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Who is Adam Smith? His Ideology and Contributions

Updated on March 2, 2016
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IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.

Introduction

Today, economics is one of the fastest area of study which deals with the human behavior as well as the environmental resources. The modern scientific form of economics came in to reality only after the publication of Adam Smith’s ebullient work “An Inquiry into the Nature and Causes of the Wealth of Nations” in 1776. so, he popularly known as the father of “political economy”.

When we analyze the history of economic thought, Adam Smith claims a respectable position because he is the first author who scientifically interpreted economics. Compared to ancient economic philosophies, he gave more focus on wealth and property while the forerunners viewed it is only as polity. This hub is a brief explanation on the idea and contributions of Adam Smith.

Adam Smith (1723 – 1790)

Adam Smith born in Fife in Scotland in the year 1723. He educated from the University of Glasgow and University of Oxford. In the year 1751 he become professor in Glasgow University. Where he mainly dealt with subjects like politics, police and administration and other social issues. Du`ring this period he published his first book “Theory of Moral Sentiments” in 1759. there after he moved to London and where he published his great masterpiece book “The Wealth of Nations” in 1776. which became a remarkable one in the development of modern economic idea. From 1778 onwards, he worked as commissioner of customs at Edinburgh, Scotland until his death.

Main Ideas of Adam Smith

Adam Smith developed many revolutionary ideas. He was a fan of physiocracy. So, his ideas are influenced and connected with physiocracy. Following section of this hub provided a very brief explanation about some of his ideas.

i) Division of Labor :

According to Adam Smith, “division of labor is the source of wealth of nations”. And also he argues that division of labor is depends on the size of market. Any how, his concept of division of labor is more effective one because of its advantages. Division of labor will increase the process of specialization. So, it will increase the productivity and output. Further this will again increase the wealth of nation. Other peculiarities of division of labor are, it will increase the skill of workers and save time. so, in short division of labor will help to produce more output with less costs.

ii) Theory of Taxation

The view of Adam Smith on taxation is known as “canon of taxation”. He arose tax as the base for financing the government activities. Basically there are four canons like canon of equity, canon of certainty, canon of convenience and canon of economy. Each of them are mentioned in the following lines.

a) Canon of equity : According to Adam Smith, people should pay the tax amount based on the ability to pay and justice.

b) Canon of convenience : It refers to the time of tax payment. According to Adam Smith, the time must be favorable to the taxpayer. For instance, farmers are favorable to pay taxes in specified seasons.

c) Canon of certainty : By this Adam Smith says that every taxpayer must be aware of time of payment, method of payment, place of payment etc.

d) Canon of economy : Naturally government must spend few amounts for tax collection. Adam smith says that the cost of tax collection must be minimum.

iii) Capital Accumulation

According to Adam Smith, there are three types of capitals in an economy, namely circulating capital, fixed capital and immediate consumption capital.

Here consumption capital are those amount which are allotted for purchasing consumer goods and other services. So, it is not possible to make gain from consumption capital. On other side fixed capital will give returns or reward to the owner. Circulating capital are those, which will earn returns in accordance with the usage of capital. For example, a person’s circulating capital is workers. So he can gain more only when he use more and more workers. In short, circulating capital will give returns based on the variations in the usage of capital.

Adam Smith also disclose that, a portion of people’s wealth will store as savings. This will turn to investment. Increasing of investment will ensure the capital formation. This will finally help the country to achieve growth and development.

iv) Theory of Value

Till the time of Adam Smith, there was only a single concept of value. That is ‘value in use’. But Adam Smith challenged this belief by using his ‘water diamond paradox’ concept. According to him water gives more and more utility but it has no value in exchange. On the other side diamond has has lower level value in utility but having higher value in exchange. So, Adam Smith concluded that the determination of value in exchange as the central problem of an economy. Further he also disclosed how the value of commodities determined. This is popularly known as the ‘labor theory of value’. By this theory, generally he says that the value of commodities will determined by the amount and time of labor embodied in the production process. In short, Adam Smith firstly developed the concept of value in use and value in exchange in the price determination of commodities.

v) Theory of Distribution of Income

The theory of distribution of income of Adam Smith provides a very clear picture of the economy. He broadly categorized the entire economy in to three agents like workers, capitals and land lords. Basically the earning for capitalist, workers and landlords. Basically the reward for capitalist, workers and land lords are profit, wages and rent respectively. These are the reward for their contribution to their functions. The capitalist class own the capital and investment. Further investment will lead to hunt more profits. So, the capitalist can save more compared with other economic agents. In the case of workers, they earn wages for their work. Adam Smith developed many theories on the wage of labor. Among them, iron law of wage rate is popular. By this theory, the workers will earn minimum wage rate. So, that their savings will be nil or very smaller. In the case of landlords, it is entirely different one because they are not engage in any productive activities. They only provides land and earn its reward as rent. Here also landlords can not save anything.

Here another important thing must noted that, Adam Smith did not developed a perfect or clear theory on the distribution of income. For instance, he says that the wage rate will determine based on different theories. He is really flexible to explain how the wage rate will determined. But, generally ‘iron law of wage rate’ is considering as his main theory on the determination of wage rate.

In short, according to Adam Smith, capitalist class is the most productive class and which will enable the country to attain growth and development. All other class are not productive one mainly because they can not save much money.

vi ) Naturalism and Optimism

As like other classical economists Adam Smith was an optimist. In his first book ‘The Theory of Moral Sentiments’, he deals with morality and other related ideas. To explain this idea, he mainly used two words like ‘naturalism’ and ‘optimism’. By the word ‘naturalism’, he simply means that, it is an order which is naturally formed. So, human beings can not influence easily this to make the order in to its perfectness. By the word ‘optimism’, he means that it is a social system built with the composition of moral rules and legal rules. Adam Smith also known as arguer of institutionalism, because he regard individuals or group of individuals as private institutions of an economy. They have their own interest. This private institutions are naturally formed one. the summation of individual interest will be the public interest and which will bring social harmony. To explain how the social harmony will established, Adam Smith divided the entire human actions in to two.they are oral rules and legal rules. Moral rules include many things which ensure the satisfaction of individual interests like improvement of life, acquiring of property, better life etc. So, each person will work for their own benefits. This is because of the working of an invisible hand. He also says that, ‘self love’ is another factor which tend the individuals to maximize satisfaction. On the other5 side legal rules are those rules which are essential when there arose strong negative addiction among individuals. As mentioned above every person will work for their own benefits. But when they work for over satisfaction by squeezing and exploiting others, the legal rules are vital to eliminate this social disequilibrium. This tendency of arrival of equilibrium is popularly known as ‘impartial spectator’.

Conclusion

Adam Smith was an important economist belonged to the classical economics of 18th century. He regarded as the father of modern economics. He is also the first author in economics who developed a systematic structure for economics. He developed many innovative and revolutionary ideas in economics. The most important work of Adam Smith is that, he developed economics as a separate branch of study which extracted from politics. In short, he provides valuable contributions for economics having validity even in this 21st century.

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