Prices, Incentives, and Economic Growth

Relative prices were at the center of economics during the one-and-a-half centuries following the publication of the Wealth of Nations. Classical economists never doubted that economic activities respond to price incentives, generating economic growth in the process. The choice between work and leisure was seen to be affected by the relative prices of goods and labor; the choice between present and future consumption by the rate of interest; and the choice among goods by their relative prices. The interactions of these choices, in turn, were seen to determine the allocation of resources among industries and the pace of economic growth, with full employment being maintained over time.