Adam Smith Theory of Economic Development | Explain the Adam Smith Theory of Economic Development

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Hi friends, in today’s article we are going to know about Adam Smith theory of economic development. So let’s discuss in details.

Adam Smith is regarded as the father of economics. He was the founder of classical school of economics. He explains the idea of economic development in his famous book ‘Wealth of Nation’.

Adam Smith Theory of Economic Development

Adam Smith theory of economic development can be explained as follows –

Natural Law – Adam Smith was a supporter of natural law in economic affairs. He was the opinion that natural laws are superior to the laws of the state. Nature teaches man the lesson of morality and honesty.

Laissez Faire – Adam Smith was a strong supporter of economic freedom. It means that the state should not impose any restriction on the freedom of action of man.

This principle is commonly known as Laissez faire. The policy of laissez faire allows the producers to produce as much they like, earn as much income as they can and save as much they like.

Division of Labour – When a particular work is divided into several parts and the worker is asked to work on a small part according to their ability and aptitude then that process is called division of labour. Division of labour is also known as specialisation.

As for example, in a large scale readymade garment factory, a man does cutting of cloth, the second man stitches clothes with machines, the third buttons, the fourth makes folding and packing, etc.

According to Adam Smith division of labour helps to increase total capital of a country in the following way –

  • Each worker specialises in a particular type of work, therefore, productivity of worker increases.
  • Since each worker performs the same work again and again, therefore, productivity of worker increases.
  • It results in greater production.
  • It becomes possible to do work quickly and efficiently without putting much strain on workers and industry.
  • Division of labour at international level of has made international trade possible.

Production Function – Adam Smith recognized three factors of production namely labour, land and capital. The production function of Smithian type can be represented as –

Y  =  f(K,L,N)


K = Stock of Capital,

L = Labour force and

N = Land.

It means the output level (Y) depends upon capital stock (K), labour (L) and natural resources or land (N). He gave top most importance to labour as an active factor of production. Without labour we can not produce anything.

Accumulation of Capital – Adam Smith also provided importance on capital accumulation or formation.  Because capital is the life of blood of any productive activity.

Capital accumulation or formation process depends upon the division of labour. This is because if labour produces is more a country accumulates more capital.

Agents of economic Growth – According to Smith there are three agents of economic growth farmers, producers and businessman. It was the free trade, enterprise and competition that led farmers, businessman and producers to expand the market and which in turn, made economic development inter-related. The development of agriculture leads to increase in construction works and commerce.

Cumulative development Process – According to Adam Smith, the process of development was cumulative. Once the process of development starts in gathers momentum to be in cumulative. This process is explained below.

Stationary State – Adam Smith believed that the progressive state was not endless. This process of development ultimately leads an economy into stationary state.

It may be regarded as the state of full employment. It is the condition when the growth of the economy becomes fully static or stagnant.

Limitations of Adam Smith theory of economic development

Several economists criticized Adam Smith theory on the following grounds –

  • Adam Smith’s neglected the role of entrepreneur in the economic development process.
  • The entire theory is based on the unrealistic assumptions of perfect competition.
  • Adam Smith did not provide any importance on the function of Government.
  • Like classical theory this theory is also based on unrealistic assumption of Laissez faire.


So friends this was the concept of Adam Smith theory of economic development. It can be concluded that Prof. Adam Smith did not propound any specific growth theory. His views relating to economic development are part of general economic principle propounded by him.

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