2023 is all set to offer a once-in-a-lifetime opportunity for economic enthusiasts across the globe to come together and reminisce about the genius of Adam Smith, on the occasion of his tercentenary. The 'father of Economics' or the 'father of capitalism', as people regard him in the economic sphere, is best known for his book, An Inquiry Into the Nature and Causes of the Wealth of Nations. The simple yet revolutionary ideas introduced by him here altered the course of economic thought and analysis for the better. Here are three groundbreaking philosophies and theories introduced by him that form the basis of classical economics:
Division of Labour
He laid strong emphasis on the division of labour in order to reap the economic benefits of specialisation. Under this, the workers are asked to focus on a single task, or a few smaller ones, to increase their productivity and enhance their skills.
Gross Domestic Product
He believed that the growth potential of an economy can be encapsulated in the total number of final goods and services being produced within the domestic territory of a country, during a given period.
The Invisible Hand
This idea captures the essence of a free market that comprises rational consumers and producers, who care about preference maximization and are interdependent. The interdependency causes the latter to produce what is socially necessary and in demand, and the consumer to complete the exchange. Every free exchange creates signals about which goods and services are economically valuable. These signals are captured in the price system that then spontaneously directs competing consumers and producers—each pursuing their plans—to inadvertently fulfil the needs and desires of others. Thus what prevails is a self-perpetuating condition known as the equilibrium.
Another well-known contribution of his' from this book is the compensatory wage differential. According to this theory, dangerous or undesirable jobs tend to pay higher wages to attract workers to these positions. It indicates towards a direct relationship between wage rate and the substantial risk associated with the given job.
The greatness of Adam Smith is not confined to this blockbuster book. In fact, in academic circles, he is even more critically acclaimed for his first book, The Theory of Moral Sentiments, which dealt with more philosophical than economic matters. Perhaps it was his ability to view economies, countries and societies as a whole, rather than in isolation, that made him the grand thinker and trailblazer that he was.
Gaurika Bhanot
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