Laissez-faire

9 Pages 2190 Words

laissez-faire

Classical Laissez-faire Economics The earliest organized school of economic thought is known as Classical. The father of this school is Adam Smith. Smith used the concept of the invisible hand to describe the role of the market in the allocation of resources. In the market, the interaction of demand and supply determines how much of a good will be produced and the price that is charged for that good. Absent any explicit guidance mechanism, the invisible hand guides participants in the market towards an outcome that efficiently allocates resources to the production of goods that society desires. Other important classical economists include David Ricardo who introduced and developed the concepts of comparative advantage and the benefits of an open economy that participates in international trade. J.B. Says presented what is today known as Say's Law: supply creates its own demand. Say's law captures the essence of the classical school of thought. The statement that supply creates its own demand implies that by producing goods and services, firms create the jobs and incomes capable of buying those goods and services. With economic foundations based on the role of markets, a theory generally free of outside intervention, and emphasizing the role of production in determining income and economic output, the classical school of thought has several important implications: • The government should play a minimal role in determining the condition of the economy. The government does have an important place in areas such as providing a legal framework, preventing abuses of the market, and to sustain national defense. However, extensive government intervention will hinder the efficient operation of the market in the determination of prices of goods and services and the allocation of resources towards their production. • The normal economic state of the economy is at full employment. This implies that all workers that desire jobs...