Classical Macroeconomics Analysis

Classical Macroeconomics

This phase of Macroeconomic history started with the book entitled “An Inquiry into the Nature and Causes of the Wealth of Nations” written by Adam Smith in 1776. (Smith, 1904) Working of the economy was presented by the classical economists like Smith, Ricardo, Say, and Marshal etc. According to the classical economists, “Supply creates its own demand.” It means that whatever is produced in the economy is sold. So, there is no question of unemployment in a market. They also argued that savings is always equal to investment. (Shahid, 2013)In short, they proved that there is always full employment in an economy based on the following:

1. Flexibility of prices;

2. Flexibility of rate of interest;

3. Flexibility of wages; and

4. Constancy of velocity of circulation of money (Shahid, 2013)

So, they believed that there was an inherent ability in the economy to reach the level of full employment and there was absolutely no need of government intervention in the economy. The economy must be let free to correct itself on its own. However, the Great Depression of 1930 brought forth an entirely new situation. Millions of people were wandering the streets of London and New York in search of jobs but there were no jobs.

Economists of each era responded to the requirements of their era and there is no true and false in their cases. Circumstances render one model better or worse than the other models. Both of the classical and Keynesian schools agreed that the economy is always at full employment but differed at the point where such a level of full employment takes place. Other schools differed on the basis of determinants of employment, focus on inflation, focus on growth, and etc. All the development in macroeconomics was guided and is still being guided by the circumstances prevailing in each period of