Classical Economics the Easy Way


So I have a confession to make. I am not really sure that I ever understood Classical Economics until I started teaching it. Truth of the matter is that I’m not sure I understood a lot of Economics until I started teaching it.

Here is the short story of Classical Economics:
Once upon a time, there was an old dude named Adam Smith. He believed that all prices were flexible and that even if all you could get was a penny an hour, you would eventually take a job. (Insert red flag here – although I will buy a Christmas tree in July if it’s cheap enough!)

Based on this assumption, he believed that an economy would always find its way back to its long run full employment level of production. (AKA the amount of stuff we should be making when everybody that is actually supposed to have a job has one and is working their ass off.)

If the economy was in a recession, he knew that:

  • More people were unemployed than should be – Unemployment is higher than the natural rate to get technical
  • We weren’t making as much stuff as we should be – GDP is lower than it should be

He then argued that:

  • People still needed to eat, so they would compete for jobs and drive down the market wage.
  • Once companies were paying less out in salaries, it would be cheaper for them to make products, so they would make more.
  • Once they decided to make more stuff, they would hire more people.

He believed that as the economy went through this process, unemployment would creep down to the natural rate over time and output would creep up. Since this would all occur as the result of flexible prices we should just suck it up and let nature take its course with no government intervention necessary or desired.

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