Editing Economics (section)

=== Classical political economy ===
{{Main|Classical economics}}
[[File:AdamSmith.jpg|thumb|upright=0.8|The publication of [[Adam Smith]]'s ''[[The Wealth of Nations]]'' in 1776 is considered to be the first formalisation of economic thought.|alt=Picture of Adam Smith facing to the right]]
The publication of [[Adam Smith]]'s ''[[The Wealth of Nations]]'' in 1776, has been described as "the effective birth of economics as a separate discipline."{{sfnp|Blaug|2017|p=343}} The book identified land, labour, and capital as the three factors of production and the major contributors to a nation's wealth, as distinct from the physiocratic idea that only agriculture was productive.

Smith discusses potential benefits of specialisation by [[division of labour]], including increased [[labour productivity]] and [[gains from trade]], whether between town and country or across countries.<ref>{{cite web |author-link=Alan Deardorff |last=Deardorff |first=Alan V. |date=2016 |title=Division of labor |website=Deardorffs' Glossary of International Economics |publisher=University of Michigan |url=http://www-personal.umich.edu/~alandear/glossary/d.html#DivisionOfLabor |access-date=1 March 2012 |archive-date=16 March 2020 |archive-url=https://web.archive.org/web/20200316082342/http://www-personal.umich.edu/~alandear/glossary/d.html#DivisionOfLabor |url-status=live }}</ref> His "theorem" that "the division of labor is limited by the extent of the market" has been described as the "core of a [[Theory of the firm|theory of the functions of firm]] and [[industrial organization|industry]]" and a "fundamental principle of economic organization."<ref>{{cite journal |author-link=George J. Stigler |last=Stigler |first=George J. |date=June 1951 |title=The Division of Labor Is Limited by the Extent of the Market |journal=Journal of Political Economy |volume=59 |issue=3 |pages=185–193 |jstor=1826433 |url=https://www.sfu.ca/~allen/stigler.pdf |doi=10.1086/257075 |s2cid=36014630 |access-date=26 August 2017 |archive-date=25 August 2016 |archive-url=https://web.archive.org/web/20160825225559/http://www.sfu.ca/~allen/stigler.pdf |url-status=live }}</ref> To Smith has also been ascribed "the most important substantive proposition in all of economics" and foundation of [[Allocation of resources|resource-allocation]] theory—that, under [[Competition (economics)|competition]], resource owners (of labour, land, and capital) seek their most profitable uses, resulting in an equal rate of return for all uses in [[Economic equilibrium|equilibrium]] (adjusted for apparent differences arising from such factors as training and unemployment).<ref>{{cite journal |last=Stigler |first=George J. |date=December 1976 |title=The Successes and Failures of Professor Smith |journal=Journal of Political Economy |volume=84 |issue=6 |pages=1199–1213 |jstor=1831274 |doi=10.1086/260508|s2cid=41691663 }} Also published as {{cite report |title=The Successes and Failures of Professor Smith |work=Selected Papers, No. 50 |url=http://testwww.chicagobooth.edu/research/selectedpapers/sp50c.pdf |publisher=Graduate School of Business, University of Chicago |date= |access-date=16 August 2010 |archive-date=25 August 2016 |archive-url=https://web.archive.org/web/20160825213630/http://testwww.chicagobooth.edu/research/selectedpapers/sp50c.pdf |url-status=live }}</ref>

In an argument that includes "one of the most famous passages in all economics,"{{sfnp|Samuelson|Nordhaus|2010|p=30|loc=ch. 2, "Markets and Government in a Modern Economy", The Invisible Hand}} Smith represents every individual as trying to employ any capital they might command for their own advantage, not that of the society,{{efn|"Capital" in Smith's usage includes [[fixed capital]] and [[circulating capital]]. The latter includes wages and labour maintenance, money, and inputs from land, mines, and fisheries associated with production.{{sfn|Smith|1776|loc=Bk. II: ch. 1, 2, and 5}}}} and for the sake of profit, which is necessary at some level for employing capital in domestic industry, and positively related to the value of produce.{{sfnp|Smith|1776|loc=Bk. IV: Of Systems of political Œconomy, ch. II, "Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home", IV.2.3 para. 3–5 and 8–9}} In this:

{{blockquote|He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.{{sfnp|Smith|1776|loc=Bk. IV: Of Systems of political Œconomy, ch. II, "Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home", para. 9}} }}

The [[Reverend]] [[Thomas Robert Malthus]] (1798) used the concept of [[diminishing returns]] to explain low living standards. [[Human population]], he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labour. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.<ref>{{cite book |last=Malthus |first=Thomas |date=1798 |title=An Essay on the Principle of Population |publisher=J. Johnson Publisher|title-link=An Essay on the Principle of Population }}</ref>{{Primary source inline|date=November 2021}} Economist [[Julian Simon]] has criticised Malthus's conclusions.<ref>{{cite book|last=Simon|first=Julian Lincoln|title=The Ultimate Resource|year=1981|publisher=Princeton University Press|title-link=The Ultimate Resource}}; and {{cite book|last=Simon|first=Julian Lincoln|title=The Ultimate Resource 2|url=https://books.google.com/books?id=wVyDwYqq5fMC&pg=PP1|year=1996|publisher=Princeton University Press|isbn=978-0-691-00381-8}}</ref>

While Adam Smith emphasised production and income, [[David Ricardo]] (1817) focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw an inherent conflict between landowners on the one hand and labour and capital on the other. He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits. Ricardo was also the first to state and prove the principle of [[comparative advantage]], according to which each country should specialise in producing and exporting goods in that it has a lower ''relative'' cost of production, rather relying only on its own production.<ref>{{cite book |first=David |last=Ricardo |date=1817 |title=On the Principles of Political Economy and Taxation |publisher=John Murray|title-link=On the Principles of Political Economy and Taxation }}</ref> It has been termed a "fundamental analytical explanation" for [[gains from trade]].<ref>{{cite encyclopedia|author-link=Ronald Findlay |first=Ronald |last=Findlay |date=2008 |edition=2nd |editor-first1=Steven N. |editor-last1=Durlauf |editor-first2=Lawrence E. |editor-last2=Blume |chapter-url=http://www.dictionaryofeconomics.com/article?id=pde2008_C000254 |doi=10.1057/9780230226203.0274 |title=The New Palgrave Dictionary of Economics |pages=28–33 |isbn=978-0-333-78676-5 |chapter=Comparative advantage |publisher=Palgrave Macmillan UK |access-date=16 August 2010 |archive-date=11 October 2017 |archive-url=https://web.archive.org/web/20171011021521/http://www.dictionaryofeconomics.com/article?id=pde2008_C000254 |url-status=live }}</ref>

Coming at the end of the classical tradition, [[John Stuart Mill]] (1848) parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the market's two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene.<ref>{{cite book |last=Mill |first=John Stuart |date=1848 |title=Principles of Political Economy |publisher=John W. Parker Publisher|title-link=Principles of Political Economy }}</ref>

Value theory was important in classical theory. Smith wrote that the "real price of every thing&nbsp;... is the toil and trouble of acquiring it". Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.{{sfnp|Smith|1776|loc=Bk. 1, Ch. 5, 6}} Other classical economists presented variations on Smith, termed the '[[labour theory of value#The theory's development|labour theory of value]]'. Classical economics focused on the tendency of any market economy to settle in a final [[Steady-state economy#Concept of the stationary state in classical economics|stationary state]] made up of a constant stock of physical wealth (capital) and a constant population size.