Classical Theory Vs Classical Economics

In the world of economics, before the Great Depression, there was only a single idea of capitalism which was known as classical theory. It is to believe that the steps to developing the idea of classical economics started with Adam Smith’s book, “An Inquiry into the Causes of the Wealth of a Nation.” One of the ideas of the book was the concept of the economy being controlled by “an invisible hand.” Classical theory is a idea in which the market is at its most efficient when the government does not interfere, following the term “laissez faire,” He preached that government need only preserve law and order, enforce justice, defend the nation, and provide for a few basic services that could not be met through the market.(serrano) This allowed

Say was one agreed with what Adam Smith except for the labor theory of value. Say’s law was an idea Say introduced in his work called, A Treatise on Political Economy. In his work he writes,“As each of us can only purchase the productions of others with his own productions - as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.” The work depicted that the Aggregate supply is required in order to produce an aggregate demand. To classicalist, this law seems viable, as the consumers would never buy a product this is not in their self interest, nor would they buy a product that is nonexistent. he argue further on to say that in a short term development of supply and demand, supply can never overpower demand. This Idea is what keynesians would normally attack, for it was found false by the lack of demand created for businesses during the Great

In a mathematical equation, it appears as Ep=C+Ip+G+NX. This is known, as the keynesian cross, for it used to define the intersection between the planned expenditures and the equilibrium(defined as income being equivalent to expenditures). If the planned expenditure fail to reach equilibrium, then the producers are suffering from a shortage of goods and services, or if the planned expenditures exceeds equilibrium, then there is a surplus. The problem with this equation is when to remove the government in order to stop the purchasing of unnecessary goods. Because of the now implemented reliance on the government, if they were to remove themselves from the company, then the supplies required to create equilibrium would slowly regress back to it status prior from the government