An analysis of the classical theory of macroeconomics

Macroeconomic analyses the behaviour of the whole economic system in totality or entirety. In other words, macroeconomic studies the behaviour of the large aggregates such as total employment, the national product or income, the general price level of the economy.

History[ edit ] The classical economists produced their "magnificent dynamics" [3] during a period in which capitalism was emerging from feudalism and in which the Industrial Revolution was leading to vast changes in society. These changes raised the question of how a society could be organized around a system in which every individual sought his or her own monetary gain.

Classical political economy is popularly associated with the idea that free markets can regulate themselves. Smith saw this income as produced by labour, land, and capital.

With property rights to land and capital held by individuals, the national income is divided up between labourers, landlords, and capitalists in the form of wagesrentand interest or profits. Their ideas became economic orthodoxy in the period ca.

Henry George is sometimes known as the last classical economist or as a bridge. The economist Mason Gaffney documented original sources that appear to confirm his thesis arguing that neoclassical economics arose as a concerted effort to suppress the ideas of classical economics and those of Henry George in particular.

Other ideas have either disappeared from neoclassical discourse or been replaced by Keynesian economics in the Keynesian Revolution and neoclassical synthesis. Some classical ideas are represented in various schools of heterodox economicsnotably Georgism and Marxian economics — Marx and Henry George being contemporaries of classical economists — and Austrian economicswhich split from neoclassical economics in the late 19th century.

In the midth century, a renewed interest in classical economics gave rise to the neo-Ricardian school and its offshoots. Classical theories of growth and development[ edit ] Analyzing the growth in the wealth of nations and advocating policies to promote such growth was a major focus of most classical economists.

However, John Stuart Mill believed that a future stationary state of a constant population size and a constant stock of capital was both inevitable, necessary and desirable for mankind to achieve.

This is now known as a steady-state economy. In political economics, value usually refers to the value of exchange, which is separate from the price. Market prices are jostled by many transient influences that are difficult to theorize about at any abstract level.

Natural prices, according to Petty, Smith, and Ricardo, for example, capture systematic and persistent forces operating at a point in time.

Market prices always tend toward natural prices in a process that Smith described as somewhat similar to gravitational attraction. The theory of what determined natural prices varied within the Classical school. Petty tried to develop a par between land and labour and had what might be called a land-and-labour theory of value.

Smith confined the labour theory of value to a mythical pre-capitalist past. Others may interpret Smith to have believed in value as derived from labour. Ricardo also had what might be described as a cost of production theory of value.

He criticized Smith for describing rent as price-determining, instead of price-determined, and saw the labour theory of value as a good approximation. Some historians of economic thought, in particular, Sraffian economists, [14] [15] see the classical theory of prices as determined from three givens: From these givens, one can rigorously derive a theory of value.

But neither Ricardo nor Marx, the most rigorous investigators of the theory of value during the Classical period, developed this theory fully. Those who reconstruct the theory of value in this manner see the determinants of natural prices as being explained by the Classical economists from within the theory of economics, albeit at a lower level of abstraction.

For example, the theory of wages was closely connected to the theory of population. The Classical economists took the theory of the determinants of the level and growth of population as part of Political Economy.

Since then, the theory of population has been seen as part of Demography. In contrast to the Classical theory, the determinants of the neoclassical theory value: Classical economics tended to stress the benefits of trade.

Its theory of value was largely displaced by marginalist schools of thought which sees " use value " as deriving from the marginal utility that consumers finds in a good, and " exchange value " i. Ironically, considering the attachment of many classical economists to the free market, the largest school of economic thought that still adheres to classical form is the Marxian school.

Monetary theory[ edit ] British classical economists in the 19th century had a well-developed controversy between the Banking and the Currency School.

This parallels recent debates between proponents of the theory of endogeneous moneysuch as Nicholas Kaldorand monetaristssuch as Milton Friedman.

• What is 'Classical Economics'?
• Classical economics - Wikipedia
• The Classical Theory

Monetarists and members of the currency school argued that banks can and should control the supply of money. According to their theories, inflation is caused by banks issuing an excessive supply of money.

According to proponents of the theory of endogenous moneythe supply of money automatically adjusts to the demand, and banks can only control the terms e. Debates on the definition[ edit ] The theory of value is currently a contested subject.

One issue is whether classical economics is a forerunner of neoclassical economics or a school of thought that had a distinct theory of value, distribution, and growth. The period —75 is a timeframe of significant debate. Karl Marx originally coined the term "classical economics" to refer to Ricardian economics — the economics of David Ricardo and James Mill and their predecessors — but usage was subsequently extended to include the followers of Ricardo.Chapter Classical Business Cycle Analysis: Market-Clearing Macroeconomics Cheng Chen SEF of HKU November 2, Chen, C.

(SEF of HKU) ECON/ Intermediate Macroeconomics November 2, 1 / Analysis of the process of economic growth was a central feature of the work of the English classical economists, as represented chiefly by Adam Smith, Thomas Malthus and David Ricardo.

Keynes’s theory made a genuine break from the neo-classical economics and produced such a fundamental and drastic change in economic thinking that his macroeconomic analysis has earned the names “Keynesian Revolution” and “New Economics”.

Classical economics or classical political economy is a school of thought in economics that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century.

Its main thinkers are held to be Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert Malthus, and John Stuart Mill. Classical economics or classical political economy is a school of thought in economics that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century.

Its main thinkers are held to be Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert Malthus, and John Stuart Mill. Chapter 2 The Classical Model of the Macroeconomy 3 prosperity are doomed to failure according to the classical analysis.

At best, government which resides in the private sector and is powered by the incentives of private property and competitive markets. This classical theory of limited government effectiveness, reinforced by abuses of.