Classical political economy arose when business activity after trade, monetary and lending operations spread on many industries. Therefore, in the manufacturing period, which put forward capital of production in the economy, mercantilist protectionism ceded its dominant position to the new concept – the concept of economic liberalism, based on the principles of non-interference of the state in economic processes, unlimited freedom of business competition.
Mercantilism was the basis of the New Economic School in the late Middle Ages. Mercantilism is the teaching of French economists of the 18th century, the essence of which was the fact that the state should play an active role in the economic life of the country to promote the enrichment of the country and the king. Proponents of mercantilism (Thomas Mun, Antoine de Montchretien) proclaimed the need for active state intervention in the economy to fill the coffers. Considering the specifics of economic development in that period (the main indicator of the country’s wealth was the amount of gold) mercantilists encouraged exports and discouraged imports.
As a result of decomposition of mercantilism and strengthening of the growing trend of limiting direct government control over economic activity, pre-industrial conditions have lost their importance, while free private enterprise became prevailing. The latter, according to Paul Samuelson, led to the conditions of complete laissez-faire (i.e., the absolute non-interference of the state in business life). Events began to take a different turn and only in the end of the 19th century there was a steady expansion of the economic functions of the state in almost all countries.
According to the classical approach of the period, the state must ensure the safety of human life and resolve disputes, in other words, do what the individual is not capable of on their own. Smith argued that the striving of an entrepreneur to meet their particular interests is the main driving force of economic development, increasing in the end welfare of oneself, and a society as a whole. The essence of laissez-faire was the fact that all economic agents shall be guaranteed basic economic freedoms, in particular, freedom of choice of fields of activity, freedom of competition, and freedom of trade.
The principle of complete laissez-faire became the motto of the new direction of economic thought – classical political economy. Its representatives distinguished mercantilism and protectionist policy in the economy, putting forward an alternative vision of economic liberalism.
Classical political economy arose when business activity after trade, monetary and lending operations spread on many industries.