![]() Smith observes that, “when the market is small, no person can have encouragement to dedicate himself entirely to one employment, for want of power to exchange all the surplus part of production of his own labour, which is over and above his own consumption, for such parts of the produce of other man’s labour as he has occasion for”. Smith argued that real cost of production shall tend to diminish with the passage of time, as a result the existence of internal and external economies occurring out of the increases in market size.Īdam Smith asserted that division of labour does not depend merely on technological feasibility, it greatly depends on the extent of the market as well and the size of market depends on the available stock and the institutional restrictions placed upon both domestic and international trade. It is subject to law of increasing returns to scale. The production function does not conceive the possibility of diminishing marginal productivity. He wrote, “To him (farmer) land is the only instrument which enables him to earn the wages of his labour and to make profits of this stock”. Adam Smith regarded labour as father and land as mother. ![]() Since the growth is a function of capital, labour, land and technology and land being passive element is least important. He emphasized labour as an important factor of production along with other factors and observed, “The annual labour of nation is the fund which originally supplies it with all necessaries and conveniences of life which it annually consumes and which consists always either in immediate produce from other nations”. He believed that “there is a set of rules or rights of justice and perhaps even of morality in general which are, or may be known by all men by hello either or reason or of a moral sense, and which possesses an authority superior to that of such commands of human sovereigns and such customary legal and moral regulations as may contravene them”. Saving or capital accumulation is the starting point of this theory. The theory of economic development rests on the pillars of saving, division of labour and wide extent of market. Laissez Faire:Īdam 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. These exercise favourable effects on the economic progress of society. Nature teaches man the lesson of morality and honesty. Statutory law or manmade law can never be perfect and beneficial for the society, that is why Smith respects nature’s law because nature is just and moral. He opines that natural laws are superior to law of states. He was a staunch free trader and advocated the policy of Laissez-Faire in economic affairs. Adam Smith opposed any government intervention in industry and commerce. ![]() Freedom of action brings out the best of an individual which increases society wealth and progress. If every individual member of society is left to peruse his economic activity, he will maximize the output to the best of his ability. He advocated the philosophy of free and independent action. The main points of the theory are as under: Natural Law:Īdam Smith proposes natural law in economic affairs. Adam Smith’s ‘Wealth of Nations’ was scientific not because it contained the absolute truth but because it came as a turning point, the beginning of all that came after, as it was the end of all that came before. They believed in science of natural laws and emphasised the significance of agriculture and contended that it is the only industry that can make country wealthy. Physiocracy came into existence due to mercantilism. The most important aspect of this book was a Theory of Economic Development. “He was the man of systematic work and balanced presentation, not of great new ideas but a man who carefully investigates the given data, criticizes them cooly and sensibly, and coordinates the judgements arrived at with others which have already been established”.Īdam Smith contained all his ideas in his “Wealth of Nations”. He was the editor and not the author, organizer and not the originator of economic science. It is not so because he was first explorer in the field of economics, also not because he revolutionized economic planning by his maiden ideas, but because he abbreviated what he had received from his predecessors and handed it down as a guide to the coming generations. ![]() Adam Smith is considered to be the father of economics. ![]()
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