The Classical Theory of Economic Growth

Focused on the emerging conditions of industrial capitalism in Britain in their own time, the classical economists were able to provide an account of the broad forces that influence economic growth and of the mechanisms underlying the growth process. Accumulation and productive investment of a part of the social surplus 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. As worked out most coherently by Ricardo, the analysis indicated that in a closed economy there is an inevitable tendency for the rate of profit to fall. In this article, the essential features of the classical analysis of the accumulation process are presented and formalized in terms of a simple model. Classical Perspectives on Growth Analysis of the process of economic growth was a central feature of the work of the English classical economists, as represented chiefly by Adam Smith, Thomas Malthus and David Ricardo. Despite the speculations of others before them, they must be regarded as the main precursors of modern growth theory. The ideas of this school reached their highest level of development in the works of Ricardo. The interest of these economists in problems of economic growth was rooted in the concrete conditions of their time. Specifically, they were confronted with the facts of economic and social changes taking place in contemporary English society as well as in previous historical periods. Living in the 18th and 19th centuries, on the eve or in the full throes of the industrial revolution, they could hardly help but be impressed by such changes. They undertook their investigations against the background of the emergence of what was to be regarded as a new economic system – the system of industrial capitalism. Political economy represented a conscious effort on their part to develop a scientific explanation of the forces governing the operation of the economic system, of the actual processes involved in the observed changes that were going on, and of the long-run tendencies and outcomes to which they were leading. The interest of the classical economists in economic growth derived also from a philosophical concern with the possibilities of ‘progress’ an essential condition of which was seen to be the development of the material basis of society. Accordingly, it was felt that the purpose of analysis was to identify the forces in society that promoted or hindered this development, and hence progress, and consequently to provide a basis for policy and action to influence those forces. Ricardo’s campaign against the Corn Laws must obviously be seen in this light, as also Malthus’s concern with the problem of population growth and Smith’s attacks against the monopoly privileges associated with mercantilism. Of course, for these economists, Smith especially, progress was seen from the point of view of the growth of national wealth. Hence, the principle of national advantage was