The Classical school is the school of economics founded by Adam Smith. Smith was primarily concerned with explaining the origins of wealth creation and with advocating the benefits of free trade. He achieved this by analysing the economic relationships between the classes: workers, who earn their living by wage labour; capitalists, who derive income from profits; and landlords, whose income derives from rent. Supply and demand in each class determined prices. David Ricardo extended this analysis, in particular elucidating the concept of value, which in the Classical school is seen as a product of labour. The labour theory of value was used by Karl Marx as a basis for his analysis of the capitalist economy and Marxists have remained firmly wedded to the Classical school. The Marginalists of the late 19th century overturned this thinking by defining value in relation to scarcity alone; this remains the basis of the neoclassical school. Research Classical School
In economics labour is a factor of production usually combined with land and capital to produce outputs. Economists of the Classical school and Marxists attach a special importance to labour as the prime mover of the production process, a view encapsulated in the labour theory of value. Economists of the neo-classical school view labour as simply one input among several, whose value is determined by supply and demand, in the same way as any other commodity.
The labour theory of value is the theory that the value of an item is dependent on the quantity of labour that is required to make it. First developed by Adam Smith, this theory was at the core of the Classical school of economics and has subsequently been the basis of Marxist economic theory. In practice, the theory has few useful applications and was superseded by the Marginalist theory of value, which associates the value of a good with its utility and its scarcity. Research Labour Theory of Value
Value is a word used in a number of senses. It is in current, use for both moral and economic degrees of appreciation. It is frequently confused with price, which is very similar, but the latter denotes a measure of value quoted in some acceptable medium of exchange, generally money. In economics, the theory of value is held to be the central doctrine of the science, but it has been so variously defined, and has been the subject of so much controversy, that its special importance has fallen into the background and its usefulness disputed. The labour theory of value, initiated by Sir William Petty, was developed by Locke and Adam Smith, and ultimately defined by Ricardo. The term labour as originally used was intended to cover all efforts and sacrifices involved in the production of goods, and with this qualification labour under primitive production accounted for and roughly measured the amount of value in any given object. It implied some utility and some scarcity, but looked predominantly to labour-cost of production as the chief constituent of value.
The surplus-value theory was originated by William Thompson, an Irish socialist, and the term surplus was used by Malthus in connexion with profits and rent. It waa the product of the factory system, which appropriated the term labour to the hand-work of the wage-earning classes. It was a perversion of the labour value theory of Ricardo, asserting that the revenues accruing in rent, interest, and profits were obtained by exploiting the labour of the poor, who were the sole creators of value.
The demand theories of value envisage the problem from the side of the buyer rather than of the producer. The English school (Jevons and Marshall) took a common-sense but not scientific view, that value was determined by final or marginal utility - that is to say, the desirability of the last object of a series sold to a last remaining buyer in the given market at a given price. This theory is descriptive but not explanatory. As Cassel has pointed out, the term marginal utility itself is a mistaken attempt to combine in one expression the two incompatible ideas of scarcity and desirability, the latter being a quality of the object in question, the former an outside circumstance. The Austrian school of economists have carried the analysis of the mental attitude of the buyer to an extreme point.
Micro-economic theory shows that in a well-functioning market system, the price of an item reflects the value of the last unit sold and bought. Value added by a firm is that part of the gross value of its output that has been created by the firm in question. In other words, it represents revenue minus the input costs of raw materials, bought-in services, and semi-finished items. *Vertical Integration
Vertical integration is an industrial structure involving unified ownership or control of two or more stages of production. Complete vertical integration means that a company controls a production process from start to finish: from the extraction of raw materials to the final retail sale. Vertical integration may be achieved through organicgrowth, or through merger or take-over. There may be significant economies of scale from vertical integration, but it may also lead to monopoly power. Well- known historical examples of vertically integrated firms were the major multinational oil companies such as BP, Exxon, and Shell, before the 'OPEC' revolution of 1973 to 1974 deprived them of control over major sources of crude oil.
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Abbreviations
Research Classical School
