In addition to the concept of the economic world as a great natural community created by

division of labour, we can distinguish in Smith’s works two other fundamental ideas around
which his theories are framed. First is the idea of the spontaneous origin of economic
institutions and secondly, their beneficent character. These two are called as “Naturalism”
and “Optimism”. They are closely related and frequently mixed up in his work.
Smith proved that all economic institutions created by human beings came into existence
spontaneously. For this he gave many examples like division of labour, money, capital,
theory of demand and supply etc. Through a process of evolution man felt the need and
established various economic institutions.
Division of labour is not the effect of human wisdom. Division of labour is the result of the
common instinct among men to barter and exchange. It is spontaneously developed under
the influence of self-interest which acts simultaneously. This is quite clear from his
statement, “It is not from the benevolence of the butcher, the brewer or the baker that we
expect our dinner but from their regard to their own interest”.
Similarly, money is the result of the collective instinct of people, guided by personal
motives. The desire to barter and exchange gave rise to money. As people realised many
difficulties in the barter system of exchange, they thought of a medium of exchange and
invented money. “Money is thus, the product of the simultaneous action of a great number
of people, each obeying his personal inclination”. (Gide and Rist).
The same position is with capital. To Adam Smith, capital was the true source of economic
life. He gave too much importance to capital and treated it as a fountain of national wealth.
The accumulation of capital is mainly due to the simultaneous efforts of thousands of
individuals. People, motivated by self-interest, spontaneously save something out of their
income and employ these savings in productive activities.
Another example of Smith’s naturalism or spontaneous origin of economic institutions is his
theory of demand and supply. Producers supply commodities according to the demand.
They try to secure a balance between demand and supply. Because then only, market price
will be equal to normal or natural price, which is good not only for themselves but also for
all.
Smith also extends his naturalism to other spheres. For example in the case of population,
he maintains that variations in the wage rate regulates the supply of labour, through
changes in population. If wages are more than subsistence level, prosperity of the workers
leads to an increase in population. But when wages are below the subsistence level, poverty
and misery cause the death of many.
For Adam Smith Naturalism and Optimism are inseparable. Economic institutions are not
only natural but also beneficial. Smith believed that self-interest not only creates and
maintains economic institutions, but ensures that the nation progresses towards greater
wealth and prosperity.
Smith thus tried to prove that these spontaneous institutions were also best. Even though,
this philosophy of naturalism and optimism pervades all economic theories, he never
applies this concept to all. In fact optimism is intended for production and not distribution.