Hi friends, in today’s article we are going to know about the classical theory of economic development, mathematical explanation, weaknesses, etc. So let’s discuss in details.
Classical Theory of Economic Development
From the ancient times the problems of economic development has attracted the attention of economists and sociologists. The various classical economists focused their attention on the factors affecting development such as market, population, land, capital accumulation, etc.
The classical economists had explained growth process in terms of rate of technological progress and population growth. According to them technological progress remains in lead for some time but finally it disappears when the falling rate of profit presents further accumulation of capital. It is at this stage that the economy stumps down into stagnation.
Classical theory of economic development is explained in the following way –
Suppose an expected increase in profits bring about an increase in investment which adds to the existing stock of capital and to the steady fool of improved techniques.
This increase in capital accumulation raises the wage fund. Higher wages induce an accelerated population growth which causes the demand for food to rise.
Food production is raised by employing additional labour and capital. But diminishing returns to land bring about rise an labour and capital.
But diminishing returns to land bring about rise in labour cost and as result, the price of corn goes up in turn, rents increase, wages rise, thereby reducing profits, reduction in profit implies reduction in investment, retarded technological progress, diminution of wage fund and slowing down of population growth and capital accumulation.
Mathematical Explanation of Classical Theory of Economic Development
The basic proportions of classical theory of development or growth can be explained in terms of mathematical equation as this makes the model brief simple and easy, as follows –
(i) Proposition – The production function
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.
Here total output of an economy depends upon the size of labour, the stock of capital, the amount of available natural resources and available technology.
(ii) Proposition – Technological progress depends on investment
i.e. T = f(1)
Here the technology depends upon the size of investment.
(iii) Proposition – Investment depends on 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 = ΔK = f(R)
(iv) Proposition – Profits depends upon labour supply and level of technology
i.e. R = f (T, L)
The level of technology depends upon the level of investment and it depends on the profit. Again profit depends on the level of technology. This implies technical progress is vital for economic development.
(v) Proposition – The size of labour force depends on size of the wage fund. Which explains the iron law of wages.
Here, L = f (w)
(vi) Proposition – Size of labour force depends upon level of investment. According to classicists wage fund depends upon the savings of the capitalists and these savings find their way in investment automatically.
W = f (I)
(vii) Proposition – Closing equation
Q = R + W
Here, output is the sum of profits and wages. From above (7) equation we get circulatory system which may be stated as Q→T IR→W→L→Q
In the classical model, the end result of development activity is the stationary state.
Weaknesses of Classical Theory of Development
This theory has some weaknesses or limitations which are given below –
- The outcome of classical model depends upon certain key assumptions which do not seem to be valid.
- The use of capital and technological advances here technical progress depends on saving and investments. This relationship is not rigid as classicist assumed.
Thus classical theory of development plays a significant role despite its weakness.
So friends, this was the concept of the classical theory of development. Hope you get the full details about it and hope you like this article.
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