Question

"History of Economic Thought" short answer question

Provide a detailed description of the process by which Adam Smith believed the wealth of nations was created and self-reinforcing. Draw flow chart.

Answer 1

Adam Smith (1723-1790), was a typical
early economics writer who did not see
economics as a narrow technical theory
but as a grand narrative of the society
with a focus on the interrelatedness of its
different parts.

His argument against the protectionist
argument of the mercantilist doctrines of
protectionism was based on the same
philosophy.
Smith’s major book was titled “An inquiry
into the nature and causes of the wealth
of nations (1776). Two other important
books are “The theory of Moral
Sentiments (1759) and “Lectures on
justice, police, revenue and arms” .

He identified the role of production
(rather than collection of precious metal)
in determining the wealth of nation.

The major assumption of Adam Smith
was that competitive markets exist and
within these markets factors move freely.
Moreover, natural process at work in the
economy can resolve conflicts more
effectively than any arrangements devised
by human beings.

With competitive markets and an absence
of government regulation, the resulting
natural prices bring about an optimum
allocation of resources in that consumers
receive the goods they want at the lowest
possible cost and maximum rates of
growth are ensured.

He argues that economic activities occur out of self interest and not benevolence .

Wealth of nation depends on capital
accumulation because this is what
determines the extent of the division of
labor and the proportion of labor engaged
in productive labor. This in turn
determines overall economic development.
Individual self-interest coupled with
accumulation of capital leads to an
optimum allocation of labor.

According to Smith, wealth of nation
depends on productivity of labor and ratio
of productive and unproductive labor.
Productivity of labor depends on the
division of labor which in turn depends on
the extent of market and capital
accumulation. So wealth of nations is self-reinforcing in nature .