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It is argued that that while Smith emphasised stock as circulating capital, he assumed a one period-lag between inputs of labour and materials and outputs of saleable goods.This assumption enabled Smith to speak of profits on stock interchangeably as mark ups and as rates of return over time.
In James Tobin’s view, the welfare of populations depends uniquely on these policies and it is important to be aware of their impact.
which is believed to have laid the foundation of economic thought and led to emergence of various schools of economic thought.
Invisible Hand Many economists believe that Adam Smith’s main contribution has been the principle of invisible hand.
Adam Smith emphasised that personal self-interest when directed by market prices is a powerful force promoting economic progress.
To explain his point further, Smith took the example of a factory producing pins.
Smith believed that when each worker specialised in productive function, ten workers were able to produce 48,000 pins per day, or 4,800 pins per worker.According to Tobin, Adam Smith’s specific macroeconomic ideas are not an important part of his legacy to modern ‘new classical’. They reject the Keynesian dichotomy and expect competitive markets to transmute self-interest into public interest in macroeconomic as well as microeconomic outcomes.Adam Smith on Competition According to Smith, with the existence of competition in the economy, even self-interested individuals would tend to promote the general welfare.According to Smith, co-ordination, order and efficiency would result in the planning and direction of central authority. This paper will provide a critical analysis of Smith’s explanation of various economic concepts.It will also provide the arguments put forward by other economists who believe that Adam Smith has left a legacy for economics discipline.Amongst many things, Smith advocated that free exchange and competitive markets would harness self-interest as a creative force.Directed by the ‘invisible hand’ of market prices, individuals pursuing their own interests would be encouraged to produce the goods and supply of the resources that others value cost highly relative to cost.Conversely, when competition is weakened, business firms have more leeway to raise prices and pursue their own objectives and less incentive to innovate and develop better ways of doing things.Gwartney (2000) in support of the above argument stated that competition is a disciplinary force for both buyers and sellers.A few key concepts will be discussed in the following paragraphs to highlight Smithian view and how his views have evolved in the present day economic sense.Smith on Division of Labour Smith noted that specialisation and division of labour permitted far more output.