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Classical economics

The classical period of economics ranges from Adam Smith’s Wealth of Nations, which was published in 1776, to John Stuart Mill’s Principles of Politicat Economy of 1848, and was dominated by the work of David Ricardo. The French Physicrats had lain stress on. the position ofi agriculture in the economy, claiming that this sector was the source of all economic wealth. Smith rejected this view and drew attention to the development of manufacturing and the importance of labour productivity. Ultimately labour was the true measure of value. Ricardo took up this idea and propounded a theory of relative prices based on costs of production in which labour cost played ihe dominant role, although he accepted that capital costs were an additional element. Capital played an important role, not only by improving labour productivity, but also by enabling labour to be sustained over the period of waiting before work bore fruit in consumable output. This was the idea of the wages fund. Wages were dependent on two forces: (a) the demand for labour, derived from the availability of capital, or savings, to finance the wage bill; and (b) the supply of labour, which was fixed in the short run, but in the long·run was dependent on the standard of living. The latter was related to the leve! of subsjstence. This was not regarded as merely the basic necessities required to keep the workers alive and to reproduce themselves. It was determined by custom, and was accepted to be increasing as real living standards improved.

Reference: The Penguin Dictionary of Economics, 3rd edt.