Adam Smith on Inequality and Factor Incomes: His Relevance for Contemporary Development Challenges

The primary purpose of the present paper is to dispel the common perception that Adam Smith was only a proponent of laissez faire policy, and was not concerned with inequality and the role of the government. It points out that income inequality and the role of the factors of production in generating inequality received a good deal of attention in his writings, especially in “Wealth of Nations”. The paper provides an understanding of Smith’s treatment of inequality and examines its relevance for the challenge faced in the present-day developing world. Smith was not only concerned about inequality and poverty, his position was generally pro-poor. His analysis of the process of determination of the prices of the key factors of production provides valuable insights into how inequality is created. Wage inequality occupies a key position in that, and education is an important factor in generating such inequality. This implies that public policy can play an important role in reducing it.