Adam Smith is termed as the father of modern economics. He was the man behind all the basic laws of Modern Economics. He laid the foundation of classic economics followed by the most sophisticated and realistic theories of economics and its effects on the World’s politics.
Definition of Economics by Adam Smith
Adam Smith proposed the definition of Economics as the ‘study of wealth’ in his famous book, “The Wealth of Nations”. The Scottish economist said that Economics is a science of wealth that studies the process of production, consumption, and accumulation of wealth.
As opposed to the other two most famous theories of Marshall and Robbins, he regarded the economic balance and distribution of wealth as a material thing rather than Marshall’s welfare concept or Robbin’s definition of Scarcity.
The definition later helped European nations erect the Capitalism system of Economy and Gross Domestic Product instead of gold and silver reserve accumulation for economic balance.
Adam Smith strongly opposed the accumulation of material wealth i.e. gold and silver reserves as a standard of the wealth of nations; he proposed a whole new idea for the wealth generation and distribution for the wealth of nations.
The two complementary tools for the production and distribution of wealth were the Invisible hand and price system; he outdated the longing gold and silver reserve system in the pre-industrialization era of Europe that was being followed for centuries.
Adam Smith’s Concept of GDP
Adam Smith proposed the concept of Gross Domestic Process of GDP for nations and developed a free exchange economic system for exports in his book “Wealth of Nations”. GDP is a scale of wealth and prosperity of a nation based on its production and distribution capacity instead of how much gold and silver reserves are in its capacity.
His definition helped create a freeway for governments doing imports and exports without imposing taxes and based on the country’s production capacity and quality of products being exported and vice versa.
Adam Smith’s Wage Distribution Theory
Adam Smith, in his elaborated studies in “Wealth of Nations” and “The Theory of Moral Sentiments”, created a wage differential system for workers installed in life-threatening positions. He presented a theory of wage compensation that proposed to pay high wages to the worker in risky places to attract the workers.
Adam Smith profoundly discussed the need for an “invisible hand” in the economic prosperity and disparity in the politico-economic scope of a nation. The supply and demand must be under the influence of the invisible hand in Smith’s definition of economics. He emphasized the minimal role of government in free trade and discouraged the process of taxation in free markets. The invisible hand is definitely the purchase and production power of people.
Invisible hand helps produce raw materials for the consumer market, refine & deliver retail to end-user. The chain completes creating financial equity in the economy. A meal comprises meat, bread, and wine; a baker, butcher, and brewer provided indirectly for the meal to be served at the table.
The producers were rewarded financially for their services while the end-user has to buy all the products as a necessity. In the above case, on one hand, the nation’s food necessity is fulfilled while on the other hand, the financial necessity and economic growth and balance were boosted in the process.
Smith also proposed the distribution of workload in a capitalist market for the production of more goods in lesser time. A worker working for the same task with 10 steps is likely to produce a single product taking a full day while 10 workers working on each step will produce hundreds of products that were produced once a day singlehandedly.
The division theory for prosperity was widely acclaimed throughout the European nations. The trickledown effect of capitalism is based on this theory.
Drawbacks of Adam Smith’s Definition
While acclaimed by many, the theory and classical definition of Economics by Adam Smith was and is still disapproved and criticized by economists around the world.
- The main disapproval of Adam Smith’s theory is by those acclaiming Marshall’s theory of welfare. Both definitions are in contrast with each other. The former implies wealth and terms Economics as purely a science of wealth, while the latter says it is the study of mankind and then of wealth. Adam Smith’s definition of economics focused on consumption and investment of wealth, he does not explain its effects on mankind or its main beneficiary i.e. humans.
- The capitalists’ approach to the economy by Smith and his followers led to the horrible age of slavery for laborers in early 1800s. Smith seldom paid any head to welfare and scarcity aspects of a nation’s economy and wealth. Smith’s theories grew stronger and are still followed in one form or the other.
- The materialist’s approach towards wealth deviating from the cultural and religious norms of European society was a strong point against Adam Smith’s definition. The church thought that it would create materialism and desire for more wealth and aberration from the religion. The main opponents were Carlyle and Ruskin, both termed Smith’s definition of Economics as a ‘Dismal Science’ and ‘the Gospel of Mammon’. Smith’s definition of economics is also referred to as ‘Butter and Bread Science’ in general.
- Robbins was of the view that the present definition does not justify the presence of immaterial things that fall in daily economics. It included things other than plain wealth distributed in trade. The immaterial services were of teachers and doctors; they help grow the society without trading for money. Services were unclear in Smith’s definition.
- Smith was criticized in view of his wage and labor distribution formulas for large-scale industrial production. For industrialists following Smith’s definition of wealth, there was nothing about human welfare; the definition looked like a selfish money-making proposal to generate wealth. Smith defined the economic man as the accumulation of wealth who has no concern for his workers or human welfare.
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