In the book Macroeconomic Theory by Gardner Ackley, there is a section exclusively reserved for “classical macroeconomics.” It is a long section, so I ready only the first half; a beautiful account of Say’s law and the quantity theory of money as it applies to wages, production and prices.

Ackley began his section with a discussion of supply and demand. But rather than a simple explanation, the author tried to draw out a distinction. To say that Supply = Demand, is make a statement of identity: whatever is sold, must also be bought. However, to posit a chain of causation between them, is to argue and economic theory. This is in reference to Say’s law, a theory that states simply: supply determines spending. A mans production will determine the amount of commodities that he has to trade with others. Each man’s production (supply) constitutes his demand for other goods, and hence the aggregate demand must in some sense equal the aggregate supply. This is founded upon the assumptions that “people do not want money for its own sake,” and hence “the world must work at full employment.” As Ackley points out, Say’s law is not the income-expenditure identity because this version of the model assumes full-employment. Any increase in production (supply) will also increase income and spending.

The quantity theory of money is another example of classical reasoning, although it is significantly different from say’s law (a theory that was originally intended to describe the economics of barter).

MV = PT M = supply of money

V = velocity of money

P = average price level

T = the quantity of or physical volume of transactions.

Given that the transactions velocity of money is a constant (because non-active money is always zero), and T is always at its maximum value given the full employment condition, then prices are contingent upon changes in the money supply.

In Chapter VI, Ackley’s then discusses more in-depth the classical model of wages, prices and full employment. He re-demonstrates much of what we already have learned in our intermediate Micro class. Namely:

M / P = W

P x MPL = VMPL and W

MC = W / MPL

These equations belong to the classical approach because they assume full employment. These equations are relevant to the classical macro approach when we further assume that absence of idle balances (all money is being used in the economy). The major contribution of Ackley’s discussion, is simply that the aggregate level of output in the economy does not depend on the level of prices, but rather the structure of prices — the interaction of wages and prices as they determine the real wage rate and aggregate demand.

 Ackley, Gardner.  Macroeconomic Theory.  The Macmillan Company, New York: 1961.

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