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Adam Smith’s Theory of Economics


The economic realm forms the bedrock of human existence, and its fundamental role can never be ignored. The continuous phenomenon of allocation of scarce resources, distribution, and consumption has been at the heart of human existence since time immemorial. The economic world has, over the years, witnessed remarkable strides that have resulted in to increase in large, multifaceted, and dynamic economies. Economic policies have often been the igniter and power behind the prosperity of nations (Yale, 2022). This has resulted in heavy reliance on economic thoughts that have been developed over the years to gain a comprehensive understanding of various policies that can be rolled out and maintained in different nations around the world. There has been a long history of economic thought that has been integral in the development of various subjects, from political Economy to other fields of economics. Ancient Greek intellectuals such as the like of the decorated philosopher Aristotle presented insights on how wealth was to be acquired. He questioned the relevance of property either being left to private or public dominance; this was further built on by Thomas Aquinas, who reinforced the need to make it a moral obligation for business to sell their goods at just prices. (Aristotle and Business 2017). Ideas and thoughts on the Economy have been flowing through the years; the world has been served by a plethora of theories from economists such as Adam Smith, David Ricardo, and Alfred Marshall, among others. Adam Smith has been regarded as one of the best economic thinkers and dubbed as the father and pioneer of modern economics; his unique ability to utilize and abbreviate economic ideas from his predecessors and make them available to the future generation in a comprehensive way. His systematic approach, concise presentation, meticulous investigation, and collective judgment established the foundation of one of the most sought economic thoughts of all time.

Adam Smith is a towering figure in the history of economic thought.

Born in a remote village in Scotland to a single mother, Adam Smith was lucky enough to secure a scholarship to join the University of Glasgow at the tender age of fourteen. He was later privileged to attend Balliol College (Library of Economics and Liberty). The schooling experience resulted in his first shot at leadership as he was made the first chair of logic in 1751, followed by chairing moral philosophy the next year at Glasgow University.

After close to a decade in the field of academics, Adam Smith exited to offer tutoring duties to the young duke of Buccleuch. This new adventure saw him travel to different parts of France and Switzerland. This experience made him interact with contemporaries such as Anne Turgot, Voltaire, Quesnay, and Jean Rousseau (Library of Economics and Liberty). The ideas he had picked from them were so immense since he retired and began working on his book ‘The Wealth of Nations, published in 1776. This is what installed him as the fountain of contemporary economic thoughts. Adam Smith’s influential work was a critical view on economics and explained why nations become wealthy; he argued that by enabling citizens to pursue their self-interest in free markets, with no government regulations, the chance of prosperity was doubled (Galbraith, 2017). However, his appointment as the commissioner of customs put him at loggerheads with his thoughts since he was tasked with dealing with smuggling, an activity he had previously described as a legitimate activity in his work.

Smith significantly built his reputation through his work ‘The Wealthy of Nations’, which emphasizes how a free-market economy subsequently gives rise to the overall economy thriving. This discounted Smith as a propagator of extreme individualism among most people (Galbraith, 2017). It is, however, essential to note that Smith’s acts and demonstration of ethics and charity were envisaged during his time at Glasgow University, where his lecture subjects of preference were natural theology, jurisprudence, and economics. His previous engagement points to the direction of thoughts that were well-informed and based on historical clarity. Smith’s first work on the theory of Moral Sentiments laid the framework for which The Wealth of Nations was actualized. The theory of moral sentiments is set to answer the question of the potential of arriving at moral judgments, including in events where the behavior of one’s individual is concerned and where the interests of an individual are involved (Smith, 2010). Smith explained this as an individual’s ability to employ reason in taming their desires. It also demonstrates how socialization can be vital in creating markets that can act in fuelling the economic system.

Smith rested his belief that for the nation to be wealthy, the citizens had to constantly work in areas of productivity to better themselves and fulfill their financial obligations. According to Smith, individuals would always be prompted to put them in investments that would guarantee maximum returns at specific risk levels. The leading cause also guided free markets and capitalism to actualize efficiency by fast-tracking supply and demand on the ongoing competition for scarce resources (Introduction to the thought of Adam Smith 2014). He also banked on the significance of institutional frameworks in revitalizing production endeavors for the good of the society. This should comprise a justice system whose solemn duty is to ensure that there is always free and fair competition where everyone thrives.

Adam Smith’s Theory on Economic Development

In this theory, the ideas of Adam Smith in his book ‘The Wealth of Nations are visualized. The theory of economic development stresses the important space occupied by classical economies, and it sheds light on how the human society has revolutionized from the medieval hunter stage towards nomadic agriculture to the feudal society where there is a firm establishment of laws and property rights and finally the modern society characterized by institutions obligated in market transactions. The theory is based on the approaches of natural law, free markets, and division of labor (Singh, 2009). Smith advocated for the application of natural law in the driving of economic affairs. He believed that freedom brings the best out of any individual’s potential and when left alone, would engage in economic activities more prudently for their own good. The government was also required to stay clear on economic activities, as natural laws, as per Smith, were believed to harbor morality.

Smith’s theory of economic development was also based on the theory of free markets. He categorized this as the principle of ‘Laissez-Faire’ (Paganelli, 2020). This implied that the government was not by any chance in the position of restricting the nature of an individual taking part in economic activities. The free market principle was vital since it was built on the framework of the development theory; according to Smith, legal regulation operations would lower the savings rates, and this would, in turn, affect capital accumulation, which is the initial phase of the entire theory. Only through the application of laissez-faire would individuals have the leeway to produce to their full potential and limits, enjoy the highest returns and save to the best of their ability to spur capital accumulation. The Economy was always able to self-regulate and control all its dynamics by using an invisible hand (Singh, 2009). Forces emanating from the desire to achieve self-targets by participants in the free trade space helped minimize the volume of saving for development.

The ‘physical hand’ from the government limits the production capacities of individuals; for instance, in the face of a command economy, a farmer may be limited by the government on products to generate from their farms. The rules may require one, for example, to produce a certain amount of wheat, beans, or potatoes. The regulations may force the farmer to adhere to given needs strictly. This, in Smith’s view, was detrimental. He proposed the idea that the farmer should instead be allowed to participate in the production of whatsoever he wishes. The market would help to construct the decision policy of the farmer; if he sells out only beans and is left with wheat, his decision will be informed by that, and he will stand guided, unlike in the event where the government limited him.

The last critical phase in the theory of economic development, according to Smith, was the role of the division of labor in the Economy. The productivity and relevance of economic thriving productiveness depend on the labor organization (Paganelli, 2020). The ideas of specialization in handling different tasks achieve high productivity levels. In this case, Smith opines that every individual familiarized with a small part of a given enormous task breaks down the complex production process into simple and easily executable tasks while also ensuring efficiency is realized. His concentration put heavy emphasis on the social division of labor that envisaged the cooperation of various societal players in satisfying producer and consumer needs.

The focal point in the theory of economic development revolves around economic growth as an influence of higher rates of investments. An increase in capital stock directly results in to increase in output on the utilization of the division of labor (Galbraith, 2017). Capital stock, in this case, comprises goods used in the production process and those for maintaining productive workers. Higher investment meant increased saving rates, and wages were considered equal for laborers’ subsistence.

Development of the theory

Adam Smith’s ‘The Theory of Moral Sentiments’ set the pace for the Economic development theory. It discussed how the desire to satisfy individual needs naturally ends up working to the advantage of everyone in society. He described this as the ‘Invisible hand’ that led individuals to empower their society while also benefiting from the same through using resources around them. This was a diversion from the previously held mercantilism theory that described wealth on the parameters of being fixed. A nation could only market its goods while not purchasing anything in return. Emphasis was heavily on hoarding minerals such as gold and silver as a sign of being wealthy. The concept is what materialized into the economic theory.

Adam Smith further built much of his thoughts from his experiences with Francis Hutcheson, an Irish national who was also Smith’s teacher in Glasgow. His lectures were intense and engaging, and he was the first in his time to teach in English at the expense of Latin. One of his famous works was ‘The System of Moral Philosophy,’ which stressed utility and scarcity as the most relevant determinants of value (Kanopiadmin, 2010). He can be easily referenced through his famous quote, ‘where there is no demand, there is no price’ this explains the reasons behind, despite water and air being central in the survival of human survival, they still bore minimal or even completely zero value since they were readily supplied in significant quantities by nature. The scarcer a product was, the better value it attributed in the market. These assertions find perfect residence in the thoughts of Adam Smith’s belief in natural rights and how nature controls and regulates itself. It built on his thought of individuals exercising their potential by exploring nature to satisfy their needs.

Hutcheson expressed high regard for the relevance of the division of labor in spurring economic growth. His experiences rested on the need to divide labor to accelerate specialization, improve skills, and exchange knowledge and competencies at free will. The revelations foreshadowed Adam Smith’s critical examination of the integral role played by the division of labor in the thriving of economies. Smith appreciated the interlink of technological advancements in complimenting the labor force while also acting as a conduit for spreading and communicating skills and knowledge that form the baseline of machinery production.

Smith’s theory on the development of economic development had ripple effects on the world of economic thoughts. That notwithstanding, his thoughts were criticized and further developed by a couple of thinkers such as Ricardo and Malthus. For Ricardo, labor embodiment had to be considered carefully in economic growth. The value attributed to a commodity was determined by the relative hours disposed at production (Ucak, 2015). Ricardo believed that labor had to make meanings in what he described as the value of a function of wages which resulted in the successful distribution of income. The hallmark of Ricardo’s thoughts circulated on the need cost should not under any circumstances be measured based on compensation for labor but on what was factored in during production; for instance, if it takes two hours to produce a phone and an hour to produce a monitor, then a single phone is equivalent to the two monitors this is regardless of the amount paid to producers of the phone and monitor in an hour.

Relevance of Adam Smith’s theory in the Modern Economy

Smith’s thoughts on economic development laid the foundations and contributed immensely to the growth of modern-day economics. The theory of economic development provided a reference for understanding the relationship between production and rates of return from it.

Smith’s philosophy of free markets has been incorporated into the economic field, and there has been a growing need for the minimization of government involvement and taxation of free markets. For instance, the United States of America has free trade agreements with twenty countries (USTR, 2020); this, with the government providing defense and education, has resulted in widened trading relations. The United States government has policies that aim to effectively use its population by increasing creativity and encouraging business enterprises’ development. This has guided the capitalist economies in realizing efficiency through meticulous programs on demand and supply and utilization of scarce resources. Smith’s thoughts on the necessity of institutional frameworks in guiding the production process have seen the development of judicial systems and quality boards that ensure fair competition in the market.

The Gross Development product’s inception heavily relied on the ideas articulated in ‘The Wealth of Nations by Adam Smith. Before the publication of the ‘The Wealth of Nations,’ mineral deposits of gold and silver formed the basis of wealth declared by countries. Smith critiqued the idea and elaborated on the importance of countries’ wealth being evaluated based on the production and rate of returns from the production process (Galbraith, 2017). This revelation prompted designing the Gross Domestic Product system that would enable the prosperity of different countries to be measured and evaluated. The slow start at the beginning of countries reluctant to trade with other countries is currently marked by increased import and export business made possible by requisite legislation that has eased the business transactions.

Smith’s ideas also revitalized the labor dynamics in the production process. It is interesting to note that someone offering labor services is rewarded an income and benefits himself; he also directly builds on the society since his output must trigger a value to generate income in the highly competitive market. This builds on the skill competence and rapid innovation in the spirit of the laborers seeking to maintain their economic niche. Division of labor has also fast-tracked organization and management in various spheres of production; individuals have been able to specialize in their tasks and become more efficient, thus increasing the output realized in production.

The idea of a solid currency to operate concurrently with the principles of the free market economy was propagated by Smith. The introduction of hard metals to be used as currencies was aimed at diminishing the possibilities of the government in overflowing circulation in the market since tracking down on the expenditure from the same would be detrimental; solid currency provided regulation and checks on spending. This has evolved to the modern-day currencies used in different countries to monitor their economic situations while also being able to transact business activities.


Adam Smith’s theory on economic development stands to date as the most significant stride in the field of economics. Through his book ‘The Wealth of Nations,’ the inception of the modern Economy was realized. It is clearly evident that his thoughts laid the framework for the economic thinking that has revolutionized humanity discourse and established economic interactions of countries on economic spheres. The theory of economic development is not only an inquiry into the economic spectrum but also a model of how different nations can realize the importance of their wealth in an environment where fair competition is practiced, and his ideas remain the cornerstone as far as economics is concerned.


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Singh, V. B. (2009). Adam Smith’s Theory of Economic Development. Science & Society, 23(2), 107–132.


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