2. Born on 16th June 1723, Adam Smith was a
Scottish Economist and philosopher.
He was also known as ''The Father of
Economics'‘
It is said that “He was the editor and not the
author, organizer and not the originator of
economic science.”
Smith wrote two classic works, The Theory of
Moral Sentiments (1759) and An Inquiry into
the Nature and Causes of the Wealth of Nations
(1776).
4. Adam Smith
proposes natural
law in economic
affairs.
He advocated the
philosophy of free
and independent
action.
If every individual
member of society is
left to pursue his
economic activity, he
will maximize the
output to the best of
his ability.
Freedom of action
brings out the best of
an individual which
increases society
wealth and progress.
Adam Smith opposed
any government
intervention in
industry and
commerce.
5. Adam Smith’s theory is based on the
principle of ‘Laissez-Faire’ which requires
that state should not impose any
restriction on freedom of an individual.
The theory of economic development rests
on the pillars of saving, division of labour
and wide extent of market. Saving or
capital accumulation is the starting point
of this theory.
6. The policy of laissez-
faire allows the
producers to
1. produce as
much they like,
2. earn as much
income as they
can and save as
much they like.
Adam Smith believed that it is
safe to leave the economy to be
propelled, regulated and
controlled by invisible hand i.e.
the forces of competition
motivated by self interest
be allowed to play their
part in minimizing the
volume of savings for
development.
7. Adam Smith recognized three factors of
production namely labour, capital and land i.e.
Y = f (L, K,T)
He emphasized labour as an important factor
of production along with other factors.
Since the growth is a function of capital,
labour, land and technology and land being a
passive element. Prof. Adam Smith regarded
labour as father and land as mother. He wrote,
“To farmer land is the only instrument which
enables him to earn the wages of his labour
and to make profits of this stock”.
8. A very important contribution made by Adam Smith to the
analysis of the factors that bring about expansion of output
is the division of labour.
Benefits of
division of
labour:Increase
in skill, saving in
time, and
invention of
better machines
and appliances.
But he points out
that division of
labour is
profitable only if
there is adequate
market for the
goods produced.
He, thus,
emphasized the
expansion of
international
trade, which
widens market
for goods.
10. It is worth noting that Adam Smith
expressed the view that industry
generally permitted greater scope
for division of labour or
specialization than agriculture
and, therefore, in rich developed
countries industrialization had
taken place to a greater extent.
11. •Adam Smith gave an
important place to
saving and
accumulation of capital.
As a means of
economic
development
• Their greatest obstacle to
economic development is
the deficiency of capital. In
this respect they are caught
up in a vicious circle of
poverty.
He gave a clear
guideline and
suggestion to
the developing
countries.
12. Low Real Income
Low savings
Low buying power
Low Demand
Low
Investment
Capital deficiency
Low rate of capital
formation
Low productivity
13.
14. Adam Smith points out that
the development process
once started gathers
momentum and becomes
cumulative, i.e., it feeds
upon itself. This happens in
the following ways.
17. The increase in size of
market and availability
of capital
Improvement in
technology
18. According to Adam Smith, the natural course of
development is
Agriculture
Industry
Commerce
19. Agriculture creates a surplus and increases
the purchasing power of the people which
generates demand for industrial products. It
also supplies raw materials for industries.
Agricultural growth thus provides a base for
industrial development.
20. Adam Smith pointed out that
there is limit to the economic
development which ultimately
lands a free market economy
in a stationary state in which
further capital accumulation
ceases to take place and
therefore there is no more
growth of the economy. This
happens because of two
reasons.
21. • First, there is a limited amount of natural
resources at the disposal of the economy and
after passing through a phase of growth a
point is reached when they are fully utilized
and do not permit further growth of output.
• The second factor responsible for occurrence
of stationary state is fall in profits which
reduces inducement to invest further. Profits
tend to fall as a result of competition among
the capitalists, i.e., investors. This results in
decrease in demand for more capital
accumulation.
22. Smith in his model includes just two segments of
the economy, i.e., the capitalists (landlords) and
laboring class. But it is not true, in addition to
these two classes, there is also a middle class
which plays an important role, in the economic
growth. The savings are not just made by the rich
class, the middle class also saves.
The Smith's model is based upon Laisseze-Fair.
But the non-intervention system is possible just
in dreams. Each govt. has to intervene to tackle
both internal and external matters.
23. In Smith's 'model, we do not find the role of
entrepreneurs. While according to
Schumpeter, it is the entrepreneur which
combines other factors of production and it
starts the process of production.
The Smith's hypothesis regarding stationary
state is also misleading, because economic
growth is not a smooth process. It is
furnished with jumps and shocks. As in this
regards John Hicks says that Smith's model is
a static model.
