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pohnpei397 eNotes educator| Certified Educator

The classical theory of economics is a theory of macroeconomics that says that the economy is essentially self correcting.  It says that the economy will pull itself out of recessions or will end high inflation all by itself as long as the government does not interefere with its workings.

In economic terms, the classical theory says that the aggregate supply curve is vertical.  It says that changes in aggregate demand will not change RGDP.  Changes in AD will only cause changes in the price level (CPI).

The classical theory is based on the idea that wages and prices are flexible and will change as AD changes.

krishna-agrawala | Student

I am not sure if there is a theory of economics called "classical theory". However there are a set of economics theories which are collectively referred to classical economics.

Classical economics represents the predominant thinking in economics prior to appearance of economic theories advanced by Keynes. The origin of classical economics can be considered to be the the Ideas of Adam Smith, presented in his book Wealth of Nations published in 1776. Other major economist that have contributed to the ideas of classical economics are David Ricardo, Thomas Malthus, and James Stuart Mill.

The predominant premise of classical economics is that economic laws relating to individual self interest and competition determine economic variables such as prices, production, allocation of resources, and distribution of economic rewards.