In The Adam Smith Theory of Economic Growth, published in 1817, Adam Smith contends that individuals can act to improve the state of their living standards. For example, instead of spending money, or borrowing it, individuals can save it. There are two ways to do this, as Smith describes them: “the first means by which we may encourage the improvement of the condition of the whole body of labour, and of that of the individuals are to employ some particular body of work to give the money a regular and easy way to every person's hands.” The second way, in Smith's Theory, is “to provide the money with such a channel by which it may be accessible to all, and not to a chosen few.” This second way, as Smith clarifies, is not always preferable to the first; for “the difficulty may probably be less in the one case than in the other; because there is no danger from losing the money to those whom we do not know and trust.”
In order to illustrate the theoretical foundation of the theory of economic growth, Smith uses a number of diverse illustrations from real life. One such illustration occurs when two families are discussing where to put a new plant for the children to enjoy when they grow up. One member of the couple suggests that they plant it in the ground close to the house, while the other suggests they plant it in a wider area. When pressed to make a decision, the couple realizes that the narrow area would be more beneficial to them financially.
According to the Theory of Economic Growth, the key to wealth creation is education. For example, the ability to learn something new, coupled with the determination to learn the information is important. Additionally, the knowledge acquired through schooling is considered to increase individuals willingness to work in order to gain wealth. Smith further theorized that this increased wealth is only possible through appropriate government intervention, as without it, everyone would be at equal level financially.
The theory of Adam Smith further extends its scope to include the idea that business owners and managers are also entitled to a portion of the wealth created by their businesses. With the assumption that individuals have an unlimited amount of capital, the value of a company automatically increases. In addition, since entrepreneurs are considered to be individuals, a portion of the profits created is given to them as their reward for their entrepreneurial venture. This principle of the theory of economic growth is also applied to trusts. Since a trust is formed in accordance with the wishes of the beneficiaries, these beneficiaries can receive part of the profits created by the trust, as long as they have agreed to it.
A further assumption of the theory of economic development is that money is a commodity just like food, clothes, and shelter. In addition, prices are also determined according to supply and demand. The theory of production, on the other hand, posits that productive activity always increases the demand for goods and services, while that created by the government or other groups does not affect the demand.
The theory of economic growth is also linked to the theory of markets. According to this second theory, the price system in a country has a great impact on the level of economic growth. If there is high inflation, for instance, products will tend to be priced higher, which will result in consumers increasing demand for goods and services. However, if there is low inflation, consumers may tend to buy fewer products, which will decrease the need for goods and services. Economic growth is believed to be significantly connected to the . . . . . . ability of a country to successfully conduct its economic activities, including its consumption, production, distribution, and investment activities.
The theory of economic development also considers a factor that may be referred to as the theory of potentiality. The theory of potentiality postulates that the size of a country's economy is largely dependent on the size of the amount of goods and services that a country can produce. This theory is used to explain the phenomenon that a country with fewer people have a larger amount of economic output than a country with a larger population. Another aspect of the theory of economic growth suggests that the rate of economic activity rises or decreases depending on the level of technological knowledge possessed by a country. As technology is increasingly developed, the ability of a country to produce goods and services becomes easier. As more individuals are able to partake in the process of technological change, the rate of economic activity also increases.
Adam Smith, one of the country's founding fathers, is considered to be the father of the theory of economic growth. Smith understood the concepts surrounding population, capital, and technology. His analysis, which is still widely used today, is designed to show why certain patterns will occur in a country's economy. By studying microeconomics, Smith was able to show why some areas of the country will grow while others, such as the city of London, will remain static. Other economic theories suggest that national levels of income or wealth will vary depending upon the level of government regulation, national output, and technological output, all of which are based on Smith's ideas.