Classical Economics Explained: Understanding Economic Theory Before Keynes

29 Pages Posted: 19 Oct 2016

Date Written: October 19, 2016


Since the publication of The General Theory, pre-Keynesian economics has been labelled “classical,” but what that classical economics actually consisted of is now virtually an unknown. There is, instead, a straw-man caricature most economists absorb through a form of academic osmosis but which is never specifically taught, not even as part of a course in the history of economics. The paper outlines the crucial features that differentiate modern macroeconomics from classical theory, with the emphasis on what an economist would have understood as The General Theory was being published. Based on the differences outlined, a model of classical economic theory is presented which explains how pre-Keynesian economists understood the operation of the economy, the causes of recession and why a public-spending stimulus was universally rejected by mainstream economists before 1936. The classical model presented is an amalgam of the final edition of John Stuart Mill’s 1848 Principles of Political Economy published in his lifetime and Henry Clay’s influential 1916 Economics: an Introduction for the General Reader, a text which was itself built from the economics of Mill.

Keywords: classical economics, Keynesian theory, business cycle

JEL Classification: B12, B22, E12, E32, E62

Suggested Citation

Kates, Steven, Classical Economics Explained: Understanding Economic Theory Before Keynes (October 19, 2016). Available at SSRN: or

Steven Kates (Contact Author)

RMIT University ( email )

Level 11 - Building 80
445 Swanston Street
Melbourne, Victoria 3000
+61399255878 (Phone)

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