Classical economics is the macroeconomic school of thought that suggests that real GROSS DOMESTIC PRODUCT (GDP) is determined by aggregate SUPPLY, while the EQUILIBRIUM price level is determined by aggregate DEMAND. Classical economics was the predominant theory from 1776 to the introduction of KEYNESIAN ECONOMICS in 1936. Classical economics is also defined as the study of an economy operating at full EMPLOYMENT, while Keynesian analysis portrays economies operating naturally at less than full employment. According to classical theory, a major part of the selfcorrecting mechanism in an economy is flexible wages and prices. With this assumption, classical economists suggest real GDP is determined by the price of resources, technology, and expectations (the factors influencing aggregate supply). Prices would adjust depending on the overall level of demand. The assumption of flexible wages and prices distinguishes classical economics from Keynesian economics. Classical economists believe economies tend to operate at or near full employment. Using Say’s law (named after French economist Jean-Baptiste Say), supply creates its own demand; hence, desired expenditures will equal actual expenditures. According to classical economics, people produce goods and services because they desire to purchase other goods and services. The act of producing is based on their desire to trade their goods and services for other products, creating demand in the economy. From this reasoning, an economy would tend toward full employment of labor and other resources. Though temporary shocks may cause excessive UNEMPLOYMENT, this would be a temporary phenomenon. Classical economists saw the GREAT DEPRESSION as a downturn in the BUSINESS CYCLE that would self-correct. Some politicians—U.S. president Herbert Hoover, for example—accepted classical theory. During the 1930 presidential election, Hoover said the current economic condition was just a mild recession, not a depression, suggesting this was a temporary situation that would self-correct. Political cartoonists compared Hoover to the Roman emperor Nero, famous for supposedly having fiddled while Rome burned. Hoover’s opponent, Franklin Delano Roosevelt, advocated government intervention, a policy supported by Keynesian economics, leading to the New Deal.
See also MACROECONOMICS.