Economic Development: Theory and Policy Applications

By Fidelis Ezeala-Harrison | Go to book overview

4
The Classical Theories of Economic Growth and Development

This chapter presents a set of growth and development models advanced in the pioneering era of economic thought. These theories have been the basis of many development policy formulations across the world during the twentieth century. The classical theories are those formulated on the basis of the works of Adam Smith, David Ricardo, John Stuart Mill, Jeremy Bentham, Jean-Baptiste Say, and Thomas R. Malthus, on the one hand, and Karl Marx and Friedrich Engels, on the other. 1 The major tenets of classical doctrine have frequently been referred to as "liberalist" economic thinking. Apart from the ideological departure of Marxian thinking from it, classical ideas are based on personal liberty, individual initiative, private enterprise, private property, and minimal government intervention.

The term liberalism, considered in its historical context, indicates a contrast to feudal and mercantilist restrictions on individual choice of occupations, land transfers and ownership, trade, movements, and property rights. The classicists believed that the individual's economic behavior is guided largely by self- interest, which is basic to human nature. That is, producers and merchants provided goods and services out of profit motives, and workers offered their labor services out of a desire to obtain wage payments, while consumers purchased goods and services in order to satisfy their needs and wants. There is a natural harmony of these various interests as they interact in a free market setting: by pursuing their own individual interests, people serve the best interests of others.

Traditional classical economic analysis presumes that the decisions made by individual economic agents acting in their own self-interest can be relied on to take national output and employment to their potential (full-employment) levels. According to classical economic analysis, income, wealth, output, and employment are determined entirely in the supply side of the economy. The explanation of these variables is based firmly on a microeconomic foundation: quantity of output and level of employment depend on factor market decisions made by profit-maximizing producers and utility-maximizing workers (con

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