The classical school of political economy emerged in the period of origin and approval of the capitalist mode of production. The foundations of market economic relations developed further in the world’s wealthiest countries. It became evident that state intervention in economic activities was not a panacea for overcoming obstacles to achieving coherence in the relations between financial entities in both domestic and foreign markets. At the same time, mercantilism, which studied the problems of circulation, gives way to the classical school, which transferred research to the sphere of production. Classical economists have laid the foundation of the political economy and have had a significant influence on the main directions of further development of economic science.
The theory of the Scottish economist Adam Smith (1723-1790) is rightly considered to be the pinnacle of the classical school. The rationale for free trade Smith complements with the theory of absolute advantage. According to this theory, each country, by its acquired capabilities, has an absolute advantage regarding the cost of the production of certain goods (Smith, 1937).
International markets, as well as domestic markets, are dominated by the division of labor and the specialization of countries in the production of goods for which they have an absolute advantage. International trade should, according to Smith, be based on the use of priorities that can be realized in the course of free exchange in global markets.
The economic doctrines of David Ricardo (1772-1823) were due not only to the inner logic of the development of economic thought, but also the situation in the British economy, which was undergoing the industrial revolution. Scientific works of Ricardo reflected the orientation of his economic theory on the consistent observance of the principle of “laissez-faire,” which implies freedom of entrepreneurship and non-interference of the state in economic life.
According to Ricardo, the wealth of society is created in the sphere of production and embodied in its products (Ruffin, 2002). The main task of political economy is to determine the laws that govern the distribution of created products, the disintegration of the aggregate and social product into wages, profits, and rents. Without refuting the structure of the types of income, proposed by A. Smith, Ricardo sees the task of political economy in justification of the distribution of income, which would stimulate the development of production.
D. Ricardo is the founder of the theory of comparative cost or comparative advantage. According to Ricardo, not absolute, but relative prices in the production of goods have a significant meaning. His examples consider two countries – Portugal and England, which produce two products – wine and cloth. There is only one factor of production in the Ricardo model, which is labor, so the production costs of the ditch are measured by labor costs (Ruffin, 2002). With all the assumptions related to the relativity of the example, Ricardo’s model of comparative advantages remains one of the most important achievements of classical economic theory to this day. Numerous empirical tests of the model have shown that world trade is based on comparative (rather than absolute) productivity advantages in the creation of goods.
The advantages that can be offered by internationalization were explained by the theory of comparative advantages of David Ricardo, which later was adapted for companies with the help of the method of production factors. The major leap in technological development in the 1960s, coupled with the significant emergence of transnational corporations, gave impetus to specialists for developing new theoretical foundations that could explain the changes in international trade.
One of these foundations was the theory of the product lifecycle, which was developed by Raymond Vernon. His work can be considered as a unified theory that explores the problem of transnational companies ‘ development while proving that trade flows are directly related to international trade (Ruffin, 2002). Thus, Ricardo’s theory became the basis for functioning and improvement of modern economic systems.
Smith, A. (1937). The Wealth of Nations. Modern Library. New York, 423.
Ruffin, R. (2002). David Ricardo’s discovery of comparative advantage. History of political economy, 34(4), 727-748.