In the absence of adequate demand, only a little degree of division of labour or specialization can be used and a good deal of capital stock is likely to remain underutilized. This is because if size of market for a good (i.e., the magnitude of demand for it) is quite small, it will not be profitable to introduce a higher degree of division of labour along with the use of large capital stock. If the extent of market is small, it will not be profitable to produce on a large scale which requires introducing a higher degree of division of labour or specialization. It is worth noting that Adam Smith expressed the view that industry generally permitted greater scope for division of labour or specialization than agriculture and, therefore, in rich developed countries industrialization had taken place to a greater extent.Īnother important related notion put forward by Adam Smith was that division of labour is limited by the size of market’. Along with division of labour it is acceleration of investment or capital accumulation that leads to the increase in growth of output and living standards of people. Given the crucial significance of increasing returns based on division of labour, productivity of labour rises with the increase in the size of market. Thus Thirlwall writes, “It is the notion of increasing returns, based on division of labour that lay at the heart of Adam Smith’s optimistic vision of economic progress as a self-generating process, in contrast to later classical economists who believed that economies would end up in a stationary state owing to diminishing returns in agriculture.” He thought the gain from by division of labour or specialization was a basic feature of social economy otherwise everyone, like Robinson Crusoe, will produce everything they want for themselves. One of the most significant contributions to economics by Adam Smith was to introduce the idea of increasing returns caused by division of labour. He, thus, emphasized the expansion of international trade, which widens market for goods. Division of labour is profitable only if there is adequate market for the goods produced. But Adam Smith points out that the degree of division of labour is limited by the extent of the market. He pointed out that there was a natural tendency among human beings “to truck, barter, and exchange one thing for another.” Among the benefits of division of labour he refers to increase in dexterity, saving in time, and invention of better machines and appliances. His treatment of this aspect of production is classic. Also learn about the relevance of Adam Smith’s Theory to developing countries.Ī very important contribution made by Adam Smith to the analysis of the factors that bring about expansion of output is the division of labour. We explain below these factors in detail. The two factors that facilitate the use of more division of labour are capital accumulation and size of market. Productivity of labors increases through division of labour. The crucial aspects of development theory as propounded by Adam Smith are – (1) division of labour and (2) capital accumulation. He advocated free trade among nations of the world and urged that all restrictions on foreign trade should be removed to promote international specialization so as to increase the incomes of the nations. He laid stress on individual freedom in conducting their economic affairs without any obstructions and restrictions by the Government. We will study below that he advocated the policy of laissez faire, that is, non-intervention of government in economic activities of the individuals. We briefly explain below his ideas about economic development. We get his ideas about economic development from his well-known book, “An Enquiry into the Nature and Causes of Wealth of Nations” (1976) which has tremendously influenced the thinking about economic growth and development. Adam Smith is known as father of economics.
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