The classical theory of income and employment, also known as classical economics, is an economic theory that emerged in the 18th century and was influential until the late 19th century. It is primarily associated with economists such as Adam Smith, David Ricardo, and John Stuart Mill.

According to the classical theory, the level of income and employment in an economy is determined by the interaction of aggregate supply and aggregate demand. The theory assumes that markets are self-regulating and tend to naturally reach equilibrium. It emphasizes the role of supply-side factors in determining economic outcomes.

Key principles of the classical theory of income and employment include:

1. Say's Law: This principle states that supply creates its own demand. In other words, when producers create goods and services, they receive income which they can then spend on other goods and services, thus creating demand.

2. Flexible wages and prices: Classical economists believed that wages and prices are flexible and adjust according to the forces of supply and demand. They argued that any imbalances in the economy, such as unemployment, would be self-correcting through the adjustment of wages and prices.

3. Quantity theory of money: Classical economists believed that changes in the money supply would only lead to changes in prices, not real output or employment. They argued that changes in the money supply would be offset by corresponding changes in the price level.

4. Laissez-faire: Classical economists advocated for minimal government intervention in the economy. They believed that markets would naturally reach equilibrium and that government intervention would only distort these natural forces.

The classical theory of income and employment has been criticized for its assumptions of flexible wages and prices, as well as its limited focus on aggregate supply. It was later replaced by the Keynesian theory during the Great Depression, which emphasized the role of aggregate demand and the need for government intervention to stabilize the economy.