ABSTRACT
Classical macroeconomics The idea captured by Adam Smith (1723-1790) in his celebrated metaphor of the ‘invisible hand’ – namely that the best economic outcome for society is obtained when each individual pursues his or her own interests (Smith 1976: IV, ii, 9) – has provided the fundamental motivating idea of economics theory and practice in liberal capitalist countries for over two centuries. In modern times it is commonly interpreted to mean that the best guarantors of national wealth and future prosperity are private enterprise and freely operating markets. Smith, in advocating his view, was arguing against the mercantilist economic doctrines that had held sway during the sixteenth and seventeenth centuries. These contended that national wealth consisted of the amount of bullion amassed by a nation through trade, and implied an interventionist role for the state in promoting exports and restricting imports through tariffs and other protective devices. Smith, despite his scepticism as to the role of the state in economic affairs, did however acknowledge its importance in national defence, in protecting members of the society from injustice, and in the provision of public works and institutions which ‘could never repay the expence to any individual . . . though it may frequently do much more than repay it to a great society’ (IV, ix, 51). In arguing against an interventionist role for government, Smith believed that he was arguing in favour of the interests of the poor and against those of the owners of property.1 A further advance in the theory of the market-based economy was due to the French political economist Jean-Baptiste Say (1767-1832) who in 1803 stated his ‘law of markets’ which also became a cornerstone of classical economics. Say’s Law held that ‘products are paid for by products’, that is, the bringing to market of one good provided income and purchasing power which would be made effective in the purchase of other goods in other markets, or as is more directly said: supply creates its own demand. Although individual markets may be subject to fluctuations of excess supply or excess demand from time to time, these would be rapidly remedied and equilibrium restored, he believed. Taking markets across the economy overall, Say’s Law implies that there can be no general glut of commodities, no lack of aggregate demand for them, and no deficiency of full employment.
