What is 'Classical Growth Theory'

The classical growth theory argues that economic growth will decrease or end because of an increasing population and limited resources. Classical growth theory economists believed that temporary increases in real GDP per person would cause a population explosion that would consequently decrease real GDP.

BREAKING DOWN 'Classical Growth Theory'

Economists behind classical growth theory developed an idea of a "subsistence level" to model the theory. They believed that if real GDP rose above this subsistence level of income that it would cause the population to increase and bring real GDP back down to the subsistence level. It was sort of like a equilibrium level that real GDP would always revert to in this theory. Alternatively, if the real GDP fell below this subsistence level, parts of the population would die off and real income would rise back to the subsistence level.

History of Classical Growth Theory

Classical growth theory was developed alongside the emerging conditions brought about by the industrial revolution in Great Britain. In formulating the theory, classical economists sought to provide an account of the broad forces that influenced economic growth and of the mechanisms underlying the growth process. Accumulation and productive investment, in the form of profits, were seen as the main driving force. Hence, changes in the rate of profit were a decisive reference point for analysis of the long-term evolution of the economy. Analysis of the process of economic growth was a central focus of English classical economists, most notably Adam Smith, Thomas Malthus and David Ricardo.

Living in the 18th and 19th centuries, on the eve or in the midst of the industrial revolution, the goal of these economists was to develop a scientific explanation of the forces governing how their economic systems were functioning at the time, of the actual processes involved in observed changes and of the long-run tendencies and outcomes to which they were leading. They attempted to demonstrate and promote the idea that individual initiative, under freely competitive conditions to promote individual ends, would produce beneficial results to society as a whole.

Meanwhile, conflicting economic interests could be reconciled by the operation of competitive market forces and by the limited activity of responsible governance. Armed with their recognition that accumulation and productive investment of a part of the social product is the main driving force behind economic growth and that, under capitalism, this takes the form mainly of the reinvestment of profits, their critique of feudal society was based on the observation among others, that a large portion of the social product was not so well invested but was consumed unproductively.

RELATED TERMS
  1. New Growth Theory

    New growth theory is a concept that presumes the desire and wants ...
  2. Gross Domestic Product - GDP

    GDP is the monetary value of all the finished goods and services ...
  3. Theory Of Price

    The theory of price is an economic theory whereby the price for ...
  4. Residual Equity Theory

    Residual equity theory assumes common shareholders to be the ...
  5. Misappropriation Theory

    Misappropriation theory postulates that anyone using insider ...
  6. Applied Economics

    Applied economics refers to the use of economy-framed theories, ...
Related Articles
  1. Insights

    The GDP and its Importance

    GDP is an accurate indication of an economy's size. Few data points can match the GDP and its growth rate's conciseness.
  2. Investing

    Nobel Winners Are Economic Prizes

    Before you try to profit from their theories, you should learn about the creators themselves.
  3. Insights

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about this famous British economist's proposed solution to a widespread economic problem.
  4. Insights

    Adam Smith: The Father of Economics

    Adam Smith is renowned as "The Father of Economics" for his work in pioneering ideas such as free trade and GDP.
  5. Insights

    How to Calculate the GDP of a Country

    The GDP of a country can be calculated using two different approaches. GDP or gross domestic product of a country provides a measure of the monetary value of the goods and services that country produces ...
  6. Investing

    Interest Rate Predictions With Expectations Theory

    The expectations theory uses long-term interest rates to predict future short-term interest rates.
  7. Insights

    The History of Economic Thought

    Economics is a vital part of every day life. Discover the major players who shaped its development.
RELATED FAQS
  1. What Is the Ricardian Vice?

    The Ricardian vice refers to model building and mathematical formulas with unrealistic assumptions. Read Answer >>
  2. When do economists use real GDP instead of GDP?

    Learn about the purposes for which economists rely on real GDP. Find out how real GDP is calculated and how it is important ... Read Answer >>
  3. Is real GDP a better index of economic performance than GDP?

    Learn why real GDP is a better index for expressing the output of an economy, as it takes into account the factors that distort ... Read Answer >>
  4. How can I use the rule of 70 to estimate a country's GDP growth?

    Find out about the rule of 70, what it is used for and how to use it to determine the number of years a country's GDP takes ... Read Answer >>
  5. What does the term 'invisible hand' refer to in the economy?

    Discover and understand the concept of the "invisible hand" as explained by Adam Smith, considered the founder of modern ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center