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.

Key Takeaways

  • According to the classical growth theory, economic growth will decrease or end due to an increase in population and the existence of finite resources.
  • Classical growth economic theory was developed by economists during the industrial revolution.
  • Modern progress has proved classical growth theory wrong.

Understanding Classical Growth Theory

Economists behind classical growth theory developed an idea of a "subsistence level" to model the theory. Subsistence refers to the minimum amount of income required to survive. Income beyond the subsistence level translated to profits. Related to this concept was the manner in which different classes within society utilized their wages. For example, workers spent their wages on subsistence, landlords spent their earnings on "riotous living," and industries reinvested their profits into their ventures.

The economists 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 essentially an 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.

Modern progress has proved classical growth economists wrong. Even as population has multiplied, wages and economic growth have increased in tandem. Critics of the classical growth economic theory say that its authors failed to take into the account the role of technology in improving modern life. Other authors, such as Karl Marx, also pointed out other flaws with the capitalist theory underlying classical growth theory.

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 an 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 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 primarily takes the form 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.