SMITHS THOUGHTS ON CAPITAL AND POLICY CONCLUSIONS

 

Regarding the function of capital in the process of generating wealth and in economic development, Smith made several significant contributions. First, he made the argument that a country's current wealth is dependent on capital accumulation because this defines the distribution of labor and the percentage of the population engaged in productive work. Second, Smith concluded that economic growth is also a result of capital accumulation. Third, the optimal distribution of capital throughout the various industries is the result of individual self-interest combined with the accumulation of capital.

The function of the capitalist system is crucial to the health of the economy. His pursuit of material gain and financial gain lead the economy toward resource efficiency and economic expansion. Individual savings are the main source of capital in a private property economy. Smith thought that because of the number of wages, which only allowed for the fulfillment of urgent consumer needs, labor could not accumulate capital. He noted that while members of the landowning elite had salaries sufficient to develop capital, they instead used them to support their enormous demand for a high standard of living by engaging in useless labor. The beneficiaries of society, according to Smith, are the members of the emerging industrial class who are working hard for profits and accumulating capital to grow their wealth by saving and investing. Therefore, an unequal income distribution that benefits capitalists is extremely important to society. Economic growth is impossible without an unequal distribution of income since entire years’ worth of output will be consumed.

The Impact of Smith on Policy

The ways in which economies and societies operate have been significantly impacted by Adam Smith's policies. His theories, which are frequently referred to as the "Principles of Capitalism," placed a strong emphasis on the role that individual liberty, rivalry, and self-interest play in promoting economic progress and success.

Businesses were encouraged to function freely under Smith's "Laissez-Faire" doctrine, which refers to letting things happen without a lot of government intervention. Due to the competition among businesses to offer consumers better goods and services, this stimulated innovation and output.

His "Invisible Hand" theory postulated that people unwittingly advance the interests of society while they pursue their personal goals. According to this theory, markets could self-regulate, which would lead to effective resource allocation and economic expansion.

Overall, Adam Smith's economic theories helped to establish modern economics and significantly influenced the way other nations approach their respective economic systems. They still have an impact on debates concerning the advantages of free market competition and the function of government in the economy.

🎯 Following is an animated video that summarizes the theory of Invisible Hand...

Written by : M.Dinushi Madushika & R.M.Chathurika Samanmali

Video Credit: G.A. Shehani Navodya

References:

Skinner, A. S. (1990). The Wealth of Nations Book I - III. . London: Penguin Group.

MAJASKI, C. (2023, March 21). What Is the Invisible Hand in Economics? Retrieved from Investopedia: https://www.investopedia.com/terms/i/invisiblehand.asp#:~:text=The%20invisible%20hand%20is%20a%20metaphor%20for%20how%2C%20in%20a,about%20their%20own%20well%2Dbeing.