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Adam Smith (1723 1790)

Adam Smiths Theory of Development
Adam Smith known as father of Economics

Smith Abbreviated the Theories of His predecessors and handled it
down as a Guide to the coming Generations.

Adam Smith exposed all his ideas in his wealth of Nations.

This book explained a theory of Economic Development.

Wealth of Nations was a Turning Point
& A Beginning of all other Economic Theories &
in approach
Natural Law
Adam smith proposed a natural law in Economic Affairs

If individuals are Left Free to pursue Economic Activity
They will maximize the output to the best of ability.

If individuals are Left Free to pursue Economic Activity
They will maximize the output to the best of ability.

Freedom of Action beings out the Best of Individual which increases the
Sentrys wealth & progress.
Adam Smith advocated free trading &
Policy of laissez Faire in Economic Affairs.

Smith opines that Natural Laws are Superior to Statutory law & man
made law.

For smith Natural law is just and moral.

Nature teaches man morality & Honesty

This has favorable effects of Economic Progress
Laissez Faire
Adam smiths Principle of Laissez faire

Requires the state not to impose

Restriction on
Freedom of an Individual.
Economic Development Rest an pillars
of Wide
Division of
Saving extent of
A set of Rules & rights of Justice are Adam Smith believed that it is safe to leave Economy
Hals if not applied. Propelled regulated & controlled by
Their applications will command Forces of Competition between Individuals.
Human sovereigns to produce more products & Income.
Production Function
Adam smith recognized Three factors of Production.

Labor Labor Capital Stock of Land Property

force Capital owned Premises

Smith emphasized labor as an Important factor of Production, along with other

Annual labor of a Nation like a fund supplies. All necessaries & conveniences
that consumes labor for Immediate produce of Products both for the nation &
other nations.
Smith regarded labor as father and land as mother in production units.
To smith land is the only instrument that enables a farmer to earn wages of his
labor & make profit of his stock.
To Smith technological development is an important factor for productivity with
sufficient capital available.
Division of Labor
Productivity of labor

Depends on Technological progress

This depends upon Division of labor
Division of labor is a True dynamic force
For Smith theory of Growth.

Prof. Schumpeter Except Adam Smith nobody

stressed the importance of Division of Lab hour for
Economic Progress.
3 Benefits of Division of Labor According to Smith are:

Increase of specialization of

Saving time required to

produce commodity

Invention of better
manliness and equipment

Division of labor leads to Exchange of Goods and Highlights the

importance of Trade. It also widens the extent of Market.
Wide Extent of market is an Essential Pre-requisite for
Economic Development.
Capital Accumulation
Capital is the base for Economic Development
Proportionate increase of output continually helps to grow
Division of Labor.

Capital stock consists of

Goods for maintenance of productive workers
Goods for helping the workers in productive activities.

Adam Smith distinguishes between

Non-capital : Goods which one directly and immediately useful to the
Fixed Capital: Good directly used in productive process.
Fixed Capital : Resources consists of means of production.
- Investments are made because the Capitalist wants to earn more
profits on investment.
Smith was observed that Farmers, Producers and Businessman are
Important agents of Economic Growth

Free trade enterprises and competition Farmers, producers and

Businessman to expand the market

This Developed the economy and Economy is Inter related.

This leads to agricultural surplus.

Economic Development and the Demand for Commercial Services &

Manufacture of Articles products.

Division of labour made possible by Accumulation of Capital &

Expansion of market increases national Income & Output which
Facilities saving & Further investment rising Economic Development
Higher & Higher.
Process & growth in a stationary
State is characterized by

Unchanged population

Constant total Income

Subsistence wage

Elimination of profit in excess of the minimum consistent

with Risk and absence of Net Investment.

To smith the economy of a Stationary state finds itself at the

Highest level of Prosperity consistent with its Natural Resources &
Once profit falls, it continues to fall.
Investment also with begin to decline.
The end results of capitalism is A Stationary State.
Life is dull, declining and melancholia
in a Stationary State.

Hence Laissez faire Economics must be encouraged to increase.

Agricultural surplus
Construction Works and
Commercial Activities must be developed through free market.

Smiths Theory Points out

How Economic Growth comes through other policies accompanying it.
There is always inter-dependence of Farmers, Traders & producers.
Smith has developed a static model not a growth model.
Neglect of Entrepreneur
Role of State is ignored.
One sided saving base.
Rigid Division of society between capitalists & labours ignoring the
middle class.
Adam smith did not propound any specific growth
theory. But views on Economic Development are part
of General Economic Principles.

Smith Farmers, Traders & Producers are Three agents

of Growth.

They help in developing Economy raising productivity.

In the absence of Free market economy in Backward

countries state can induce them to produce more.

Every prodigal appears to be public economy and

every frugal man a public benefactor. Smith
Smiths emphasis on


Division of

Expansion of

In the process of Development has become the

corner stone policy under developed countries.
Wealth of Nations is a Dynamic Analysis &
programming of policy for an under developed