Adam Smith’s Theory of Growth

Topics: Economics, Adam Smith, Laissez-faire Pages: 3 (649 words) Published: August 24, 2012
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Adam smith’s Theory of Economic Growth is based on classical thought , also called as The Optimistic Theory . According to Adam Smith, the process of development never comes to an end . Capital accumulation has two favourable effects . On one hand , it facilitates technological progress by making division of labour possible. On the other, it expands markets by increasing wages. Thus, economic growth continues forever. Smith’s optimism is because :

i)He took into consideration that machines are complementary to labour, but neglected the labour-replacing effect of technology. ii)He assumed constant returns , and bypassed the gloomy effects of diminishing returns. iii)He focused on aggregate wealth resulting from division of labour, economics of scale and the invisible hand . Smith says that individualism is the outcome of the principle of the natural liberty. He says each individual acts freely , according to the natural laws operating within him, he maximizes his individual welfare and his socitie’s welfare in the physical world. According to Adam Smith , the ideal economy is aself-regulating market system that automatically satisfies the economic needs of the people. He arrived at this conclusion more from his observations of the individual behavior and functioning of the society than from some abstract principle. He describes the market mechanism as an “Invisible hand” that leads all te individuals, in pursuit of their own self-interests, to produce the greatest benefit for the society as a whole. He approves only three fields for government action: defence, justice, and public works and institutions. Another important aspect of the classical economists and Adam smith is the doctrine of laissez-faire upholding the idea of the economic liberalism .Smith gave two arguments in support of the doctrine of laissez-faire : (i)Economic liberty allows for full and free working of the mechanism...
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