Widely believed to be 1st modern school of economic theory

Adam Smith Wealth of Nations: established foundation of economics as a separate study

(laissez-faire; invisible hand driven by self-interest > optimal efficiency)

View was separate from actual social dilemmas: immersed mostly in theory
Other economists such as Ricardo, Malthus, Mill further refined Smiths ideas with
rapidly changing world of 18th/19th centuries

Enlightenment & Industrial Revolution: propelled search for natural, universal laws
governing human behavior > classical economics replaced doctrine of sin in justifying
social evil

Self-correcting economy: moves to equilibrium and YFE without government intervention

Long-run stability & growth achieved through supply-side policies that reduce free
market imperfections and inflation

Flexible prices for both goods/wages

Focuses on long-run solutions to growth & stability over short-run improvement
AS is vertical line at YFE & determines output
Says Law: "the nature of the products is always regulated by the wants of society >
total demand will never exceed or fall below the total supply of an economy.

Overwhelmingly against government intervention

Except some supply-side policies to improve imperfect market: decreasing influence of
trade unions to ensure wage flexibility, improving education/training, removing controls
and regulations > has little to do w/ fiscal policy

Monetary policy is significant in classical economics: quantity theory of money

 Government should only ensure price stability (so inflation doesnt get out of hand)
MV = PQ, classical belief leads to Q and V stable
If the amount of money were to be changed by expansionary/contractionary monetary
policy, would only lead to inflation or deflation > can get excessive

Classical vs. Keynesian economics differ on a fundamental level

Classical: AS is vertical vs. Keynesian: slopes upwards (economy can remain below full
employment in the long run)

Keynesian: prices/wages inflexible & particularly sticky downwards

Keynesian: created in direct juxtaposition to classical economics because it calls for
government intervention, especially during deep recessions such as the Great Depression,
need discretionary fiscal policy (especially expansionary policy during recession: economy
not always self-correcting)

Opinion: combination of classical & Keynesian

Economy may not always stabilize itself with ease, even in long run
Some government intervention needed: too many would suffer
Too much intervention unnecessary: trade barriers, fiscal policy can even exacerbate the
situation, such as an inflationary spirals in the case of cost-push inflation

Monetary policy: decisions could disrupt the whole nation & affect future economic growth