Theories Of Economic Development According To Adam Smith

Economic development according to Prof. Meier and Baldwin: “Economic development is a process whereby an economy’s real income increases over a long period of time.” It refers to the adoption of new technologies, transition from agriculture-based to industry-based economy, and general improvement in living standards. The contributions of Adam Smith, David Ricardo and Karl Marx which are mentioned below, to the theory of economic development and growth are of great importance. ADAM SMITH THEORY OF DEVELOPMENT Adam Smith (1723-1790) defines economics as the science of wealth. He is known as THE FATHER OF ECONOMICS because he was the first who put all the economic ideas in a systematic way. It is only after him we study economics as a systematic

According to Adam Smith there are three factors of production which include labour (L), capital (k) and land (N).
Y (output) = f (K, L, N)
In his theory of production function he takes into account land and labour in which he assumes that land is a fixed variable and as labour increases, the total output produced increases at a diminishing rate. DIVISION OF LABOUR:
Division of labour is dividing the process of production into several components assigning each of them in the hands of a labourer or a set of labourers who are specialists in that particular process. Division of labour improves the efficiency of a labourer and thus lead to an increase in the production and widens the extent of market (trade) and thus lead to economic development. It also results in innovations. Also, time and the materials are put to the best and most efficient use.
CAPITAL

So did Adam Smith’s theory of development. A few of them are as follows:
- This theory neglects the role of the middle class which provides the necessary impetus to economic development and concentrates more on the capitalists and the laborers.
- Adam Smith neglected the role of entrepreneurs who bring about innovations and thus lead to capital formation.
- Under Laissez faire, income is not fairly distributed. As a consequence, less important and less urgent goods are produced for the wealthy people while the poor lack basic goods like education, health, housing, good food and ordinary comforts. Under such a situation, the State is not in a position to control economic activity by means of planning and reduce inequalities of income and wealth. He thus ignores the role of the state.
- His entire theory was based on unrealistic assumption of perfect competition which is not found in any economy.
- According to Smith it was only the capitalists, landlords and the money lenders who saved (one sided saving base). In the modern society, the major source of saving is the income receivers and not the capitalists or the