Adam Smith’s Theory of Economic Growth

Adam Smith’s theory of economic growth is at first sight startlingly different from that of Quesnay and the Physiocrats. In their argument industry produces no investable surplus, and therefore makes no positive contribution to growth, which depends entirely on the reinvestment of the agricultural surplus. By 1776 when Smith published The Wealth of Nations the Industrial Revolution was transforming the North of England, and he perceived more of its implications for output and living standards than many of his successors. In the theory he developed both industry and agriculture play a vital role, but the agricultural surplus has a particularly important effect on growth and it will emerge that he took over crucial elements of Quesnay’s argument which he greatly simplified. He also appreciated (from the 1750s onwards) the immense potential significance for growth of the division of labour in industry — the subject of the first three chapters of The Wealth of Nations — and this emerges as both a cause and a consequence of industrialisation. Moreover, he offers the prospect of rising living standards for the mass of the population — a possibility that Quesnay and indeed many of Smith’s successors never perceived.