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18th Century Economics

In: Business and Management

Submitted By Ollyharding
Words 1068
Pages 5
The Classical economics school of thought believe that laissez faire is the best way to run an economy in terms or regulating the markets. They thought that perfect and free competition would exist and that any extra restrictions and interventions would end up changing the dynamic of the equilibrium theory. Their main belief was that in the long run prices would always adjust to the demand of the public and so the economy would find a natural equilibrium where aggregate demand was equal to aggregate supply. This belief is derived from the assumption that both prices and wages are flexible and therefore are able to adjust to these such changes in demand and supply of workers. These views were mainly created through the works of Adam Smith and his theory of the invisible hand, other economists to work on this theory include David Ricardo, Thomas Malthus and John Stuart Mill.

The main theory behind wages and their ability to always adjust to the supply of labour requires all workers being willing to accept what the going wage rate is. The free market classical economists believed that the workers would take what wage was given to them and if they didn’t then that unemployment was voluntary. Meaning that any unemployment in the long run would always be voluntary, in the short run there was the possibility that frictional unemployment could exist as workers moved between jobs, however this was again only short term. The diagram which is used to represent the demand and supply of labour is assuming that every worker will be working for the same wage if there are any adjustments to the wage rate, and that each worker will be able to provide the same amount of productivity as the next worker would. This is being represented in Fig.1 where the supply and demand for labour is meeting at the point where We and Le meet. However Figure 2 is showing something different, here

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