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Adam Smiths Theories Of Economic Growth Economics Essay

Abstract: The goal of essay wants to explain Adam Smith's theories of financial growth contributing to the current financial development through investment and capital accumulation. Moreover, this will also shows the role of agriculture in the industry sector and the division of labor in the agricultural sector to the industry sector in the economical development.

The great classical economists of the eighteenth centuries were all development economist authoring forces determining the progress of nations as the countries of embarked on the procedure of industrialization. The question of why the pace of development differs between countries has been at the forefront of economical enquiry ever since. One of the Adam Smith's most important contributions was to introduce in to the notion of increasing returns based on the division of labor and balanced between agriculture and industry. He emphasized that the growth of output and living standards is first and foremost on investment and capital accumulation. What is the outcome of the investment and capital accumulation for developing country?

First, to know the relationship between the economic growth from the investment and capital accumulation, we should know what the capital accumulation means. The administrative centre accumulation is the fact that it enhances a country's capacity to produce goods in the future and enables it to growth fast. You will discover various kinds of capital goods such as first, plant and machinery, used in the factories and offices, which yield no utility directly but produce consumption goods and services, infrastructure investment, which partly provides goods and services directly and once makes other forms of investment more productive, for example transport facilities, telecommunications, power generation, the provision of water facilities and so on, second, expenditure on the research and development (R&D), which might improve the productivity of labor or capital, or both. R&D can lead to new inventions and then to innovation-either process innovation or product innovation. Process innovation makes the production of existing products better. Product innovations involve the creation of new products that not only add to utility but also enhance productivity by enabling new means of doing things, for example information technology. The last an example may be social expenditure such as investment in health insurance and education, which also provides some utility directly but at exactly the same time, makes individuals and society more productive.

Indeed if the capital is defined as any asset that generates the additional future blast of income to society, many goods and services ought to be included as a part of a country's capital stock. Developing economies lay great focus on the value of capital accumulation, and stress the need to raise the level of investment in relation to output. Development is associated with industrialization and industrialization with capital accumulation. Rostow (1960) defined the process of take-off into sustained growth in terms of a crucial ratio of investment to national product. Arthur Lewis (1955) has described the procedure of development as you of transforming a country from being truly a 5 per cent saver and investor to a 12 % saver and investor. Actually, it is common for countries to calculate fairly precise rations of investment to national income which will be required either to achieve a specific rate of growth or even to prevent per capita income from falling. H. G Jonhson (1969) singles out capital accumulation in its widest sense as the distinguishing characteristic of development, and has described the structural transformation of economies as generalized process of the capital accumulation. He emphasizes that the condition of being developed consists of having established, efficient social and monetary mechanisms for the maintaining and increasing large stocks of capital per head in the many forms. Similarly the health of being 'underdeveloped' is seen as a the procession of relatively small stocks of the many varieties of capital.

The returns to investment in developing countries will probably higher than in developed countries, which curently have large levels of capital per head. In countries where specialization and the division of labor is minimal, the scope for capital allowing more round about ways of production and increase productivity will be higher than where specialization has reached a high level of sophistication. Moreover, in technologically backward countries the pace of growth of capital necessary to absorb new technology may very well be greater than in advanced countries. By definition, technologically backward countries also have a backlog of technology to constitute. Furthermore, in a labor-abundant economy with a low capital-labor ration, the very act of capital deepening- giving each worker a little more capital to work with- may make a considerable difference to total product, a lot more than in countries where the procedure for capital deepening has been a continuing procedure for some length of time. All these factors represent important contributions that capital can make to economic progress, which might be relatively more important the smaller the original capital stock of the country is relative to its population. It is a familiar monetary production that the scarcer one factor of production is in relation to another, the higher its productivity, all the things being equal.

Additionally, Adam Smith emphasizes that the increasing returns based on the division of labor. He saw this vision of labor gaining from the specialization as the very basis of the social economy. This problem was explained by Arthur Lewis in a dual economy with today's exchange sector and indigenous subsistence sector, assuming that there are unlimited supplies of labor in the subsistence sector in the sense that the supply of labor exceeds the demand for labor at the subsistence wage. The marginal product of workers in the subsistence sector is add up to or less than the subsistence or institutional wage so a reduction in the amount of workers would not lower the common (subsistence) product of labor and might raise it.

The marginal product of labor may be zero or negative in an economy that is still at a reasonably low degree of development and increasing an instant growth of population. Among diminishing returns in agriculture is an activity that is likely to diminishing returns of owning to the fixity of the way to obtain land. However, in the essay of Malthus on the Principle of Population (1798), it claimed that there surely is a regular tendency in all animated life to increase beyond the nourishment prepare for it. According to Malthus, population goes on doubling itself every 25 years, or increases in geometrical ratio. In cases like this, it is a stage that land cannot provide further staff with a full time income unless the prevailing staff reduce their hours of work.

Moreover, Adam Smith also emphasizes that while the diminishing returns in the agricultural sector, increasing returns are prevalent in most industrial activities. He saw that the labor left in the agricultural sector is transferred to the commercial sector. He said that the division of labor (labor specialization) determined the amount of labor productivity, but the division of labor is limited by the extent of the market. However the extent of market partly will depend on the division of labor as the determinant of per capita income. Smith uses the exemplory case of the production of pins. There is absolutely no point in installing machinery to deal with different processes of production if the marketplace is really small. But they will use machinery for their production in economical saving if the marketplace is large. To quote Smith again: When the market is really small, no person can have any encouragement to dedicate himself totally to one employment, for want of power to exchange everything surplus part of the produce of his own labor, which in addition to his own consumption, for such parts of the produce of other men's labor as he has occasion for.

Even though industry is the main factor to financial development, in Smith's vision, the balance between agriculture and industry is vital for the growth and development process to proceed without impediment. Agriculture plays an important role along the way of financial development by having a production contribution, one factor contribution, market contribution and foreign exchange contribution.

The product contribution refers to the meals surplus in agriculture sector to feed the commercial labor employed in alternative occupations. In Rostow's style of financial growth, the take-off stage of development must be preceded by an agriculture revolution. He raised the example of the revolution in Britain which is the first country to industrialize. The first experience of agriculture revolution is dependant on the abolition of serfdom and enclosure movement, which raised agricultural productivity and provided surplus labor and food to aid commercial expansion.

In the less developed or developing countries, the marketable surplus of food is the essential stage in the first development because the development requires in the marketable surplus to upsurge in the labor productivity in industry. For instance, in Japan during the Miji Restoration (1867), when landowners were the compulsorily taxed, plus more drastically in Russia in the 1920s, when there is mass genocide of the Kulas (small prosperous landowners) during Stalin's collectivization program [Economic Growth, Development and Globalization, 129]. Moreover, the neoclassical model of development process recognized the importance of the marketable surplus that unless the marketable surplus rises as the demand for food increase, the price of food will have a tendency to rise. Therefore, the marketable surplus is the major constraint on the professional growth.

In the factor distribution for in professional sector, there are two parts: a labor contribution and a capital contribution. The existent labor surplus plays an important role in the development process. Industrial sector can get the low cost of labor released from the agricultural sector in the production process. This means that the lower the price of professional labor, the faster the rate of industrial expansion is. South-East Asian's commercial development is growing extremely fast fuelled by the cheap labor from the agriculture. For instance, the cheap labor in China's industries will lead its financial growth very fast for more than last 2 decades. Secondly, agriculture is a source of saving and capital accumulation for commercial development. For instance, the saving of farmer in the rural bank, the form of taxing the agricultural sector and using the proceeds for investment. Moreover, in traditional way, the government collects taxes through the purchase price policies of marketing boards through establishing agricultural product market. The agricultural product price sold in the market is greater than one providing farmers.

The demand from agriculture is the major source of autonomous demand for industrial goods. In the developing countries, the agricultural sector will probably provide the major market for industrial goods. You will discover complementarities between agricultural and industrial growth. THE GLOBE Bank's 1979 World Development report remarked that "a stagnant rural economy with low purchasing power holds back professional growth in many developing countries. " In other words, a precondition for rapid industrial growth is a rapidly expanding agricultural sector, at least in conditions of purchasing power. There are also relations between the price of the agricultural goods and industrial goods. It is meant that good deal of agricultural goods for industries is the low cost for industries to produce or we can say that industries get the reduced price of material input. But there has to be equilibrium terms of trade between your two sectors to achieve balanced growth between your two sectors.

In Adam Smith vision, without an comprehensive foreign market, manufactures could not well flourish. So agriculture is the top foreign exchange contribution because many countries in the world cannot growth or can growth however, not enough because of their demand. Moreover, the forex is also a resource like saving for commercial sector.

In short, we can say that, Adam Smith theories on "the growth of output and living standards is first and foremost on investment and capital accumulation" and the role of agriculture in development provide a lot of benefit in adding to the monetary development, especially in the developing countries because all current developed countries started with the investment in machine, technology to improve their productivity in both agricultural sector and professional sector. In the agricultural sector in both developed countries and developing countries, machinery is an important factor to enhance the productivities and reduce the use of labors that can do many work in once. On the other hands, they can work in other sector, industrial sector to get the income to boost their living standard. Additionally, in the commercial sector is machinery and technology is successfully encouraging the productivities. Many developed countries are employing machinery and technologies in the industries both heavy and light industries. The growth of productivity makes the countries developed their economic very fast. Moreover, the existing problem of the world is the imbalance between your agricultural sector and the professional sector. So there exists shortage in food to feed the earth population. This shortage make the population of some countries live hungrily. The price of agricultural product is growing, making the world leaders including the United Nations warn the starvation and call for supporting the meals aid for the indegent counties which is facing this issue. Therefore the theories of economic growth of classical Model are playing an important role in the contribution to develop and reduce the poverty and hunger in today's world.

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