Garth A. Brazleton — How Classical Economics Misleads On "Government Debt"

The classical economic model is a ‘pot of gold’ model, where an economy has a certain fixed amount of resources by which it creates productive capacity. The classical model assumes markets are perfect in the sense that there is 100% utilization of resources at market determined costs of those resources. This means that at market given wage and interest rates, we have ‘full employment’ (not counting a certain amount of unemployment that may exist just due normal movements between jobs, etc.) of both labor and physical capital (buildings are staffed, machines are manned, etc.).

So, now, in this classical world the government comes in to an economy that is already using 100% of the resources and says, “I want to spend $1B more and give everyone healthcare.” In our classical world, there are no more resources to devote to this new policy so the government has to take it from the existing ‘pot of gold’. In other words, they have to take resources that are currently being (presumably productively) used in the private sector (by businesses). In this world, at a minimum, the healthcare spending does nothing for growing the economy and at worst it does one of two things (or some combination): (1) severely harms economic growth by taking some of the existing ‘gold’ necessary for the private sector to do its thing – either by increasing taxes or some other mechanism, and/or (2) in the case where the government starts up the printing press and starts manually artificially creating more 'gold' to fund its spending, inflation will ensue. Neither of these is pretty. In either case, the classical model further assumes that when the government spends money, 0% helps economic growth, while, when businesses spend money, 100% of that spending helps economic growth.

Reviving Economics
How Classical Economics Misleads On "Government Debt"
Garth A. Brazleton

Garth A. Brazleton goes on to say that there is no "pot of gold" either as productive capital, financial capital for investment, or money, and the private sector does not automatically or generally operate at full capacity without government. It's a simplistic teaching model, and the assumptions are just wrong if taken to be representative of the real world. But this is the conceptual model that most people are using in thinking about the economy since it is what they learn in Econ 101, and its what they see and hear in the media. Just why do economists think that this is necessary to teaching in the first place? Well, for starters they must use the standard textbooks, and that's the way the texts are written.