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.

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