Adam Smith Thought in Economic

Who Was Adam Smith? Why Is He Considered the Father of Economics? (investopedia.com)

Adam Smith is known as father of economics. We get his ideas about economic
development from his well-known book, “An Enquiry into the Nature and Causes of Wealth of
Nations” (1976) which has tremendously influenced the thinking about economic growth and
development.

The crucial aspects of development theory as propounded by Adam Smith are – (1)
division of labour and (2) capital accumulation. Productivity of labors increases through division
of labour. The two factors that facilitate the use of more division of labour are capital
accumulation and size of market. Today Adam Smith reputation rests on his explanation of how
rational self-interest in a free-market economy leads to economic well-being. It may surprise
those who would discount Smith as an advocate of ruthless individualism that his first major
work concentrates on ethics and CHARITY.

Smith did not view sympathy and self-interest as antithetical; they were complementary.
“Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect
it from their benevolence only,” he explained in The Wealth of Nations.

Just how individuals can best apply their own labor or any other resource is a central
subject in the first book of the series. Smith claimed that an individual would invest a resource—
for example, land or labor—so as to earn the highest possible return on it. Consequently, all uses
of the resource must yield an equal rate of return (adjusted for the relative riskiness of each
enterprise). Otherwise reallocation would result. GEORGE STIGLER called this idea the central
proposition of economic theory. Not surprisingly, and consistent with another Stigler claim that
the originator of an idea in economics almost never gets the credit, Smith’s idea was not original.
The French economist TURGOT had made the same point in 1766.

The philosophy of free markets emphasizes minimizing the role of government

intervention and taxation in the free markets. Although Smith advocated for a limited
government, he did see the government as responsible for the education and defense sectors of a
country.

From Smith comes the idea of the "invisible hand" that guides the forces of supply and
demand in an economy. According to this theory, by looking out for themselves, every person
inadvertently helps create the best outcome for all.

A hypothetical butcher, brewer, and baker in this economy hope to make money by
selling products that people want to buy. If they are effective in meeting the needs of their
customers, they will enjoy financial rewards. While they are engaging in enterprise to earn
money, they also provide products that people want. Smith argued that this kind of system
creates wealth for the butcher, brewer, and baker and creates wealth for the entire nation.

According to Smith's beliefs and theory, a wealthy nation is one that is populated with
citizens working productively to better themselves and address their financial needs. In this kind
of economy, according to Smith, a man would invest his wealth in the enterprise most likely to
help him earn the highest return for a given risk level. The invisible-hand theory is often
presented in terms of a natural phenomenon that guides free markets and capitalism in the
direction of efficiency, through supply and demand and competition for scarce resources, rather
than as something that results in the well-being of individuals.

For Smith, an institutional framework is necessary to steer humans toward productive

pursuits that are beneficial to society. This framework consists of institutions like a justice
system designed to protect and promote free and fair competition. However, there must be
competition undergirding this framework, and competition is the "desire that comes with us
from the womb, and never leaves us, until we go into the grave."

Hafizhah Dzakirah

20220430174

IPIEF