Answer to Question #26846 in Macroeconomics for Jennifer Marcos
Does David Ricardo belong to the classical (supply side) economics school of thought, and what are the basic ideas of the classical economics?
To date, David Ricardo is considered as the classical economist,who devoted his life to studying the issues of cost, capital, rent and money. He explained the new definition of the value of the product:it depends on the relative amount of labor required for its production.Ricardo distinguished between use and exchange value of a commodity. Ricardo would like to draw attention to the usefulness of competition among vendors, which regulates prices.He noted that the demand causes supply, which is growing as long as the buyer's not satisfied, and the price will reimburse the cost of production. Ricardo's theory of wages is based on the provisions of T. Malthus. He believed that the dynamics of the wages is due to the motion of the working population, which affects the supply of labor. Depending on the natural growth of the working population the demand and supply of labor are formed and, therefore, varies and wages. The main idea of the Classical school was that markets work best when they are left alone, and that there is nothing but the smallest role for government. The approach is firmly one of laissez-faire and a strong belief in the efficiency of free markets to generate economic development. Markets should be left to work because the price mechanism acts as a powerful 'invisible hand' to allocate resources to where they are best employed. In terms of explaining value, the focus of classical thinking was that it was determined mainly by scarcity and costs of production. In terms of the macro-economy, the Classical economists assumed that the economy would always return to full-employment level of real output through an automatical self-adjustment mechanism.