The classical theory of Economic Development

The Classical theory of economic development is the sum total of all theories of classical economists. The views of Adam Smith, Malthus, and Mill on Economic development form the crux of the classical theory of development. Though they differ on a number of development issues, the essence of the classical approach to development is the same.

1. CLASSICAL THEORY OF ECONOMIC DEVELOPMENT Sr. Sindhu P.J ( Sr.Sharin CTC)

2. The Classical theory of economic development is the sum total of all other theories of classical economists. The views of Adam smith, Malthus and Mill on Economic development form the crux of the classical theory of development. Though they differ on a number of development issues, the essence of the classical approach to development is the same.

3. The classical economists had explained growth process in terms of rate of technological progress and population growth. In their opinion, technological progress remains in lead for some time but finally it disappears when the falling rate of profit prevents further accumulation of capital.

4. The basic Propositions of Classical theory Proposition 1. The production Function: The total output of an economy depends upon the size of labour , the stock of capital, the amount of available natural resources and available technology. Thus, it expresses a function relationship between dependent and independent variables i.e. Q = f (L, K, N, T) Q = Total output , L = Size of labour , K = Stock of capital, N = Amount of available natural resources, T = Technology.

5. Proposition 2: Technological progress depends on investment. The relation between technological progress and investment is T =f (I) i.e. the technology depends upon the size of investment i.e. why classical economists stressed on capital accumulation and saving rather than technological progress.

6. Proposition 3: Investment depends on profits. It is true that investment depends upon profits. The capitalist will make investment only if it is profitable. Here investment means net addition to the existing stock of capital i.e. I = ∆K = f(R) K = Net addition to capital stock. R = Return on capital investment or profit.

7. Proposition 4: Profits depend, upon labour supply and level of technology. According to classical economists, profit is the function of labour supply and technological progress. The application of improved technology in agriculture can raise productivity and hence profits. Thus, profits are not only influenced by the level of technology, but by labour force as well. R = F (T, L) The level of technology depends upon the level of investment and it depends on profits. Profits, in turn, depend on the level of technology. This argument explains the interdependence of these factors. T = f (I) The crux of this circular argument is that technical progress is vital for economic development.

8. Proposition 5: The size of labour force depends on size of the wage fund. This proposition explains the iron law of wages . L = f (W) W = Wage fund, L = Size of labour force.

9. Proposition 6: Size of labour force depends upon level of investment. The classical economists believed that wage fund depends upon the savings of the capitalist and these savings find their way in investment automatically. So wage fund is the function of investment or investment determines the size of wage fund, i.e. W = f (I) Where I = Level of Investment, W = Wage fund.

10. Proposition 7: Closing equation Q = R + W Q = Total output, R = Profits, W = Wages. i.e. the output is the sum of profits and wages together.

11. The circulatory system can be stated as: The economic development implies in the level of output. This increase is possible due to the application of improved technology, which in turn, depends upon the level of investment. The investment is determined by the level of profit. The level of profits will be determined by the size of wage fund which, in turn, will influence the labour force or population growth. Population growth will necessitate the discovery of new scientific inventions for raising the total output. The circulatory system may be stated as: In the classical model, the end result of development activity is the stationary state. The stationary state in the opinion of the classicalists was essentially a concept of mature economy and, thus, it should not be interpreted as something characterised by under development.

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