I am writing a paper in which I begin by setting down what a modern economist would believe about “classical” economics. In reality, of course, virtually no economist today would have the slightest clue how an economist prior to 1936 would have looked at the operation of an economy or dealt with the problems it might have. I have pulled together my own summary and am putting up it here so that others can tell me what they think. I would merely emphasise that what I have below is such a misbegotten caricature that economists ought to be thoroughly disgusted with their own discipline if they really think their ancestors believed anything like this caricature. Because if this really were what economists once believed, even Keynesian economics would have been an improvement.
The more one knows about the economics prior to the publication of The General Theory, the less dogmatic one can be about the teachings of “classical” theory, especially since in the Keynesian version it covers the entire period from 1776 to 1933. Nevertheless, here is a summary statement that more or less captures the modern version of the essential beliefs of economists prior to 1936.
The economy was seen as a world of more or less instantaneous adjustment due to the flexibility of prices and wages. Such rapid adjustments were expected to lead to an almost instantaneous economic reconfiguration in the face of new circumstances. Theory was almost entirely devoted to the long term with short-term fluctuations of little interest since downturns were so brief and government policy would anyway have been unable to alleviate any of the problems that might arise. The economy was, for all practical purposes, in equilibrium because of virtually instant adjustment made through changes both upwards or down in the price level. The key concept was Say’s Law, which stated that supply created its own demand, which in turn meant involuntary unemployment would never occur. Laissez-faire was the core policy setting. Market adjustment could not be improved on, with regulation of business and industry seen as almost never beneficial, but virtually certain to cause harm. Regulation was kept to a minimum as were welfare payments to the poor and unemployed.