Answer to the question no.

1
The contributions of Adam Smith for development and growth: Adam Smith is regarded as
the foremost classical economist. His monumental work. An enquiry into the nature and causes
of the wealth of Nations published in 1776 was primarily concerned with the problem of
economic development. Though he did not expound any systematic growth theory, yet a coherent
theory has been constructed by later day an economist who is explained below:
Natural law: Adam smith believed in the doctrine of ‘’natural law’’ in economic affairs. He
regarded every person as the best judge of his self-interest who should be left to pursue in to his
own advantage. In furthering his own self-interest he would also further the common good. In
pursuance of this each individual was led by or ‘’invisible hand” which guided market
mechanism.
Process of capital accumulation: Smith, however, emphasized that capital accumulation must
precede the introduction of division of labor. Like the modern economists, Smith regarded
capital accumulation as a necessary condition for economic development. So the problem of
economic development was largely the ability of the people to save more and invest more in a
country. The rate of investment was determined by the rate of saving and savings were invested
in full. But almost all savings resulted from capital investments or the renting of land. The
classical economists also believed in the existence of a wages fund. The idea is that wages tend
to equal the amount necessary for the subsistence of the laborers. If the total wages fund at any
time becomes higher than the subsistence level, the labor force will increase, competition for
employment will become Keener and wages will come down to the subsistence level. In such a
situation, some of the workers will find it difficult to pull on below an accustomed normal living
standard. The wages fund was, however, built up of savings and was utilized for hiring labor
through investments. He believed that savings found their way into investment more or less
automatically. Thus the wages fund could be increased by increasing the rate of net investment.
Agents of growth: According to Smith, farmers, producers and businessmen are the agents of
economic progress. It was free trade, enterprise and competition that led farmers, producers and
businessmen to expand the market which, in turn, made economic development possible. The
functions of these three are interrelated. To Smith, development of agriculture leads to increase
in construction works, and commence. When agricultural surplus arises as a result of economic
development, the demand for commercial service and manufactured articles rises. Thus capital
accumulation and economic development take place due to the emergence of the farmer, the
producer and the businessmen.
Stationary state: But this progressive state is not endless. It ultimately leads to a stationary
state. It is the scarcity of natural resources that finally stops growth. In such an opulent state, the
competition for employment would reduce wages to the subsistence level and competition
among businessmen would be profits as low as possible. Once profits fall they continue to fall.
Investment also starts declining and in this way the end result of capitalism is the stationary state.
According to Smith, the stationary state is dull, the declining melancholy. Life is hand in the
stationary state for the different sections of the society and miserable in the declining state. All
this happens in a free market economy.

Criticize his contributions: The great influence of Adam Smith on subsequent thinkers can be
traced in the pattern he set for later discussion on development problems. The emphasis he laid
on the accumulation of capital as fundamental to the development process finds a place in
subsequent theories of development. His idea of stationary state is also taken up and repeated in
later writings on the subject. One of Smith’s significant contributions to the theory of
development has been to introduce into economics the concept of increasing returns based on the
division of labor. According to him, gains from division of labor or specialization are the basis of
a social economy as without it man’s productivity will be very low. Increasing returns implies
rising labor productivity and higher per capita income while diminishing returns means fall in
labor productivity and therefore per capita income which set a limit to the growth of output and
employment. The most important contribution of Smith to the theory of economic development
is his emphasis on capital accumulation and division of labor as the factors that determine
economic growth of a country and further that capital accumulation or investment depends on
savings out of profit generated by growth of industry and agriculture. This is very much relevant
to the growth problem of present- day developing countries which requires acceleration of
investment and capital formation. Besides, Smith’s emphasis on division of labor for raising
productivity of labor is a highly significant contribution to economic thought and to the theory of
development. He uses the term ‘Division of Labor’ in a wider sense which incorporates
technological progress though he does not say so explicitly.

It is worth mentioning that Smith’s vision of development as a cumulative interactive process

based on the division of labor and increasing returns remained neglected for a long time until an
American economist, Allyn Young, revived it in 1928 in his important paper entitled “Increasing
Returns and Economic Progress”. It may be noted that unlike Marshall, Young was not simply
concerned with the factors that raise productivity or cost-reduction within an individual industry
as it expands but explained the increase in productivities in interrelated industries of the
economy as a whole. Therefore, the notion of increasing returns put forward by Young is
sometimes called macroeconomics of scale.
 Answer to the question no. 2

Adam Smith contribution: Adam Smith’s chief contribution was to build a coherent and logical
theory of how the economy works. The elements of Smith’s theory were mostly already available
in the writings of earlier writers. However, in these writings good ideas coexisted alongside
numerous other useless theories. Somebody had to figure out which theories were useful and
which were useless and combine the useful theories into a consistent and persuasive overall
theory that we can reliably use to think about society. This is what Smith did. For this he is called
the father of economics.

David Ricardo contribution: Ricardo used the labor theory of value to show that distribution of
income follows a systematic pattern over time. He sought to promote laissez faire in a non-
contextual way. In his works, Ricardo expounded the conflict between the landlord’s interests
and the capitalist’s interests. As a stockbroker who turned to an economist, Ricardo was fixated
on methodologies and theories of value. He also looked into public finance, diminishing returns,
rent, and international trade. 

Stewart Mill’s contribution: Mill has made a significant contribution to

the theory of economic development. According to Mill, economic development is a function of
land, labor, and capital. He treated land and labor as original factors of production, and capital as
the stock previously accumulated from the production of labor.

In those three economists those theories have some similarities and dissimilarities. Those are
given below:

similarities

Adam Smith David Ricardo Stewart Mills

Stationary state is a natural Stationary state is a natural Stationary state is a natural

tendency for the profit rate to tendency for the profit rate to tendency for the profit rate to
fall in the economy. fall in the economy. fall in the economy.
His publication based on
solving economic problem
He regarded economic
development as a function of
land, labor and capital.
Adam Smith
Smith used graph to describe
the theory.
The agents of growth and
process of growth.
He talks about natural law.
Labor increases productivity.
He focused on diverse
elements that constitute value of value by focusing on the
in exchange such as the cost
of production, labor and
price.
His publication based on
solving economic problem
He regarded economic
development as a function of
land, labor and capital
Dissimilarities
David Ricardo
Ricardo did not do the
following graphical
representation of his theories.
Don’t included agents of
growth and process of
growth.
Did not talk about this issue
Focused on corn production
by applying homogeneous
units of labor and capital.
He emphasized on the theory
concept of utility.
His publication based on
solving economic problem
He regarded economic
development as a function of
land, labor and capital
Stewart Mills
Mills used graphical
representation of his theory.
The control of population
growth.
Did not talk.
Land and labor are two main
factor for production. Capital
is a stock previously
accumulated of the products
of former labor.
He believed in the
philosophy of utilitarianism,
which he would describe as
the principle that holds that
actions are right in the
proportion as they tend to
promote happiness, wrong as
they tend to produce the
 reverse of happiness.

Answer to the question no. 3

Prof. W.Arther Lewis has developed a very systematic theory of economic development with
unlimited supplies of labor. Like the classical economists, he believes that in many
underdeveloped countries an unlimited supply of labor is available at a subsistence wage.
Economic development takes place when capital accumulates as a result of the withdrawal of
surplus. Labor from the subsistence sector to the capitalist sector. Lewis starts his theory with the
assertion that the classical theory of perfectly elastic supply of labor at a subsistence wage holds
true in the case of a number of underdeveloped countries. Such economics are over-populated
relatively to capital and natural resources so that the marginal productivity of labor is negligible,
zero or even negative. Since the supply of labor is unlimited, new industries can be established or
existing industries expanded without limit at the current wage by drawing upon labor from the
subsistence sector. The current wage is what labor earns in the subsistence sector i.e. the
subsistence wage. The main sources from which workers would be coming for employment at
the subsistence wage as economic development proceeds are “the farmers, the casuals, the petty
traders, the retainers (domestic and commercial), women in the household and population
growth.”

In 1954 Sir Arthur Lewis published a paper, ‘Economic Development with unlimited supplies of
labor’ (The Manchester School), which has since become one of the most frequently cited
publications by any modern economist: its focus was a ‘dual economics’ —small, urban,
industrialized sectors of economic activity surrounded by a large, rural, traditional sector, like
minute is largely in a vast ocean.

A central theme of that article was that, labor in dual economies is available to the urban,
industrialized sector at a constant wage determined by minimum levels of existence in traditional
family farming because of ‘disguised unemployment in agriculture, there is practically unlimited
supply of labor and available of industrialization, at least in the early stages of development. At
some later point in the history of dual economics, the supply of labor is exhausted then only a
rising wage rate will draw more labor out of agriculture.

Assumptions of the Lewis Model:

(A) Surplus Labor in the Subsistence Sectors:
The basic assumption of the model is that there exists surplus labor in the subsistence sectors. It
includes labor whose marginal productivity is zero as well as that whose marginal productivity is
positive but is less than the institutional wage. This labor comprises farmers, agricultural
laborers, petty trader’s domestic servants and women.

(B) Importance of Saving:

Another important assumption that Lewis makes is about the savings generated in the capitalist
sector and in the subsistence sector. The capitalist sector invests all its savings for its further
expansion. Those in the subsistence sector, on the other hand squander away their savings, if any
in purchase of jewelry & for construction of temples etc. The propensity to save of the people in
subsistence sector is also lower when compared with that of those in the capitalist sector.

Labors are contributing more in urban than in rural using a graph:

In the given figure, OS represent the real wages which a worker would be getting in the
subsistence sector; it is the average product per worker in the subsistence sector.
OW is the wage rate fixed in the modern sector which is greater than OS (i.e., average product in
agriculture by) 30 per cent. So long as surplus labor exists in the economy any amount of labor
will be available to the modern sector at the given wage rate OW, which will remain constant.
With a given initial amount of industrial capital, the demand for labor is given by the marginal
productivity curve MP1. On the basis of the principle of profit maximization, at the wage rate
OW, the modern sector will employ OL1 labor at which marginal product of labor equals the
given wage rate OW. With this the total share of labor i.e. wage in the modern sector will be
OWQ1L1 and WQ1D will be the capitalists’ surplus. Ow, Lewis assumes that all wages are
consumed and all profits saved and invested. When the capitalists will reinvest their profits for
setting up new factories or expanding the old ones, the stock of capital assets in the modern
sector will increase. As a result of the increase in the stock of industrial capital, the demand for
labor or marginal productivity curve of labor will shift outward, for instance from MP 1 to MP2 in
our diagram. With MP2 as the new demand curve for labor and the wage rate remaining constant
at OW, OL1 amount of labor will be employed in the modern sector. In this new equilibrium
situation profit or surplus accruing to the capitalist class will be equal to WQ2E which is larger
than the previous WQ1D. The new surplus or profits of WQ2E will be further invested with the
result that capital stock will increase and the demand or marginal productivity curve for labor
will further shift upward, say to MP3position. When the demand curve for labor is
MP3 employment of labor will rise to OL3. In this way, the profits earned will go on being
reinvested and the expansion of the modern sector will go on absorbing surplus labor from the
subsistence sector until all the labor surplus is fully absorbed in productive employment.
The theory shows that if unlimited labor is available at constant real wage, the capitalist surplus
will rise continuously and annual investment will be in rising proportion of national income. But
this process of economic growth cannot go forever. It comes to an end when there is no surplus
labor.