The Classical Theory of Economics

The Classical Theory of Economics

  • Submitted By: callowe2
  • Date Submitted: 01/16/2009 6:27 AM
  • Category: Business
  • Words: 731
  • Page: 3
  • Views: 1

Throughout the 19th Century economists such as classical had an opinion that if governments had an input into the markets functioning, it would only upset the equilibrium. As a result they put forward different policies such as Laissez-Faire and a popular movement of a free trade market. They only saw it fit for the government to influence the market would be implementing a “sound finance” to maintain stable prices and increasing the marks efficacy. The theory hoped for a fully employed economy and for future times be in equilibrium. Any unemployment would be marginal.

The classical theory put forward out 3 main objectives-

1. Says law
2. Macroeconomic markets would adjust it-self automatically
3. Inflation

Says Law basically means “supply creates its own demand,” meaning sufficient demand for the goods to be sold, would be created by the production of the goods. The main pointers of the law are that if the firms produce more goods they would be entitled to pay workers more wages and money to other companies (raw materials) resulting in an increase of demand for output. If the way of demand alters e.g. from one industry to an alternative, wages could rise in the industry increasing and drastically drop in the falling. But this all depends on the different factors such as mobility of labour between locations and industries, also the wages flexibility. If Says Law is correct the key to success in the economy would be a rise in “aggregate supply.”
The macroeconomic market consists of labour, goods and money. It has been conveyed that flexible prices would guarantee in saving equal investments and that exports and imports would be equal. If the government was “prudent,” it would make taxation equal government expenditure which would lead to the “total injections” equalling total withdrawals keeping the equilibrium at macro level.
The classical economists analysed inflation by the “Quantity theory of Money.” This says that the quantity of money in the...

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