Classical economics is one of the main theories of economics, besides Keynesian economics, although classical economics is considered the first school of thought in economics, probably only due to timing. Although others have contributed ideas and theories to the classical school of thought, Adam Smith is the person behind the Classical economics school of thought. The Classical economics theory teaches and is based on the idea that the economy can stabilize and run effectively on its own, without any type of assistance. There are three basic assumptions of Classical Economists theories. One is that all prices must be susceptible to flexibility downward just as easily as upward. This is proven not to be the case for downward prices because of factors such as laws or unions. Another assumption is what is called, “Say’s Law”. This law preaches that “supply creates its own demand”. However, this is also proven to not work effectively because in most economies today production is based on demand not the other way around. The third assumption is that the savings of every consumer should match their investment. This, we all know from experience, not to be the case. Classical economics believes the economy is a type of self- correcting mechanism and needs no assistance or intervention to function effectively. Unemployment in an economy is considered to be a temporary disequilibrium due to excess labor at the current wage rate. Also, whenever wages are high, Classical economics points out that there are always more people willing to work at that ongoing rate and this is what they name as unemployment. Furthermore, if the economy is a Classical one, wages are perfectly flexible, so this would cause the wage rate to fall. This would, in turn, rid the excess labor available and reduce the unemployment back to equilibrium levels. This is how Classical economics believes an economy is the perfect solution. It relies on the idea that employers will...
Please join StudyMode to read the full document