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Classical economics, also known as the classical school of economics, [1] or classical political economy, is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. It includes both the Smithian and Ricardian schools. [2]
New classical economics is based on Walrasian assumptions. All agents are assumed to maximize utility on the basis of rational expectations. At any one time, the economy is assumed to have a unique equilibrium at full employment or potential output achieved through price and wage adjustment. In other words, the market clears at all times.
Classical economics focuses on the tendency of markets to move to equilibrium and on objective theories of value. Neo-classical economics differs from classical economics primarily in being utilitarian in its value theory and using marginal theory as the basis of its models and equations. Marxian economics also descends from classical theory.
The 'first postulate' of classical economics was also accepted as valid by Keynes, though not used in the first four books of the General Theory. The Keynesian system can thus be represented by three equations in three variables as shown below, roughly following Hicks. Three analogous equations can be given for classical economics.
While general equilibrium theory and neoclassical economics generally were originally microeconomic theories, new classical macroeconomics builds a macroeconomic theory on these bases. In new classical models, the macroeconomy is assumed to be at its unique equilibrium, with full employment and potential output, and that this equilibrium is ...
Keynes makes use for the first time of the "first postulate of classical economics", and also for the first time assumes the existence of a unit of value allowing outputs to be compared in real terms. He depends heavily on an assumption of perfect competition, which indeed is implicit in the "first
He argued that this invalidated the assumptions of classical economists who thought that markets always clear, leaving no surplus of goods and no willing labor left idle. [3] The generation of economists that followed Keynes synthesized his theory with neoclassical microeconomics to form the neoclassical synthesis.
The system of imperialism produced economic conditions particularly amenable to the movement of capital according to the assumptions of classical economics. Britain, for instance, was able to design, impose, and control the quality of institutions in its colonies to capitalize on the high returns to capital in the new world.