Classical Theory

The Classical Theory
          As we learned, “The father of economics”, Adams Smith’s explanations of national economic living standards became known as the Classical Theory. In the 18th and 19th century, economies have developed really fast. Besides of that, so many theories have been discussed to explain changing circumstance. Classical theory held the balance of power in economic circles, but it began to lose it at the time of the Great Depression of the 1930s. Classical theory had difficulty in explaining why the depression kept getting worse, and it pushed the birth of Keynesian Theory.
          How to define the Classical Theory? What is the context of it? The term “Classical” refers to work done by a group of economists in the 18th and 19th century. Classical economists were not renowned for being happy, optimistic bunch of economists. Some believed that population growth would be too rapid for the resources available. If this was not enough to depress the rate of long-term growth then slow down would cause more problems for growth. They thought that the government should not intervene to try to correct this as it would only make things worse and so the only way to encourage growth was to allow free trade and free market. This approach is known as a ‘laissez-faire’ approach. Essentially this approach places total reliance on markets and anything that prevent markets clearing properly should be done away with.
        Much of Adam Smith's early work was on this theme, and he introduced the notion of an invisible hand that guided economic activity and led to the optimum equilibrium. Many people see him as the founding father of modern economics.
          Smith’s principles were modified by Jean-Baptiste Say. He believed that supply creates its own demand. If people produce more, they will spend more funds and require more work forces to produce. People make more money, so they consume more goods and save more money to support business investment....