Adam Smith and his Contemporaries (D.

Ricardo &
T. Malthus) on Development

Introduction to Development Studies

01st February 2023
Solano Da Silva

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CLASS OBJECTIVE >>

To understand Adam Smith’s perspective on development

and…

…responses to Smith’s views by some other classical

economists (David Ricardo & Thomas Malthus) and…

… to reflect on the implications of the same for development

thinking.
OUTLINE >>

1. Brief background to Smith’s endeavour

2. The mechanics of economic growth
3. Growth analysed historically
4. The limits of economic growth
5. The contradictions of economic growth
6. Contributions by David Ricardo
7. Contributions by Thomas Malthus
8. Reflections for developing economies

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1. BACKGROUND >>

▪ The classical economists were intellectual products of the European

Enlightenment and shared a concern for human progress.

▪ Adam Smith was concerned with the problem of economic growth:

its sources, forms and effects.

• Purpose of analysis: to identify the forces in society which foster

or impede progress.

Adam Smith 1723 - 1790

1759 1776
2. THE MECHANICS OF ECONOMIC GROWTH >>

▪ Interaction between factors of production

▪ Economic growth through repeated cycles of capital

accumulation
• Possible due to Increasing Returns to Scale (IRS)
• Driven by division of labour & economies of scale,
motivated by…

• The profit motive and…

‘…to tuck, barter, and exchange and to better one’s lot…’

• Market competition
‘It is not from the benevolence of the butcher, the brewer, or the
baker that we expect our dinner, but from their regard to their own
interest’
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2. THE MECHANICS OF ECONOMIC GROWTH >>

▪ The Free Market; a conducive economic arrangement for

growth
• Buyers and sellers
• Natural prices
• Efficient allocation of resources
• Investment & consumption decisions
• Greater output, employment & welfare

▪ The role of the state/governments

• [limited to] ‘… justice, police, revenue and arms… which
provide security necessary to incentivise economic activity’

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3. ECONOMIC GROWTH ANALYSED HISTORICALLY >>

▪ Rise of commercial activities in Europe, after collapse of Roman

Empire

▪ [Theoretically] Agriculture as engine of economic growth

▪ [BUT] …saw stagnation in agriculture

▪ [INSTEAD] international trade = appetite for foreign goods

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3. ECONOMIC GROWTH ANALYSED HISTORICALLY >>
▪ [INSTEAD] international trade = appetite for foreign goods

• International trade changed norms and customs and sprouted manufacturing

‘The habits, besides, of order, economy, and attention, to which mercantile business
naturally forms a merchant, render him much fitter to execute, with profit and success, any
project of improvement’ (Smith 1776: 412).

• New institutional factors increased agricultural productivity = capital

accumulation
‘…commerce and manufactures gradually introduced order and good government, and
with them, the liberty and security of individuals, among the inhabitants of the country,
who had before lived almost in a continual state of war with their neighbours and of
servile dependency upon their superiors’ (Smith 1776: 412).

• Manufacturing finds cheap inputs from agriculture and demand for its goods in
the countryside

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3. ECONOMIC GROWTH ANALYSED HISTORICALLY >>

Absolute Cost Advantage: Trade as an engine of Growth

▪ A party’s (Individual, Company or Country) ability to produce a

certain good or service at a lower cost (i.e., more efficiently) than
another party.

▪ All countries can simultaneously gain from free trade if:

• They specialised in producing those goods which they had an
absolute cost advantage and then…
• Trade these goods for the goods (cheaply) produced by other
countries.

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4. THE LIMITS OF ECONOMIC GROWTH >>

▪ Extent of markets (advocated free domestic

and international trade)

▪ Insufficient supply of labour

▪ Exhaustion of natural resources Low possibility

▪ Decline in profit motivation due to

• Competition amongst capitalists
• Wage increases

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Lessons for development?

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5. THE CONTRADICTIONS OF ECONOMIC GROWTH >>
Humans as Producers

▪ People may have relatively equal capacities for self-realisation but the
capability for self-realisation depends on social & work environment

▪ Division of labour has a high price… life spend performing simple

operations… results in an inability to exercise inventiveness…
resulting in a person becoming stupid and ignorant
• Only solution is education for all for a ‘modest reward’.

▪ ‘Wherever there is great property there is great inequality’ and

without substantial ‘trickle down’ to the masses a society would be
morally unsatisfactory and risk social stability.
• Advocated benevolence

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5. THE CONTRADICTIONS OF ECONOMIC GROWTH >>
Humans as Consumers

▪ The pursuit of ‘wealth and greatness’ is a ‘deception’ because beyond

a certain modest level of consumption brings no increase in
happiness, and often unhappiness

▪ A good society was one in which people attained happiness through

fulfilling basic human needs and not in the pursuit of unlimited
wants.

▪ The only worthwhile social good is the pursuit of happiness through

tranquillity and not the power and riches.

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5. THE CONTRADICTIONS OF ECONOMIC GROWTH >>
A Good society

[Avoids] The disposition to admire, and almost to worship, the rich and powerful, and
to despise, or at least, to neglect persons of poor and mean condition, though necessary
to maintain the distinction of ranks and the order of society, is at the same time, the
great and most universal cause of the corruption of our moral sentiments. (Smith 1761)

All the members of human society stand in need of each others assistance . . .Where the
necessary assistance is reciprocally afforded from love, from gratitude, from friendship,
and esteem, the society flourishes and is happy. All the different members of it are
bound together by the agreeable bands of love and affection, and are, as it were, drawn
to one common centre of mutual good offices. (Smith 1761, p. 85)

And hence it is, that to feel much for others and little for ourselves, that to restrain our
selfish, and to indulge our benevolent affections, constitutes the perfection of human
nature; and can alone produce among mankind that harmony of sentiments and
passions in which consists their whole grace and propriety. (Smith 1761 p. 25)

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6. CONTRIBUTION OF ADAM SMITH >>
Reflections…

• What is development?

• How can development be induced?

• Are there limits to development?

• Are there contradictions in development?

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6. CONTRIBUTIONS BY DAVID RICARDO >>

• Factors of production also include technology

• Theory of comparative advantage (c.f. Absolute Cost Advantage)

Countries should specialise in the production (and subsequent exchange) of

goods and services for which they have a lower opportunity cost relative to that
of their trading partners

1817, 1819 & 1821 David Ricardo 1772-1823

6. CONTRIBUTIONS BY DAVID RICARDO >>

▪ Sources of growth

• Technology (in addition to other factors)

• International trade: under comparative cost advantage

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6. CONTRIBUTIONS BY DAVID RICARDO >>
▪ Ricardo’s production function is subject to Diminishing Returns to Scale
(DRS) [unlike Adam Smith]

• Predicts long run decline in the rate of profit (killing the incentive to
invest)

• Profits are squeezed between: (a) rising rents and (b) rising
wages.

↑ demand for differential grades of land = ↑ rents

↑ population + differential grades of land = ↑ wages

↑ rents & ↑ wages = ↓ profits

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6. CONTRIBUTIONS BY DAVID RICARDO >>

▪ Limits and Problems of Economic Growth

• Diminishing Returns to Scale (DRS)

• Decline in Roπ
• The fixity of land

• Technology-induced displacement of labour

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6. CONTRIBUTION OF David Ricardo >>
Reflections…

• What is development?

• How can development be induced?

• Are there limits to development?

• Are there contradictions in development?

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7. CONTRIBUTIONS BY THOMAS MALTHUS >>

Key contributions to the problem of economic growth

1. Role/Problem of Demand: (1820) Principles of Political

Economy

2. Theory of population: (1798) An Essay on the Principle

of Population

Thomas Malthus 1766-1834

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7. CONTRIBUTIONS BY THOMAS MALTHUS >>
1. Role/Problem of Demand: (1820) Principles of Political
Economy

▪ Malthus disagreed with Smith and Ricardo:

• That savings automatically resulted in investments
• That supply creates its own demand (Say’s law).

▪ Against the view that supply of inputs (N, L, K, S) was the sole
determinant of growth of output.
• Instead focused on the role of demand for economic growth.

▪ Malthus argued that if an economy is to continue growing then

Effective Demand (defined as both the willingness and ability to
spend/consume) plays a critical role.

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7. CONTRIBUTIONS BY THOMAS MALTHUS >>
2. Theory of population: (1798) An Essay on the Principle of
Population

“population, when unchecked, goes on doubling itself every 25 years, or

increases in a geometric ratio [whereas] it may be fairly said - that the
means of subsistence increases in an arithmetic ratio”.

“Taking the world as a whole concludes that the human species would
increase (if unchecked) as the numbers 1, 2, 4, 8 , 16, 32, 64, 128 256
and subsistence as 1, 2, 3, 4, 5, 6, 7, 8, 9.”

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8. REFLECTIONS FOR DEVELOPING ECONOMIES >>
From the theory of demand...

▪ Importance of demand to the growth process.

• Limited effective demand in a less developed country could
prevent the development of both industrial and agricultural
sectors.
• Economic growth required a balance between the incentive to
produce and the will to consume.

From the theory of population...

▪ Mismatch between population growth and food production can

result in a low-level equilibrium trap occurs.
• Prognosis regarding population-food mismatch possibly relevant
to some developing countries.

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6. CONTRIBUTION OF Thomas Malthus >>
Reflections…

• What is development?

• How can development be induced?

• Are there limits to development?

• Are there contradictions in development?

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REFERENCES

Cannan, Edwin T. (1976), ‘Editor’s Introduction’, in Edwin T. Cannan (ed.), The Wealth of
Nations, Chicago: University of Chicago Press, pp. xix–liv.

Kwangsu Kim (2009) Adam Smith's theory of economic history and economic
development, The European Journal of the History of Economic Thought, 16:1, 41-64.

Misra, S. K. and Puri, V. K. (2010), ‘The Classical Theories of Growth and Stagnation’, in
Development and Planning: Theory and Practices, 13th ed. Himalaya Publishing House Pvt. Ltd.
Mumbai, pp. 97-109.

Thirlwall, A. P. (2011), ‘Classical Growth Theory’, in Economics of Development, 9th ed.

Palgrave Macmillan: Delhi, pp. 132-140.

Kurz, H. D. & Salvadori, N. (2003) ‘Theories of Economic Growth: Old and New’ in The
Theory of Economic Growth: A ‘Classical’ Perspective, Salvadori, N. (ed.), Cheltenham, Edward
Elgar, pp. 1 – 22.

Meier, G. M. & Rauch, J. E. (2000) ‘Comment I.C.1: Classical Growth Theory’ in Leading
Issues in Economic Development. 7th ed. New York: OUP, pp. 76 – 77.

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