An overview of classical economic theory

The chapter presents an overview of classical economic theory, which no modern economist is taught or knows the slightest thing about. Classical theory was based on a supply-side perspective that revolved around the role of the entrepreneur, not solely as an innovator, but as a manager of an enterprise. Entrepreneurial activity was based on seeking to produce what others will buy at prices that covered production costs. Entrepreneurs had to be almost entirely left to make decisions for themselves without being overburdened by government regulations and onerous taxation. The classical theory of the cycle recognized the cause of recessions as a dislocation in the structure of production, usually brought on by problems that arose as part of the credit-creation system. Public spending to “create jobs†was recognized as a non-solution, only diverting productive activity into areas in which the capital put in place would not repay their costs of production. The chapter brings together the most important features of the classical theory of growth and employment, and contrasts these with modern macroeconomic theory.