
important concepts, his analysis remained fragmented and underdeveloped.
2. Eurocentrism and Narrow Focus -Cantillon’s views were grounded in a
European context, and his assumptions about economic behavior reflected
the social and economic conditions of 18th-century Europe, limiting their
applicability to more diverse or developing economies.
David Hume (1711–1776)
Essays, Moral, Political, and Literary (1758) Hume was writing in the context of
early capitalism, when national economies were more insulated, and international
trade was limited compared to modern globalization. His theories, while useful for
understanding 18th-century economies, did not anticipate the complexities of
modern financial systems or multinational trade agreements.
Strengths:
1. Price-Specie Flow Mechanism - Hume’s explanation of how trade
balances adjust automatically via changes in the money supply was one of
the earliest formulations of what we now call macroeconomic equilibrium.
2. Empirical Approach - Hume’s insistence that economic theories be
grounded in empirical observation rather than abstract reasoning made a
significant methodological contribution.
Limitations:
1. Simplified View of Economic Adjustments - Hume’s price-specie flow
mechanism assumed a smooth and automatic adjustment in trade balances
without considering the frictions that can occur in real-world economies, such
as capital flows, political interference, and rigidities in wages and prices.
2. Neglect of Long-Term Structural Issues - While Hume was focused on
short-term price adjustments, he did not fully consider long-term structural
problems in the economy, such as income inequality, poverty, or the broader
social impacts of economic policies, issues that became more prominent with
industrialization.

Conclusion:
The texts from the Classical School forerunners—Adam Smith, Sir Dudley North,
Richard Cantillon, and David Hume—were crucial in transitioning economics from a
mercantilist framework to one focused on markets, trade, entrepreneurship, and self-
regulation. However, their works reflected the economic conditions and limitations of
their time.