Classical economics is a branch of economics that refers to the dominant school of thought for economics in the 18th and 19th centuries. It is founded on the belief that market economies are naturally self-regulating and self-adjusting, without any outside interference or regulation. The birth of western capitalism ushered in the development of classical economics with Adam Smith’s 1776 release of the Wealth of Nations.

The main focus of classical economic theory was to explain how a market economy works and how reforms should be conducted in order to increase economic efficiency and growth. The theory aimed to explain value, price, supply, demand, and distribution in a free market economy. Classical economists claimed a system of economic self-regulation would increase economic growth and work to the benefit of both employers and workers.

The notion of economic self-regulation in classical economic theory means the market is self-correcting. For instance, if demand for a product increases and prices rise, higher demand will produce an incentive for entrepreneurs to increase production and supply of the product. This adjustment in supply will eventually lead to lower prices as the market corrects itself. In other words, according to classical economics, governments should remove any restrictions on prices and production, allowing the market to determine these outcomes, which in turn creates an efficient outcome.

Classical economic theory eventually gave way to newer developments, such as Keynesian economics, which called for more government intervention than the classical theory proponents had anticipated. As the modern market economy developed, classical theorists’ faith in the self-regulating ability of the market economy was tested. While many of the key features of classical economics remain, in some form or another, in modern economic analysis, the changing nature of the economy has lead to new economic theories.

This shift in economic thought has been necessitated by the reality that economic systems are increasingly complex, something classical economic theory could not account for. Today, classical economics is largely viewed as a historical phenomenon. It is still studied in universities and examined by some economists, allowing us to better understand economies of centuries past and compare them to current ones. As economists continue to invent new theories and expand on existing ones, classical economics will continue to serve as an important reminder of how economies once worked.