Adam Smith and Ricardo both were the classical economists. They had much more
similarities in their models of growth. But now a days, there is a customary to
present a full fledge classical model which is composed of the ideas given by
Smith, Ricardo, J.S. Mill and Malthus etc., regarding economic growth.
The classical model has
(i) According to classical economists if the amount of labor is assumed to be
a specific one which is used to produce certain level of output, the labor will
be given the 'subsistence wages'.
(ii) The amount of surplus which is earned by the capitalists will be utilized
in capital accumulation. The increase in capital accumulation will increase the
demand for labor. The wages will increase if the population of the country
remains fixed. As wages exceed the subsistence wages the population will
increase, following Malthus theory of population.
(iii) Because of increase in population the manpower will increase leading to
decrease the wages. In this way, they will come back to subsistence wages and
producers will be able to reap 'Surplus'.
(iv) The 'Surplus' earned by the capitalists will be reploughed by them leading
to increase . the demand for labor and the same process will take place which we
have mentioned above.
(v) This dynamic process will come to an end when 'diminishing return' applies
in production. Here the total output produced by the economy gets equalized the
wages given over to the labor. In this way, the producers will not be earning
any surplus. With this situation, there will be no capital accumulation, no
increase in production and no increase in population. It is shown with Fig.
Here on y-axis the total production and on x-axis the labor has been shown.
The OW curve shows the subsistence wages. If level of population is ON, the
level of output is OP. Here the per capita wage is NR. Thus, the surplus
(profit) is RG. Because of this surplus the process of capital formation starts.
As a result, the demand for labor increases leading to increase the wages, as they move to GH. If the population of the country remains constant at ON and
the wages exceed the subsistence wages (NG > NR), the population and then the
working force will increase, as it goes to OM. Because of increase in population the 'Surplus' will be recreated and it will be reploughed. In this
way, the above mentioned process will be continued till the economy reaches point E, as
shown by the arrow movement in the fig. The point E represents a stationary situation
where the wages and output become equalized and no surplus would rise. In this
way, the expansionary process of capital accumulation and output will come to an
end. This would represent 'Doom's Day'. However, they think that if the
technical progress takes place in the country the production function will shift
upward, as shown by TP2
curve in the Fig. They further say that economic stagnation and stationary state can be postponed,
but it cannot be avoided of.
(i) This model ignored the role which technical progress could play. It is the
technical progress which can minimize the role of diminishing returns.
(ii) According to 'Iron Law of Wages' the wages can not exceed as well as go
below the subsistence level. But, because of changes in industrial structure and
economic development the iron law of wages cannot be accorded as the law of wage
determination. Moreover, according to classical economists it is the supply of
labor which plays an important role in the determination of wages. But it is
wrong, the wages are determined both by demand for labor and supply of labor.
Furthermore, the classical model did not consider the role played by trade
unions in the wage determination.
(iii) The development experience of advanced countries has also rejected 'Malthuaian'
theory of population. The classical economists following Malthus were of the
view that whenever wages exceed the subsistence level the tendency to have more
children develops. But it is not necessary, it may happen that rather making
marriages people go for the purchase of luxuries when their wages increase.
(iv) The classical model fails to incorporate all those complicated factors
which influence the economic development of poor countries. In UDCs, there is a
big shortage of capital. In addition to capital accumulation, the economic
development is also influenced by the culture, civilization, traditions and
institutional setup of the people. Such all has not been examined in classical