The Economic Theories of Adam Smith

Prepare and submit a term paper on Economic Theories of Adam Smith. Your paper should be a minimum of 1250 words in length. Economic Theories of Adam SmithThis report will discuss different economic theories by Adam Smith, a Scottish philosopher. Adam Smith is the founder of a free-market capitalism. He is also the father of modern classical economics and a proponent of laissez faire economic policies. His arguments against mercantilism made him the father of modern economics. The Scottish philosopher spent many years teaching and publishing some of his lectures in the “Theory of Moral Sentiments” in 1759. The material gained ground and laid the foundation for the publication of “The Wealth of Nations” in 1776 which cemented Smith’s place in history. However, many critics note that in his time Smith did not ‘invent’ the ideas he wrote about. He only popularized the ideas that became known as classical economy. Using his work other economists solidified the theories of classical economy which became dominant during the time of great depression or the global economic crisis. The report will also compare the current economic system with Smith’s and conclude whether he would agree with current policies of today if he was alive. Production Theory From the economists’ point of view, production simply means the creation of goods and services which consumers will buy. Companies are the units of production, and they convert input into output through a transformation process (Kurz & Salvadori, 1995). The theory of production then consists of how a company chooses and combines various inputs to produce an output at a given level in the most efficient manner. The assumption is that decision making is done with the view of maximizing profits. Production is all about creation of wealth which in turn adds to the society’s welfare. Resources are limited and must be efficiently utilized to create the maximum possible welfare. There are different inputs or resources of the society used in the production process. These inputs or resources are the factors of production. Adam Smith identified three factors of production which are land, labor and capital. In the economics the definition of land refers to all the natural resources which are used in production. The land notion includes farming and building land, forests, rivers, lakes, and mineral deposits. Therefore, land does not mean a piece of earth. Labor attributes to both mental and physical efforts used in the production of goods and services. Labor is distinct in that it is the services of labor that are bought and sold. Labor is also unique because it is the reason why economic activity takes place. The supply of labor is measured by the number of hours of work which is offered at a given wage rate over a given period of time (Kurz & Salvadori, 1995). Capital is a man-made input and can be classified as working or circulating capital referring to stocks of raw materials, partly finished goods, and finished goods held by producers. Alternatively, it can be classified as fixed capital which consists of all the equipment used in production. The aspect of specialization is important in the production process. It refers to the concentration of activity in those lines of production where the company or an individual has some natural or acquired advantage. Adam Smith drew attention to the importance of the labor division in his book “The Wealth of Nations”.