Economics Theories

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Economics theories

(Neo) Classical Theories
1. Introduction
The term 'Classical' refers to work done by a group of economists in the 18th and 19th centuries. Much of this work was developing theories about the way markets and market economies work. Much of this work has subsequently been updated by modern economists and they are generally termed neo-classical economists, the word neo meaning 'new'.
2. Belief
Classical economists were not renowned for being a happy, optimistic bunch of economists (in terms of their economic thinking!). Some believed that population growth would be too rapid for the resources available (Malthus was a particular exponent of this view). If this wasn't enough to depress the rate of long-term growth (and the rest of the population along with it!) then diminishing returns would cause further problems for growth.
They believed that the government should not intervene to try to correct this as it would only make things worse and so the only way to encourage growth was to allow free trade and free markets. This approach is known as a 'laissez-faire' approach. Essentially this approach places total reliance on markets, and anything that prevent markets clearing properly should be done away with.
Much of Adam Smith's early work was on this theme, and he introduced the notion of an invisible hand that guided economic activity and led to the optimum equilibrium. Many people see him as the founding father of modern economics.
The Victorian period of rapid expansion worldwide seemed to cheer the Classical economists up a little and they became a bit more optimistic, but still maintained their total faith in the role of markets.
3. Theories
Classical theories revolved mainly around the role of markets in the economy. If markets worked freely and nothing prevented their rapid clearing then the economy would prosper. Any imperfections in…...

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