What is Classical Theory of economic growth’
In the classical theory of economic growth claims that economic growth will decline or end due to growing population and limited resources. The classical Theory of economic growth economists believe that a temporary increase in real GDP per person can cause a population explosion that would, therefore, decrease in real GDP.
The destruction of the classical growth theory’
Economists of the classical Theory of economic growth developed the idea of a “living wage” model of the theory. They believed that if real GDP rose above the subsistence level income that she will cause a population to increase and bring real GDP down to the level of the subsistence minimum. It was like the equilibrium level of real GDP will always return to this theory. In addition, if real GDP fell below this subsistence level, its population would have to die and real incomes will rise back to the subsistence level.
The history of classical growth theory
The classical theory of growth developed along with the new conditions brought about by the industrial revolution in the UK. In the development of the theory, economists-classics strives to provide great forces that influenced economic growth and the mechanisms underlying the growth process. The accumulation and productive investment in the form of profit, was seen as the main driving force. Therefore, changes in the profit rate was the decisive point of reference for analysis of long-term economic development. Analysis of the process of economic growth was the focus of the English classical economists, especially Adam Smith, Thomas Malthus and David Ricardo.
Life in the 18th and 19th centuries, in the eve or in the midst of the industrial revolution, the aim of these economists was to develop a scientific explanation of the forces that govern their economic systems are functioning at the moment of the actual processes involved in the observed changes and long-term trends and results to which they led. They tried to demonstrate and promote the idea that individual initiative, under freely competitive conditions to promote private ends, will produce positive results for society as a whole. Meanwhile, conflicting economic interests can be coordinated functioning of competitive market forces and has restricted the activities of responsible management. Armed with the realization that the accumulation and productive investment of the social product is the main driving force of economic growth and that, under capitalism, this takes the form mainly of reinvested earnings of their criticism of the feudal society was based on the observation, in particular, that a large part of the social product was not so well-invested, but consumed unproductively.