Controversies in Macroeconomics: (1) Classical Economists Views

Macroeconomics is in a state of flux. It is filled with controversy and disagreements. But contrary to much of the publicity in media and academic journals macro economists and policy makers don’t disagree about everything. There are fundamental principles with which virtually all macro economists agree. On the other hand there are certain areas of disagreements. This lack of agreement manifests itself in quite different policy recommendations. For a better understanding of their policy one should also know the theoretical framework from which he/she is speaking. The political ideology of the policy maker also affects the policy menu. Today there is no agreed upon model of the working of the macro economy. It is therefore essential to become an educated spectator and frame our own informed opinion after studying the theoretical debates of all major characters in the field.

Classical School:  In microeconomics especially in the theory of value the term ‘classical’ refers to writers such as Adam Smith, David Ricardo, Karl Marx who used largely labour theory of production or surplus labour theory. Classical economists believed that labour working upon natural resources produced annually certain amount of goods. The goods are either consumed or saved for future consumption. As such all items saved for future consumption can be treated as wealth which is past production from labour. Thus classical economists viewed labour as more significant measure of value than money. Money was considered by them as a veil covering the real process of production. Neo classical economists such as willaim Stanley Jevons, Carl Menger, Leon Walras later introduced the concept of Marginal. The marginalist theories of value and distribution were based on the principle of economic rationality. The marginal utility theory, The marginal productivity theory marginal revenue, marginal cost are such concepts which explained much of the consumers’ and producers’ behaviour in microeconomic theory.

Like in microeconomics the starting point must be ‘classical’ in macroeconomics. In macroeconomics the conventional meaning of the term classical was not adopted by J.M.Keynes. The fact was that before Keynes economists rarely analysed the problems at aggregate level because of their faith that the economy will self equilibrating and will restore equilibrium at full employment through the automatic forces. They believed that nothing could ever go wrong or at least go wrong for long. If there was a problem of involuntary unemployment in the economy the flexibility of wages and price will restore the equilibrium in the economy in the long run. According to the classical economists aggregate demand curve would have exactly the same location as the aggregate supply curve and further aggregate supply curve would lie right on the top of the natural output line. The ‘natural output’ is the maximum level of output that can be produced in an economy in a situation of full employment. Classical economists envisaged no role for any form of macro policy other than to control money supply to prevent inflation. The essential reason for this was that classical economists concentrated on the long term development of the economy and followed the policy of ‘laissez faire’.

 see Controversies in Macroeconomics: (2)  Keynes and the Keynesians.