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Theoretical Survey

Classic 1: Adam SmithPolitical Economy of

DevelopmentSemester II 2008-2009

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Historical Context

It is an integral part of the ScottishEnlightenment (18 th Century) relating tophilosophy and economics

Like the other Scottish moral philosophers,emphasis on self-interest, sympathy, andbenevolence.

Emerge as a critic toward mercantilismpractices

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Practical Theory

Smiths work is concerned to show how the free pursuit of private gain can act to raise the levels of living of the entirecommunity.

In the work of ethics Smith shows how self-interest can belinked to an appreciation of the role of the community insupporting and disciplining individual activities

In the work of economics Smith shows how individual activitiescan be pursued within the community to the mutual benefit of both individuals and community

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Practical Ethics

Smith wrote on ethics in his Theory of Moral Sentiments (1759)

Natural liberty natural lawsgoverning human life

People should be allowed to pursue

their self-interests The actions of individuals togethergenerated a harmonious society

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Practical Economics (1)

The ethic of individual action within the communitywas represented in Smiths Wealth of Nations (1776)

Wealth was derived from creative human labor

working on available natural materials in order toproduce useful objects.

The mechanism of the marketplace acted to regulateeconomic exchange can be seen in terms of thecontributions and rewards of land, labor, and capitalto the productive process.

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Practical Economics (2)

Key ideas of a model of the economy as adeveloping system: (a) the division of labor

specialization in production coupled withtechnical innovation allows vastly increasedproduction and economic growth (b) the notionof the market the sphere of exchange wherebuyers and sellers meet in a self-regulating

system

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( c ) the postulate of economic rationality allbuyers and sellers are rational agents who knowtheir own wants (d) the notion of spontaneous

order the pursuit of individual satisfactionsgenerates via mechanism of the invisible hand optimal societal benefit (e) the idea of economicprogress over time as the market freed of mercantilist restriction worked to secure thegrowing wealth of the nation

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The Division of Labor

The core idea was that of the advancing division of labor which was regulated by the institution of themarket

The concept had two senses: (1) specializationwithin the labor force (2) the sectoral division of theeconomy into productive (helped the economy todevelop) and non-productive sectors (includedservices, professions, and governments)

The sum total of the activities of the productivesectors advanced the total of national wealth