We’re living through a troubling political moment when leaders from opposite ends of the ideological spectrum appear bent on ignoring the fundamental teachings of classical economics. Specifically, during his second term, the Trump Administration has pressed ahead with reckless tariff policies, strained long-time alliances, toyed with talk of territorial expansion, and undermined the rule of law. At this point, America is governed by an administration comprised of nihilists, lotus eaters, and social media-obsessed shit posters, making policy decisions based on viral appeal. To make matters worse, that catastrophe was preceded by the Biden Administration’s reckless “post-neoliberal” policies—broad emergency powers during the pandemic, unnecessary handouts to middle- and upper-income households, and centrally planned industrial policy around green energy and microprocessors—which amounted to government regulatory overreach, ballooning deficits, and severe inflation. Together, these dangerous strains of American politics have turned away from a key pillar of liberal democratic capitalism—its intellectual grounding in the teachings of classical economics.
Before we dismantle the national and international laws, institutions, and norms that have long promoted freedom and prosperity, we ought to remember G. K. Chesterton’s famous “Fence” metaphor: when faced with a gate across a road, don’t tear it down simply because you fail to see its use. Understand first why it was built. Clearly, the “fence” here is classical economics, the bedrock of liberal democratic capitalism. Based on the teachings of classical economics, liberal democratic capitalism facilitated an economic miracle often called the Great Enrichment—unprecedented gains in wealth and living standards unleashed in much of the West. The lessons of books like Why Nations Fail and How the World Became Rich reinforce this point, revealing how nations embracing liberal democratic capitalism generally outpaced their illiberal peers. Despite overreactions on both the left and the right to short-run economic conditions, Western economies remain fundamentally strong: The Economist’s recent ranking of the world’s richest countries underscores that, outside of a few oil enclaves in the Persian Gulf, the most prosperous remain liberal democracies integrated into the global market. Yet, from President Trump’s punitive tariffs to President Biden’s top-down industrial programs, too many major policy decisions amount to a dangerous assault on the cornerstones of classical economics—international trade, the rule of law, and limited but purposeful government.
Classical Foundations
Classical economics rests on a simple premise: freedom in economic life leads to spur greater prosperity than the heavy-handed control of the state. In times past, this premise functioned as a boundary that kept political discourse from drifting into zero-sum thinking—precisely the mindset behind mercantilist hoarding, central planning, and populist attempts at “national greatness” that, ironically, only serve to destroy national prosperity.1
Classical economics took root in the late eighteenth and early nineteenth centuries, reflecting major shifts in production and overseas trade that ignited rapid economic expansion in England, Holland, and the Americas. Historians often debate whether theories shape historical events or if events themselves influence the development of theories. It’s almost certainly the latter when it comes to classical economics. Thinkers like Adam Smith, David Ricardo, and John Stuart Mill—who were more akin to social scientists than pure philosophers—observed the world around them and pondered issues such as value creation, prices, the proper role of government, and the nature of money. Their ideas were frequently the result of inductive reasoning: observation, pattern recognition, hypothesis formation, and applied application/analysis, all of which was aimed at formulating theoretical rules that predict economic outcomes.
Expanding on classical foundations, the neoclassical economists of the nineteenth century—such as William Stanley Jevons and Alfred Marshall—brought greater quantitative precision and logical structure to the field, helping establish economics as a formal academic discipline.2
The Classical Vision of Government
Contrary to caricatures of “laissez-faire” anarchism, classical economics from Smith onward allowed for a significant but narrowly defined role for the state. Smith identified three core tasks: providing defense, administering justice, and managing public works that private actors wouldn’t or couldn’t maintain (infrastructure, roads, ports, and so forth). To finance those state functions, he also advocated a fair system of taxation, guided by what he called “four maxims” emphasizing predictability, proportionality, convenience, and efficiency.
Subsequent liberal-democratic thought expanded on those ideas to include aspects like representative governance, broader suffrage, and a framework of civil liberties. The point isn’t that government disappears—Smith never said that. Instead, classical thinkers insisted on limiting government’s interference in the daily operation of markets, since self-interested individuals usually drive more prosperity and innovation than any top-down instruction could deliver. By enforcing the rule of law, ensuring property rights, and keeping taxes and regulation within reason, a liberal-democratic state fosters a stable context where markets can flourish. As Smith wrote, little else is required for economic growth “but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.”3
Classical and neoclassical economics see the government as a referee of market competition, not an overbearing master. Smith’s Book V laid out how a liberal-democratic government can tax equitably, enforce contracts, foster basic infrastructure, and keep the national defense strong—without meddling incessantly in trade or production decisions. However, state functions have to be limited. He describes the wealth of a society being in “unproductive hands” which includes civil and church administration and the military. Smith’s reference to these functions being “unproductive” was not a normative judgment as to their value; rather, Smith indicates that wealth expended on unproductive uses does not add to a nation’s “stock” (i.e., capital). A government that consumes too much of the economy limits its growth potential.
That isn’t to say classical economics forbids taxes. Smith and his intellectual successors recognized the need for revenue to fund public goods—from roads to national defense—and to secure the rule of law. They simply demanded that these interventions avoid undermining the productive base of society. Overly complicated taxes that spark black markets or dampen business creation can yield less revenue than simpler, more predictable systems of taxation. Smith’s approach to analyzing taxation was groundbreaking in that he emphasized the importance of understanding the second- and third-order effects of tax policy. Smith devised a methodology for an optimum system of taxation based on four maxims: (I) Taxes should be proportionate to a taxpayer’s ability to pay or based upon the taxpayer’s revenue derived within the state, but that tax burden will vary between the three broad categories of taxation (in modern terms: income taxes, sales and excise taxes, and property taxes). (II) Taxes should be certain in that the taxpayer should be able to predict the tax liability of economic activity before engaging in it. (III) Payment of taxes should be rendered in the most convenient way for the taxpayer in order to ensure an efficient collection of revenue and to minimize any imposition on individual liberties. (IV) Taxes should not result in inefficient outcomes whether by discouraging economic activity that will ultimately lower potential tax revenues or allowing for tax administrative costs to exceed tax revenues (i.e., the costs of collection are more than the taxes collected).4
Historically, the approach to limited government helped Western democracies thrive. As the decades progressed, the explicit acceptance of some state intervention—like targeted public goods and basic welfare measures—didn’t negate the larger principle that free markets and personal liberty form the basis of a healthy political economy. This has not stopped politicians from conjuring “grand solutions,” be it utopian industrial policy or zero-sum tariffs, that ignore the complexity of markets, and the resilience of societies built on private property, contract enforcement, and open competition.
Collectivism vs. Individual Self-Interest
At heart, these ideological challenges from both the left and the right reflect a shared suspicion of individual freedom. Both impulses end up belittling personal initiative, which classical thought deemed essential. Self-interest, as Smith saw it, doesn’t mean raw selfishness. It means each person is motivated to improve his or her own situation, and in competitive markets, that impetus can elevate a community’s standard of living. Smith provided a comprehensive explanation for the importance of self-interest in economic behavior. In that sense Smith’s wide-ranging economic theory echoes his friend David Hume’s moral philosophy as it attempts to link human beings with how they are and not how they ought to be. The efficiencies gained by the division of labor are a result of human nature’s “propensity to truck, barter, and exchange one thing for another.” Smith does not rule out that humans can act with “benevolence” (which is consistent upon the emphasis he places on “sympathy” as the driver of morality described in his book The Theory of Moral Sentiments (1759)). However, Smith points out that reliance on the benevolence of others is unlikely to be a successful life strategy for most individuals: “But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour…” Finally, beyond the division of labor, principles of self-interest favor parsimony, i.e. prudent decisions by individuals to preserve and re-invest capital (Book II, chapter 3).5
In sum, the classical economists believed private ambition yielded public enrichment. I think this is best described by Carl F. Christ in his discussion of optimizing resource allocation which places profit-seeking individuals at the center of market dynamics:
Because of freedom of contract, no person is forced to accept a material position that he thinks is inferior to the one that his original property will provide for him. If anyone can produce property that he regards as more valuable than the resources he consumes in the process, then he can gain from production. And if he can find other people who will give him in trade things that he regards as more valuable than the things he gives up in return, then he can gain from exchange.6
Still, similar to Smith and Christ, F. A. Hayek put self-interested individuals at the center of the societal benefits of free markets:
[A]lthough the spontaneous order was not created for any particular individual objective, and in this sense cannot be said to serve a particular concrete objective, it can nonetheless contribute to the realization of a number of individual objectives which no one knows in their totality. Rational, successful action by an individual is possible only in a world that is to some extent orderly; and it obviously makes sense to try to create conditions under which any randomly selected individual has prospects of pursuing his goals as effectively as possible, even if we cannot predict which particular individuals will benefit thereby and which will not.
While “spontaneous order” sounds like it echoes Smith’s “invisible hand,” note that there is a clear discrepancy between Smith’s ideas about how natural and market prices are derived, and the information-laden prices described by Hayek.7
Letting individuals make choices for themselves doesn’t degrade society; it can, in fact, unleash creativity, productivity, and the kind of intangible cultural innovation that thrives in a free environment. The state, in turn, preserves the conditions of this freedom: property rights, transparent laws, impartial courts.
Free Trade as a Pillar of Progress
Classical economists emerged partly in response to the prevailing mercantilist policies of the seventeenth and early eighteenth centuries, which prioritized hoarding gold and silver and heavily regulating trade. Mercantilism makes sense at an intuitive level—much like Biden’s industrial policy to build domestic semiconductor production, and Trump’s tariff regime aimed at increasing domestic employment in export-driven industries. However, the problem with economics is that often intuition is misleading. In an age before aggregations of economic statistics and data analysis, the classical economists considered long-term impacts, second order effects, and potential hidden benefits and costs.
The Scottish Enlightenment thinker David Hume was a critic of mercantilism. In Essays Moral, Political, Literary, Hume contends that mercantilism, if successful, can only offer a short-run benefit. Trade surpluses bring in precious metals, which drive up domestic prices, and then make exports less competitive while imports are more affordable and appealing—automatically correcting the imbalance over time. In other words, the influx of gold or silver (or “specie”) from exports gives an initial boost to a country’s money supply which, in turn, stimulates economic activity. However, Hume thought that the inevitable outcome of increased economic activity was higher prices rather than sustained growth. The rise in the price level makes exported goods more expensive and imported goods more affordable. Hume’s overarching lesson is that trying to manipulate trade or hoard specie is ultimately futile: markets adjust on their own, and no single country can sustain a favorable balance of trade forever.8
Anyone with passing familiarity with economics will not be surprised that Adam Smith’s work is at the center of these concepts. The Wealth of Nations is best-known for Smith’s division-of-labor principle which identifies the efficiencies gained through labor specialization. Smith applies the same principle to global trade, stressing that countries benefit most by specializing in goods where they have a natural or developed advantage. In Book IV, chapters 1–2, he critiques mercantilist policies fixated on amassing precious metals, revealing how tariffs and restrictions stifle mutually beneficial exchange. In chapters 3–5, Smith shows real wealth comes from production rather than bullion, condemns artificial trade barriers like bounties that distort market signals, and warns how protective measures undercut a nation’s long-term prosperity. Finally, in Chapter 8’s conclusion on the mercantile system, he underscores that these interventions undermine the very gains of trade they aim to preserve. Smith’s famous example of grape-growing in Scotland—technically feasible but at thirty times the usual expense—illustrates the “manifest absurdity” of producing at home what can be imported more cheaply. Just as one artisan trades with another rather than making everything himself, a nation should buy from foreign producers who possess cost or skill advantages. Overinvesting capital and labor in inferior production methods is wasteful, whereas freer trade amplifies each country’s strengths and ultimately promotes greater overall wealth.9
Note that while Adam Smith’s insight into specialization and trade was groundbreaking, he did not address several complexities that later economists would emphasize. Most notably, he focused on absolute rather than comparative advantage, a concept that David Ricardo would later formalize to explain trade’s deeper mutual gains.
In his book On the Principles of Political Economy and Taxation, David Ricardo advanced Adam Smith’s exploration of trade by showing that economic exchange between regions or nations does not depend solely on absolute advantages in production. Smith’s famed example of growing grapes in Scotland illustrates only a situation in which one area is better at producing one good while another area is better at producing another. Ricardo’s key innovation, the theory of comparative costs, explains that trade can be profitable even if one country is more efficient at producing every good—what matters is whether the relative (or “comparative”) costs of goods differ between countries. This insight builds on Ricardo’s recognition that his “labor theory of value” does not apply when labor and capital are unable to move freely across borders. Under such conditions, even if one nation is superior at producing both goods, it still benefits from specializing in whichever good it produces with the greatest efficiency, leaving its trading partner to specialize in the other.10
By highlighting that the opportunity cost of producing one good rather than another can vary among countries, Ricardo demonstrated how comparative advantage underpins cross-border exchange. For example, even if England excels at producing both wheat and wine relative to France, England should allocate its resources to wheat if its comparative edge in that product is larger, leaving wine production to France. In the aggregate both nations lower production costs and raise total output. Subsequent refinements—particularly the theory of opportunity costs—continue to rest on this logic.
The neoclassical school, emerging in the late nineteenth century with thinkers like William Stanley Jevons and Alfred Marshall, refined classical economics by introducing more rigorous mathematical models and focusing on marginal analysis. Where Smith and Ricardo used broad, inductive reasoning, the neoclassicists developed precise theories of supply, demand, and how market equilibria form. Marshall’s offer-curve diagrams, for instance, clarified how reciprocal demand between nations sets the terms of trade. By reducing big-picture questions—like how two countries might exchange wine and wheat—into formal models, neoclassical economics strengthened the case that trade, grounded in comparative cost advantages, benefits all parties.
Historically, in the wake of the Great Depression and World War II, the US-led postwar global system carried these classical ideals forward on an international scale. Democratic elections, limited government, trade treaties, open markets, and cooperative economic policies turned out to be powerful catalysts for economic growth. The postwar liberal democratic order continued the Great Enrichment at scale because, by and large, it allowed for capital and labor flow to their most productive uses—realizing the insights of Smith, Ricardo, and their peers. Indeed, if we look at global poverty rates, life expectancy, and standards of living over the last seventy-five years, the results are astounding.
This does not mean real-world international trade is cost-free. Classical economists often underestimated the adjustment pains—unemployment in sectors losing out to cheaper imports, short-term disruptions in local markets, or the political backlash that arises when voters feel overlooked. That’s part of capitalism’s creative destruction—no one ever claimed it was a perfect system. While government programs can mitigate the hardships facing its citizens, they must not step in to avert routine bankruptcies, closures, or relocations.
Furthermore, the whims of democracy may also bring about unneeded interventions (which is why the state must be limited). To be sure, a country may wish to protect or subsidize an industry for strategic or political reasons. However, the proper way to view protectionism (tariffs, import bans, etc.) is that it’s directly and/or effectively a tax on its own citizens, and subsidizing industries through “industry policy” amounts not only to a tax, but also to private inurement for that industry’s managers and owners. Such rent-seeking behavior is corrosive to a country’s politics. Artificially inflating a domestic industry with protection or subsidies only succeeds until rising costs and shifts in exchange rates erode the advantage. In other words, short-run triumphs can lead to long-term malaise.
Reviving the Classical Vision for Our Time
This century has had no shortage of crises—9/11, the Financial Crisis, the Covid pandemic—and soon may face new ones arising out of economic downturns, environmental challenges, and geopolitical rivalries. It’s natural that voters support politicians who promise bold interventions. Yet if there’s one lesson classical economics taught us, it’s that governments tinker with fundamental market processes at their own peril. In many cases, the best tool remains upholding the liberal, rules-based order that fosters both domestic competition and global trade. The core insight of classical and neoclassical economics remains that human society functions best when individuals retain the liberty to innovate and trade, guided by stable institutions that protect rights and property. This logic stands in stark contrast to the collectivist or populist temptations of our era, which rely on heavy-handed directives, moral crusades, or ephemeral “strongman” fantasies.
A classical-liberal outlook encourages humility. It urges us to remember Chesterton’s Fence: there’s a reason we built international institutions, trade agreements, and a robust rule of law to anchor a global economic order. To nihilistic cynics, it might all sound like a naive defense of the status quo. Yet “status quo” in the historical sense means the system that ended up creating some of humanity’s greatest leaps in wealth and living standards—an outcome we should never dismiss.
Notes
- It is important to note classical economists were not the first thinkers to consider economic questions. Economic thought has its roots in ancient Greek philosophy, particularly Plato and Aristotle, who explored concepts like value and money but made no recognition of the economy as a system. Christian theologians in the High Middle Ages were heavily influenced by Aristotle. These Scholastic philosophers considered economic matters in terms of the individual rights and duties. For example, Saint Thomas Aquinas addressed real world issues such as what constitutes “just price” and what is considered usury. Later, Renaissance Europe faced new economic and societal paradigms with the development of nation-states which exerted more control over their territories, including early policy interventions through monopolies and protective tariffs. Additionally, the discovery of the New World in 1492 and the influx of precious metals into Spain caused all manner of new economic thinking. Pamphleteers advocated for specific economic policies to benefit trade interests. Eventually, mercantilism emerged as a predominant economic policy for emerging nation-states. This was a strategy for nation building, aimed at transforming medieval governance systems into centralized national governments. Mercantilism was primarily defined by policies aimed at maintaining a favorable balance of trade, enhancing national wealth by encouraging exports and limiting imports. The key measure was a nation-state’s level of bullion reserves. At its heart, mercantilism called for coordinated public-private relationships and significant state intervention in the economy through monopolies, patents, and tariffs to promote domestic industries. Nevertheless, pamphleteers and mercantilists took the first steps towards economic theory, offering early versions of the quantity theory of money (linking the money supply to price levels) and theorizing on the impact of taxes and interest rates on trade and commerce. ↩︎
- The neoclassical school and its marginal revolution deserve its own article on contributions made to liberal democratic capitalism. This essay will focus on the classical school and Marshall as a transition between the two schools. ↩︎
- Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Glasgow edition, ed. R. H. Campbell and A. S. Skinner (Oxford: Clarendon Press, 1976), Book I, Chapter 3. ↩︎
- Smith, Wealth of Nations, 825-828. ↩︎
- Smith, Wealth of Nations, Book I, Chapter 2, and Book II, Chapter 3. ↩︎
- Carl Christ “The Competitive Market and Optimal Allocative Efficiency” in Competing Philosophies in American Political Economics, ed. J. Elliott and J. Cownie, (Pacific Palisades, CA: Goodyear, 1975), 332-338. ↩︎
- Friedrich A. Hayek, “Competition as a Discovery Procedure,” The Quarterly Journal of Austrian Economics 5, no. 3 (2002): 9–23, trans. Marcellus S. Snow from Hayek (1968). ↩︎
- David Hume, “Of the Balance of Trade,” in Essays Moral, Political, Literary, ed. Eugene F. Miller (Indianapolis: Liberty Fund, 1987), 311–313. ↩︎
- Smith, Wealth of Nations, Book IV, Chapters 1-5 and Chapter 8. ↩︎
- David Ricardo, On the Principles of Political Economy and Taxation, (London: John Murray, 1817). ↩︎
