ADAM SMITH THEORY OF DEVELOPMENT

EASY

1. Why Adam Smith is called the father of Economics?

Adam smith who is also called Father of the Economics, not due to being the first discoverer in
this field or because he brought revolution with the help of his unique ideas in economic
planning but due to the abbreviation received by him from his seniors and he used it to guide the
next generation economics. He kept his every idea in his book called “Wealth of Nations”,
among which the theory of economics came out to be most important.

2. According to Smith what was the sequence of Development?

As per Adam Smith agriculture was the first natural course of development then came the
industry and lastly commerce. The demand for industrial products is generated only because of
the circulars and increase in purchasing power of people which is created by agriculture. Raw
materials for industries are supplied by the agriculture therefore, a base for industrial
development is provided by the growth of agriculture.

MODERATE

3. What was Smith’s idea on Division of Labour

Adam Smith made a very crucial contribution by analysing the factors which helps in bringing
expansion of output is the division of labour. Such kind of treatment of this aspect of production
is a classic example. He threw the light on the natural tendency of human beings to butter truck
and exchange one thing for another. Talking about the benefits of division of labour in which he
mentioned that it will increase the dexterity it will save time and there will be invention of good
kinds of machines and appliances. He also made it clear that there is a limitation on division of
labour with respect to the extent of market. He also made it clear that only if the goods produced
have a sufficient market then only division of labour will be beneficial. Therefore, he stressed
upon the fact that in order to widen the market for goods there is requirement of expansion of
international trade. Introduction of increasing returns by division of labour is considered to be as
one of the most important contribution of Adam Smith in economics. Adam Smith thought that
basic feature or a specialisation of social economy is the gain from division of labour otherwise
one person will produce more and gain everything that you want for him. With the increase in
the size of the market, the productivity of labour increases and this is considered to be very
important for increasing returns based on division of labour. Decrease in growth of output and
living standards of people is the result of not only the division of labour but also the acceleration
of investment or capital accumulation which resulted in this. Adam Smith said that in
comparison to agriculture sector industries allow greater scope of division of labour which
results in industrialisation to a great extent in developed countries which are rich.According to
Adam Smith division of labour is restricted by the size of market therefore if market is small
then large-scale production will not be profitable since it will need division of labour for
specialisation to be of higher degree.In case the market size for a good is very small then in that
case using large capital stock along with higher degree of division of labour is not profitable. A
good deal of capital stock and a little degree of division of labour or specialisation remains
underutilised if the demand of that good is not adequate. It is because of this reason that it backs
the idea of free international trade which helps in increasing the extent of goods in market and
makes it more profitable and helps in reducing the capitalist class to adjust more capital.

4. What was Smith’s idea on Accumulation of Capital

Saving and accumulating capital was given an important place by Adam Smith in order to
achieve economic development.He stated that industry is not the immediate cause of increase of
capital but they are increased by Parsimony misconduct and prodigality. Subjects which are
accumulated by parsimony is indeed provided by industry but the capital will never be greater
than what is acquired by the industry if parsimony did not save and Store up. Deficiency of
capital is considered to be the largest obstacle to economic development and because of this they
are caught by the vicious circle of poverty.Since the capital stock is smaller therefore the duty of
people is low due to their low productivity the incomes of people are small and because of this
the savings of the people are small which results in the smaller capital stock. According to Adam
Smith the only way to come out of the vicious circle is by saving the profits and investing it in
capital accumulation by the capitalist class in order to accelerate the economic growth of the
country. Therefore, parsimony of the capitalist saves the society according to the Adam Smith.
According to Adam Smith a very large proportion of profits of capitalist class is saved by them
by behaving in such a manner. According to Adam Smith capital accumulation degree of
division of labour helps in increasing the productivity of labour. Division of labour cannot be
increased much without extending the capital accumulation. Productions of different kinds of
equipment used by different classes of workers in the society who are specialised and skilled in
different tasks foster the idea of development. Such a production increases with increase in
capital formation. Increase in industrial output and employment is done with the help of capital
accumulation along with division of labour.
5. What is Smith’s idea of Cumulative Development Process?
Development process becomes cumulative by gathering momentum once the development
process starts, this happens in following ways. Firstly, productivity of labour and level of income
of people is increased with the help of increase in savings which leads to accumulation of capital
which further facilitates a greater degree of division of labour. Secondly the size of market and
demand for good increases due to higher income leads to more capital accumulation. Thirdly
improvement in technology is induced by the availability of capital and increase in the size of
market. Such a cumulative process of development leads to a cheerful note for developing
countries that is we can be sure of more and fast economic development which can catch up with
the present advanced developed countries if they start the development process and right
intensity.
6. What did Adam Smith mean by Stationary State in an economy?

With the help of his faith in increasing returns by increasing the extent of division of labour
Adam Smith advanced towards his approach. He was very much optimistic for growth of
economy in future, he also stressed upon the nature of collective and self-propelling development
process. However according to Adam Smith there is a limitation in development of economy
which in a stationary state leads to free market economy where there is no more growth of
economy because the capital accumulation stopped. Two reasons are responsible for this, Firstly,
at the time of disposal of economy there was a limited natural resource which reached to a point
where they are completely utilised and do not allow further output growth after going through
the phase of growth. Fall in profits is the second reason behind the occurrence of stationary state
which further reduces attraction for investment. Because of the competition among the investors
the profit is observed to reduce. This further leads to fall in demand of accumulation of capital.
Wages of the labours decline due to decrease in demand for labour which is a consequence of
reduced capital accumulation. Therefore, after a comprehensive growth of economy a stage is
reached where there is no more capital accumulation and profit hits the lowest level with lesser
labour wages.

7. What was presented by Adam Smith’s policy of Lassieze Faire

In economic freedom to each and every individual which is unrestricted by government

interventions Adam Smith provided this as a way to achieve economic development. Adam
Smith believed that all men with the help of reason and because of moral sense are aware of the
set of rules of rights all justice and even of morality in general. Therefore, he believed that state
intervention is harmful to human progress.Guided by enlightened self-interest, each individual
was capable of promoting his own well-being and while promoting his own interests he promotes
the welfare of the whole society in the process. It is, therefore, according to Adam Smith, the
production by individuals is led as if by the ‘invisible hand’, to promote social welfare. Thus,
though individual capitalists produce goods to make profits for them but in doing so they
promote social welfare though it was no part of their intention. As a matter of policy, therefore,
Adam Smith advocated the removal of all restrictions on trade, choice of occupation and the use
of property by individuals

DIFFICULT

8. What were the criticisms of the theory of Smith?

From the later discussion that was laid down a pattern can be traced that Adam Smith had
influenced the thinkers that came after him. The theories of thinkers had accepted the stressed
factor in the theory of Adam Smith i.e. accumulation of capital is essential in nature.Later on, in
writings on the same subject his theory of stationery state was accepted and repeated. Also, his
theory of Laissez-faire was backed by subsequent writers. In the same way, subsequent writers
accepted his view of gradual and cumulative development. The concept of increasing returns on
the basis of division of labour is one of the best gifts given by Adam Smith to conceptual
economics. As per him, social economy forms the basis of the gains from division of labour and
in the absence of the same; the productivity e of a human will be extremely low. The model that
has been presented by him gives positive ideas of development and the same is completely
opposite to the pessimistic ideas brought in by classical economics Ricardo, Marx A.P. etc. It has
been written by Thirlwall, “increasing returns formed on the wall of division of labour forms a
valuable notion regarding the optimistic ideas of progress in the economic sector and the same is
still generating process. Also it is completely opposite to the classical economics version which
was a rather pessimistic one as they had a belief that economies are bound to end in a state of
stationary. The same would lead to diminishing returns in agricultural aspects and also be in
contravention to the belief of Marx regarding capitalism leading to collapse because of its onset
of contradictions." Labour productivity is ensured by increasing returns and larger per capita
income. Labour productivity's fall signifies that there is largest per capita income while
diminishing returns and therefore per capita income has a lack of limit to the growth and
output.Factors that determine economic growth such as capital accumulation and division of
labour were the biggest areas of Adam Smith and his most significant contribution to economics
as well. Furthermore, the capital that has been accumulated and its relevant investment depend
upon the profit surplus for the money that has been generated out of growth in the fields of
agriculture and industries. The present day problems have several relevant solutions because of
Adam Smith in the form of investment acceleration and capital formation. Apart from this, the
theory of development given by Smith is also cherished with concepts such as division of labour
for enhancement in productivity. The term division of labour is used by him in the widest
amplitude incorporating important technological aspects which are not mentioned explicitly.
Moreover, greater scope for capital accumulation through division of labour has been very
rightly pointed out by him. Greatest amount of scope is to be given to machinery in terms of
production processes while producing a commodity, eventually resulting in labour productivity.It
is to be mentioned that the vision possessed by Smith regarding development as a process of
cumulative interaction, the basis of which work division of labour and increasing returns, faced
neglect for quite some time. The same got a revival in 1928 because of Allyn Young's paper '
Increasing Returns and Economic Progress'. Young did not only take into account individual
industry but also focused on collective industry goals which would help the entire economy to
grow. This is the reason by the notions of Young are called macroeconomics of scale on several
instances. Due credit has to be given to Adam Smith finally, that international trade based on
specialisation by several countries was accountable to explanation by him and the same was on
the basis of larger efficiency while producing different goods and trade relations. International
market was properly explored and advocated by him in terms of free trade. Free trade was
advocated by him as the same would amount to an increase in the size of market for goods that
different countries produce in order to get benefits as much as possible with reference to division
of labour.

9. What is the conclusion from aforementioned topic?

It is concluded that any specific growth theory was not given by Professor Adam Smith. Several
general economic principles are the basis of economic theories of Professor Adam Smith. As per
R Lekachaman, “it seems like a lot of Smithian ideas are written keeping in mind the UDC of
today's times". Moreover, as discussed above, Adam Smith did not give any specific theory and
the analysis of several theories proves that his theories were not applicable to developing
countries because of the facts that have been discussed earlier.Lastly the Smithian school of
thought cannot be considered extremely practical as no economic and work without minimal
government intervention as properly regulated policies and rigorous regulated efforts are the
guiding principles for the welfare of any economy.

10. What are the merits and demerits of Smith’s ideas?

Demerits:
Restricted Meaning of Wealth:
Only material goods were considered as wealth. Non-material goods like services of doctors,
lawyers and teachers were not considered as wealth.
Neglect Human Welfare:
During the later part of the 19th century, the economists started realizing the humanistic
character of economics. Adam had completely aspect of human welfare.
Ignores the Problem of scarcity and choice:
This definition by giving too much importance on wealth has completely ignored the problem of
scarcity and choice.
Merits :
Control over finances :
According to Adam, viewing economics as science of wealth, would help human keep account of
all their finances by letting them understand the control they have over their own wealth.
Role of government :
Regarding economics as a wealth would make the government take initiatives to do their
financial duties, like, financing public projects, enforce contracts, and grant patents amongst
others.
Basis of Future Economics :
Adam Smith gave the first definition of economics, hence, future terms, ideologies, theories,
would all the wealth definition of economics as its base.

Additional Questions:

1. How is Smith’s theory pertinent to developing countries?

2. How Smith’s theory does demarcate between rural poor and urban rich economies?
3. What is the role of Government as per Smith?

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