Classical Economic Theory

Thought of classical theory has brought major changes in the economic field. One of the thoughts of the classical theory is pioneering liberal economic system of thought. In the classical idea that the macro economy will grow when the economy driven by market. Role of government is limited to the problem of law enforcement, security and development to maintain infrastructure.

Thought of classical inspired "Washington consensus". Based on the "Washington consensus" government's role in the development focused on budget control, and the utilization/use of market power.


According to the "Washington consensus" (consisting of 10 macro-economic policy package), the role of government in development-oriented and should be limited to infrastructure development, health and education. Government intervention in the planning of development excessively feared cause "Government Failure", such as the excessive bureaucracy, corruption and so forth. Budget restrictions can reduce the deficit, because it will cause instability in the economy. Market power is used for developing an efficient market, free from monopoly, oligopoli, and external disekonomis. Therefore, government policies must be "Market Friendly".

Interest rate and foreign exchange rate must be determined by the market. Market price is considered as the actual price. Market is considered more efficient than the government's use of the economic sector, so that the economy will be optimized. Foreign trade will yield gains from trade, the flow of Foreign Dicert Investment will be more free to stimulate foreign investors to invest their funds, privatization of state-owned economy mengefisiensikan be considered. Therefore, the role of government is to deregulate. Here the emphasis the government to protect property rights.

IMF (International Monetary Funds) and the World Bank adopted a liberal trying to implement the "Washington consensus" as their bargaining power to the government of Indonesia. The Government of Indonesia on 12 Oct 2006 was effectively a loan to pay off all the IMF under the Extended Fund Facility scheme. Satisfaction of SDR 2,153,915,825, or its equivalent to U.S. $ 3,181,742,918 (USD / SDR = 1.47719) is the remainder of the loan should mature at the end of 2010. Loans settlement to the IMF will result in a loss of power to force the IMF "Washington consensus" to Indonesia. After loans settlement to the IMF, Indonesia is not obliged to follow more IMF's monitoring program, same with other countries that the macro economy is in good condition.

Liberal economic thought is based on the idea that the market itself know their needs better ,so that the government should not intervene in the market. Jean Baptiste Say (1767-1832) argued that "supply creates its own demand" so that there will be no surplus production. Adam Smith (1723-1790) have also argued that the "invisible hands" that will guide the individual to promote the interests of the community.

Could not be denied that globalization increasingly pushed by the fruit of classical thought. Free trade that has been defended by the classical try to break in the merchantilism and protectionist walls. Globalization makes the limit state becomes faded and widen market. Countries that have competitive advantages can enrich the economy. On the other hand, countries that are not ready in the face of competition in the global market will increasingly fall. Apart from the positive and negative sides of globalization, here every country must be prepared to have a competitive advantage.



Some of the classical economic such as Adam Smith (1723-1790), Thomas Robert Malthus (1766-1834), Jean Baptiste Say (1767-1832), David Ricardo (1772-1823), Johan Heinrich von Thunen (1780-1850), Nassau William Senior (1790-1864), Friedrich von Herman, John Stuart Mill (1806-1873) and John Elliot Cairnes (1824-1875) to obtain honor of Karl Marx (1818-1883) set up in keklasikan economic issues that are not obsolete kunjung . Unlike the Merchantilist and Physiocrats, the classic economic analysis focuses on the price theory. They try to complete the classic problems of economic research with the way demand and supply factors that determine price.

John Maynard Keynes (1883-1946) stated that the classical economic analysis focusing on the theory of the price, it is necessary to understand the direction of the perfect production tool. In this understanding classical economists assume the existence of unemployment is not a desired (involuntary Unemployment).

One of the results of the classical thought that influenced the world in the globalization era is thinking about international trade. Thought of the classical thought of merkantilis the only entrance to the noble metal and export-oriented minimize the import of goods from abroad.

The merkantilis laying emphasis on foreign trade. The physiokrat regard agriculture as a source of all prosperity. Adam Smith (1723-1790) as the classical express opinions in a book entitled "Inquiry into the Nature and Causes of the Wealth of Nations" that: "Employment is a nation that is financing the capital needs of the people that live in the home first, and with the results of this work can be purchased the needs of his life abroad." productive capacity of the work always increases because of the division of labor is the fundamental and tidy.

Adam Smith (1723-1790) explains the advantages of the division of labor with a sample needle factory. In the needle factory, a worker can make needle 20 a day. Results of Smith's visit to a factory which make division of labor, the 10 laborers can make 48,000 pieces needle, with the division of labor, there is worker that specialized for pull the wire, worker for cut, worker for sharpen, and other. Division of labor can improve the production of 20 needle per workers into 4800 needle per worker, in the other word, in this case division of labor, this method increase output 240 times.

The division of labor is often divided into the two, the first is to share the work to be simple so that all workers with a certain level of expertise can do the work. The second is a composite of the work of a share of production jobs into several parts. In its development, the concept of division of labor and continue to develop effective activities to work terspesialisasikan, and production activities in a more modern division of the labor happens belt system ("conveyor system").

Mass car production by Ford itself is also inspired from the concept of division of labor, so that production costs are cheaper. With the cost of production more efficient, the price offered can be more competitive with other products. While this concept of division of labor has been widely used in almost all industrial sectors.

Benefits of division of labor are:

1. Each person can do the work in accordance with their talent.


2. Can improve knowledge in the work so that more solid.


3. People are working on the same job on an ongoing basis so that they can avoid loss of time, this means more efficient.

Thinking about values by the classic still relevant to the development of the world at this time. For example in Indonesia, which has a problem in determining the selling price of some state-owned enterprise that is considered too low.

View of Adam Smith (1723-1790) on the concept of value can be divided into 2 and the value of the exchange rate. This raises paradok value, ie goods that have a value of (use value which is very high, such as water and air, but the exchange rate have a very low. In fact, it is said may not have any exchange rate. On the other hand, the value of goods that use less but can have a high exchange rate, such as diamonds. This new solved by the teachings of subjective value.

David Ricardo (1772-1823) state that goods has exchange value if it has function value.

Thus, the goods can be exchanged if the goods can be used. Someone will make something good, because it has the goods to the value needed by the people. Then David Ricardo (1772-1823) also make the difference between the goods and / or can be made in accordance with the willingness, on the other hand there are the limited goods or goods monopoly (such as paintings of renowned painter, antiquarian, the grape that is only grow on mountain slopes and so forth). In this case the goods are for the limited value is very subjective and relative willingness to pay in accordance with the prospective buyer's. While for the items that can be added by production in accordance with the wishes penukarannya based on the value of sacrifice that is required.

David Ricardo (1772-1823) revealed that the various difficulties arising from the academic value of work:

1. Please note the quality of work, quality of work is educated and not educated, the quality of work skills and so forth. The classical flow in this case does not take hours of work that is used for making goods, but the number of working hours and the normal operation is required to produce goods. Carey then from there and replace the value of academic work with the "theory of the cost of reproduction."


2. The difficulty that there is value in the workplace is that in addition to working much more productive services that assist the creation of goods that must be avoided. Then David Ricardo (1772-1823) states that a comparison between work and capital used in production may dikarakan fixed magnitude and only very few changes.

On the basis of the value of work, be on the side of the "natural price" (natural price) there are "market price" (market price). According to the classical (Adam Smith) "natural price" will occur when each of the residents have freedom of choice to create a product which according to him a more profitable and change when assessed by both. This is in line with the views of physiokrat. The term "natural price" (natural price) that is presented Smith with the same term Cantillon "valeur intrinsique" (intrinsic value), Turgot "valeur fondamental" (basic price), Say "prix Reel" (real price), Ricardo "primery / natural / necessary price "(price subject) and Cairnes" normal price "(normal price).

"Market price" could be different from the "natural price" in which the state will adjust the supply and demand on the goods concerned. Similarly, on the basis of certain considerations, the government regulations that may inhibit price adjustments with the natural market price. But anyway, the price will be the natural reference (guidelines) for the determination of market price.

Before Adam Smith wrote his book The Wealth of Nations (1776), Adam Smith has been writing science of economic philosophy in the year 1759, entitled "The Moral Sentiments." Like the physiokrat, Adam Smith thought that the interests of society and individuals have a natural harmony in which This agreement was created by the "invisible hands."

Meanwhile, in the book The Wealth of Nations, Adam Smith, among others, writing that "the nature and causes of the wealth of nations is what is properly called political economy" and just explain what the goal should be economic.



After Adam Smith describes the division of labor, exchange of goods, and money as a tool to promote the exchange of goods, to provide further analysis of symptoms and value price. There are three components, namely wage rates, land rent and profit. Work that is the size and price. Adam Smith distinguishes between working and productive work that is not productive. Work is productive work that produce physical goods and the real work that is not productive work that does not produce real physical goods. Assessed the importance of saving as well as obligations and as a good bread to have become the main religious. In this Leautaud Paul defines the store "l'Economie c'est l'art de ne pas vivre."

Adam Smith opinion about land rent is one of the factors that set the price. Then also raised that the land rent is due and not because of the high price of agricultural products.

Adam Smith did not make the difference between interest and hit the capital. Meanwhile, Jean Baptiste Say (1767-1832) share the "profit de l'industrie de l'entrepreneur" (the return):

1. Wages submit their property for industrial purposes (so the capitalist), penggatian "capitaux service."


2. Wages for the land owners for the "service foncier."


3. Replacement for the "industrial service" earned by the production process.

David Ricardo (1772-1823) states that the distribution of income is a matter of important public matter of economics. Physiokrat explain if the land is on lease as the productive capacity of land, while according to Ricardo (1772-1823) ground rent arising from the limitations (lack of) land. Theory of land rent Ricardo (1772-1823) known as the "Land Rent Theory differential" theory states that at this early stage, people will use the land that is fertile, and because keterbatasannya then will use the land less fertile. Each has a ground rent that is different. Land rent is the compensation that must be paid to the landowners for the use of "original and indestructible powers of the soil."

Meanwhile, Johan Heinrich von Thunen (1780-1850) states the difference between high-low land rent due to differences in location of the sales market. The close location of the land market with the resulting product will then press / to reduce the cost of transport products to market. As a result, land rent is relatively higher than the land that is located further from the market.

About poverty, David Ricardo (1772-1823) and Thomas Robert Malthus (1766-1834) revealed that the poverty population is due to "own fault" because it does not form a small family. This is seen as the resistance of the laws of the poor (poor law) that was valid in the UK. According to Ricardo (1772-1823) law tersebit will not fix poverty, only to reduce the prosperity of the poor and the rich both. This mainly arises from the theory of "wage fund" that had been diketengahkan by Cantillon, Turgot and Smith.

According to this theory of labor demand will depend on funds from the wage terakumulasi, rather than "funds which are destined for the payment of wages" which dihematkan, and each amount of money paid to that one, by itself reduced than the other. That is that the assistance to the poor is the wage disadvantage of funds, so the wage-wage work more.

According to William Nasau Senior magnitude average wage, depending on the comparison between the amount provided for the payment of wages, and the number of workers, in this there are also similar in Stuart Mill. However, the wages fund theory, this is a repetition of words that do not mean that there is no other than the cited case, that the wages of the average wage is the same as the fund, divided by the number of workers and the wage fund that can be known from the time the average wage with the number of people hired. If Ricardo (1772-1823) said that in the case of agriculture, mining and industrial production, the goods exchanged in comparison the amount of work, which is used to pembuatannya in marginal circumstances, the profit can now dipandangnya as a reward, though he does not put much attention to the this residue. Summary prognosis Ricardo (1772-1823) about the division of public revenue can be defined "rent increase, profit down, while wages remain."

About profit, so the decrease is a decreasing tendency, to be greeted by Marx (1818-1883) with the statement that is considered as evidence to explain the downfall capitalism. Meanwhile, according to Keynes rather use it to show the need for political konjungtur (Bussiness cycle) specific. Whereas for Ricardo (1772-1823) explained that the just-the first or early in the new opinion (Experiment) will be the first premium, while the latter will get the part, which is relatively small. This is in line with the theoretical advantage of the dynamic introduce by Joseph Schumpeter.

On the basis of the classical ideas about the profit decline, the country west-race competition for the "selling" the invention of and willing to pay for the research. For Indonesia alone, research is seen as a cost that will be useless terbuang, so that Indonesia continues to lag because it did not get the premium and be the first to obtain only a small part of production on the old technology products.

Trade issues have become important since the era filusuf make a trade if that morally acceptable or not. The merkantilis the trade even though the image still have a noble metal into a country (export oriented). They tried to explain the classical benefits of international trade cooperation.

Adam Smith started submitting absolute advantage theory (absolute advantage), while David Ricardo put improve the comparative advantage theory (comparative advantage). Unlike the opinion that Smith will make a profitable trade when a country's goods trade, which is absolutely menguntungkannya. Ricardo argued that a country will benefit from trade because each party to take efficient relative energy of each.

International trade theory by David Ricardo (1772-1823) which began with the supposition that the exchange of international traffic are valid only between two countries that between them there is no customs office wall, and the two countries is only gold money circulating. Ricardo (1772-1823) using the law of marketing together with the quantity theory of money to develop the theory of international trade. Although the country has a superior aboslut, but when the trade will be beneficial for both countries that do trade.

Trade theory has changed the world toward globalization with more quickly. If the first country that has the benefits of absolute reluctant to trade, thanks to "law of comparative costs" of Ricardo (1772-1823), English began to back the perdagangannya with other countries.

Thought has the classic diadakannya encourage free trade agreements between some countries. Theory of comparative advantage has become a dynamic comparative advantage states that comparative advantage can be created. Therefore, control of technology and hard work into success factors of a country. For the state of the technology will increasingly benefit from the presence of free trade, while countries that rely solely on the natural wealth will be lost in international competition.

Globalization is no longer avoided. How does not want, should be ready to face. Wrong government policies will make Indonesia fall. The control of technology and human resources development must be considered.



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