Classical growth theory

Growth can occur with and without bounds. Logistic growth is an example for a
bounded growth which is limited by saturation: In the picture the blue curve
could depict the development of the size of an imaginary market with logistic
growth. The red curve then would describe the growth of that market as the 1st
derivative of the market volume. The yellow curve is the growth weighted by the
size of the market. As for logistic growth, the yellow curve shows, that even a
large market size cannot strengthen growth when approaching saturation. Logistic
growth never is negative, but in the saturation area, the growth is as small as
before the market took off. (In the example all curves are scaled to cover the
range between 0 and 1.) The modern conception of economic growth began with the
critique of Mercantilism, especially by the physiocrats and with the Scottish
Enlightenment thinkers such as David Hume and Adam Smith, and the foundation of
the discipline of modern political economy. The theory of the physiocrats was
that productive capacity, itself, allowed for growth, and the improving and
increasing capital to allow that capacity was "the wealth of nations". Whereas
they stressed the importance of agriculture and saw urban industry as "sterile",
Smith extended the notion that manufacturing was central to the entire economy.
David Ricardo would then argue that trade was a benefit to a country, because if
one could buy a good more cheaply from abroad, it meant that there was more
profitable work to be done here. This theory of "comparative advantage" would be
the central basis for arguments in favor of free trade as an essential component
of growth.
Income per capita was essentially flat until the industrial revolution. This
period of time is called the Malthusian period, since it was governed by the
principles explained by Thomas Malthus in his "Essay on the Principle of
Population." In essence, Malthus said that any growth in the economy would
translate into a growth in population. Thus, although aggregate income could
increase, income per capita was bound to stay roughly constant. The mainstream
theory of economic growth states that with the industrial revolution and
advancements in medicine, life expectation increased, infant mortality
decreased, and the payoff to receiving an education was higher. Thus, parents
began to place more value on the quality of their children and not on the
quantity. This led to a drop in the fertility rates of most industrialized
nations. This is known as the breakdown of the Malthusian regime. With income
increasing faster than population growth, industrialised economies substantially
increased their incomes per capita in the next centuries.