Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter17: Institutions, Policies, And Cross-country Differences In Income And Growth
Section: Chapter Questions
Problem 8CQ
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Question
Give the point of view of the classical economists on economic development. Explain the pros and cons.
![In 1776, Adam Smith ([1776] 1936) published his treatise, An Inquiry into Nature and Causes of the
Wealth of Nations , which was taken by many to be a theory of economic growth. Smith, however,
was clearly concerned with economic development. The classical school of economic thought,
predominantly modeled after Smith, is largely geared toward understanding and explaining economic
development. Smith presented a supply driven model of growth, where output was related to labor,
land, and capital. Thus, economic growth, which is the increase in output, was related to population
growth, investment, land growth, and increases in productivity. According to Smith, society was
dependent on the economy's ability to sustain its increasing workforce. Investment was dependent on
the rate of savings. Land growth was dependent on the ability to acquire more land (through
conquest) or on the increase in the productivity of existing land. He also believed in the division or
specialization of labor as a key factor in economic growth, enhanced by improved machinery and
international trade. Smith argued that increased specialization would increase productivity and
reduce per-unit costs, leading to increasing returns. However, he also thought that, in spite of
increasing returns, such an economy would ultimately stagnate, wherein capital accumulation and
population growth will approach zero. Smith believed that the extension of markets was the key to
economic growth largely through the role that market extension played in creating greater
specialization. Smith emphasized specialization as leading to greater productivity. He also argued
that the mercantilist system was holding back England by limiting its market and, hence, limiting the
division of labor. The mercantilist system, while it promoted the expansion of markets beyond the
more limited markets of feudalism, restricted and regulated markets in many ways that Smith found
objectionable.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F6b8aa816-8770-4596-a86b-2309ba25a4d7%2Fe6765f17-f014-423a-b450-597543d515e1%2Fqekpxfi_processed.jpeg&w=3840&q=75)
Transcribed Image Text:In 1776, Adam Smith ([1776] 1936) published his treatise, An Inquiry into Nature and Causes of the
Wealth of Nations , which was taken by many to be a theory of economic growth. Smith, however,
was clearly concerned with economic development. The classical school of economic thought,
predominantly modeled after Smith, is largely geared toward understanding and explaining economic
development. Smith presented a supply driven model of growth, where output was related to labor,
land, and capital. Thus, economic growth, which is the increase in output, was related to population
growth, investment, land growth, and increases in productivity. According to Smith, society was
dependent on the economy's ability to sustain its increasing workforce. Investment was dependent on
the rate of savings. Land growth was dependent on the ability to acquire more land (through
conquest) or on the increase in the productivity of existing land. He also believed in the division or
specialization of labor as a key factor in economic growth, enhanced by improved machinery and
international trade. Smith argued that increased specialization would increase productivity and
reduce per-unit costs, leading to increasing returns. However, he also thought that, in spite of
increasing returns, such an economy would ultimately stagnate, wherein capital accumulation and
population growth will approach zero. Smith believed that the extension of markets was the key to
economic growth largely through the role that market extension played in creating greater
specialization. Smith emphasized specialization as leading to greater productivity. He also argued
that the mercantilist system was holding back England by limiting its market and, hence, limiting the
division of labor. The mercantilist system, while it promoted the expansion of markets beyond the
more limited markets of feudalism, restricted and regulated markets in many ways that Smith found
objectionable.
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