ADDITIONAL SEMINAR

(ECM: 907)

SUBMITTED TO: SUBMITTED BY:-

RUPALI SATSANGI KANWALJYOT KAUR GANDHI
1801385
 Born on 16th June 1723, Adam Smith was a
Scottish Economist and philosopher.
 He was also known as ''The Father of
Economics'‘
 It is said that “He was the editor and not the
author, organizer and not the originator of
economic science.”
 Smith wrote two classic works, The Theory of
Moral Sentiments (1759) and An Inquiry into
the Nature and Causes of the Wealth of Nations
(1776).
The Development
Theory
 If every individual
Adam Smith He advocated the member of society is
left to pursue his
proposes natural philosophy of free
economic activity, he
law in economic and independent will maximize the
affairs. action. output to the best of
his ability.

Freedom of action Adam Smith opposed

brings out the best of any government
an individual which intervention in
increases society industry and
wealth and progress. commerce.
Adam Smith’s theory is based on the
principle of ‘Laissez-Faire’ which requires
that state should not impose any
restriction on freedom of an individual.

The theory of economic development rests

on the pillars of saving, division of labour
and wide extent of market. Saving or
capital accumulation is the starting point
of this theory.
The policy of laissez-
faire allows the
producers to
Adam Smith believed that it is
safe to leave the economy to be
1. produce as propelled, regulated and
much they like, controlled by invisible hand i.e.

2. earn as much
the forces of competition
income as they
motivated by self interest
can and save as
be allowed to play their
much they like. part in minimizing the
volume of savings for
development.
 Adam Smith recognized three factors of
production namely labour, capital and land i.e.
Y = f (L, K,T)
 He emphasized labour as an important factor
of production along with other factors.

 Since the growth is a function of capital,

labour, land and technology and land being a
passive element. Prof. Adam Smith regarded
labour as father and land as mother. He wrote,
“To farmer land is the only instrument which
enables him to earn the wages of his labour
and to make profits of this stock”.
 A very important contribution made by Adam Smith to the
analysis of the factors that bring about expansion of output
is the division of labour.

Benefits of He, thus,

But he points out
division of
that division of emphasized the
labour:Increase
labour is expansion of
in skill, saving in
profitable only if international
time, and
there is adequate trade, which
invention of
market for the widens market
better machines
goods produced. for goods.
and appliances.
 Division Increased
Specialization
of labor. Efficiency

Labor Invention
Time Increase in
saving of Large
machines numbers saving productivity

Productivity Capital
Savings Investment
increase Accumulation
It is worth noting that Adam Smith
expressed the view that industry
generally permitted greater scope
for division of labour or
specialization than agriculture
and, therefore, in rich developed
countries industrialization had
taken place to a greater extent.
As a means of •Adam Smith gave an
important place to
economic saving and
development accumulation of capital.

He gave a clear
• Their greatest obstacle to
guideline and economic development is
suggestion to the deficiency of capital. In
the developing this respect they are caught
up in a vicious circle of
countries. poverty.
 Low productivity Low Real Income

Capital deficiency Low savings

Low rate of capital Low buying power
formation Low Demand

Low
Investment
Adam Smith points out that
the development process
once started gathers
momentum and becomes
cumulative, i.e., it feeds
upon itself. This happens in
the following ways.
Increase in
savings

More
Accumulation
of capital

Great degree
of division of
labour

Raising productivity
of labor and levels
of incomes of the
people
 Capital
Accumulation

More saving Higher incomes

and higher
and further degree of
investment division of labor.

Increase in
Increase in the
national output
size of market
and income
 Improvement in
technology

The increase in size of

market and availability
of capital
According to Adam Smith, the natural course of
development is

Commerce
Industry
Agriculture
Agriculture creates a surplus and increases
the purchasing power of the people which
generates demand for industrial products. It
also supplies raw materials for industries.
Agricultural growth thus provides a base for
industrial development.
Adam Smith pointed out that
there is limit to the economic
development which ultimately
lands a free market economy
in a stationary state in which
further capital accumulation
ceases to take place and
therefore there is no more
growth of the economy. This
happens because of two
reasons.
• First, there is a limited amount of natural
resources at the disposal of the economy and
after passing through a phase of growth a
point is reached when they are fully utilized
and do not permit further growth of output.

• The second factor responsible for occurrence

of stationary state is fall in profits which
reduces inducement to invest further. Profits
tend to fall as a result of competition among
the capitalists, i.e., investors. This results in
decrease in demand for more capital
accumulation.
 Smith in his model includes just two segments of
the economy, i.e., the capitalists (landlords) and
laboring class. But it is not true, in addition to
these two classes, there is also a middle class
which plays an important role, in the economic
growth. The savings are not just made by the rich
class, the middle class also saves.

 The Smith's model is based upon Laisseze-Fair.

But the non-intervention system is possible just
in dreams. Each govt. has to intervene to tackle
both internal and external matters.
 In Smith's 'model, we do not find the role of
entrepreneurs. While according to
Schumpeter, it is the entrepreneur which
combines other factors of production and it
starts the process of production.

 The Smith's hypothesis regarding stationary

state is also misleading, because economic
growth is not a smooth process. It is
furnished with jumps and shocks. As in this
regards John Hicks says that Smith's model is
a static model.
Thank You.