MODULE 4

Classical models
For classical economists, the development of the economy has become very sensational. The views of classical economist differ in a number of developmental issues but the essence of their approach was the same.

 We shall take in to consideration about the views of few economist namely: Adam Smith David Ricardo T R Malthus Classical theory of Development

Adam Smith theory of Development

Adam Smith is considered to be the father of modern economics He proposes natural law in economic affairs He advocated the philosophy of free and independent action. He threw light upon the following Laissez faire. Division of labour. Capital accumulation.

Laissez faire
It states that the state should not impose any restriction on freedom of an individual. The theory of economic development rests on the pillars of saving, division of labour and wide extent of market. Saving or capital accumulation is the starting point of this theory. He recognized three factors of production namely labour, capital and land. He emphasized labour as an important factor of production.

Division of labour.
The rate of economic growth is determined by the size of productive labour and productivity of labour. The productivity of labour depend on technological process of a country- which in term depends upon the division of the labour

Division of labour increases the specialisation of task.

Benefits of division of labour(Adam Smith)

Increase of dexterity(cleverness) of worker. Saving time required the produce commodity Invention of better machine and equipments.

Capital accumulation.
The growth of an economy is related to the rate of investment. Capitals stock consists of: a) Goods for the maintenance of productive workers. b) Goods for helping the workers in their productive activities. Agents of economic growth- Farmers, Producers and Businessmen.

Process of economic growth

Adam Smith has portrayed economic growth as a tree. This process is exposed to disturbances by external factors that are not economic but it proceeds continuously and steadily and this way economic development rises higher and higher. It is the scarcity of natural resources that stops growth. Acc to Adam Smith economy is always characterized in a stationary state.

CRITISCISM
Static model Neglect of entrepreneur Ignores the role of state One sided saving base Rigid division of the society Unrealistic assumption of perfect competition Role of improved technology

RICARDIAN THEORY OF DEVELOPMENT

Prof.Ricardo added little to the economic knowledge gathered by Smith. Ricardian system considers agriculture as the most important sector of the economy. Acc to Ricardo, there are three major groups in the economy. They are landlords, capitalists and labourers among whom the entire productive land is distributed.

Assumptions
Supply of land is fixed. Land is used for production of corn and the working force in agriculture helps in determining the distribution in industry. Law of diminishing returns operates on land. Demand for corn is perfectly inelastic. Labour and capital are variable inputs. There is capital homogeneity. There is perfect competition

CRITISCISM
Impracticable Laissez Faire Policy Baseless Notion Regarding Population Law of Diminishing Return criticized Neglects impact of technology Wrong notion of stationary state. Neglects institutional factors Capital and labour not fixed Land also produces goods other than Corn.

MALTHUS THEORY OF DEVELOPMENT

T.R. MALTHUS pioneered the theory of population. Acc to him, population growth is an end product of the whole process of economic development but the increase in population cannot take place without proportionate increase in wealth. The demand for labour depends on rate of capital accumulation.

Factors In Economic Development

Acc to Malthus, the size of potential gross national product depends up on land, labour, capital and organization. When these for factors are combined in right proportion, they maximize the production in two major sectors i.e, the agricultural sector and the industrial sector of the economy.

Measures to Promote Economic Growth

Balanced Growth. Raising effective demand

CRITISCISM
Negativity view of capital accumulation One sided saving base Commodities do exchange for commodities Secular stagnation not Inherent in capital accumulation Unproductive consumers Retard progress

CLASSICAL THEORY OF DEVELOPMENT

The classical economists had explained growth process in terms of rates of technological progress and population growth. In their opinion, technological progress remains in lead for some time but finally it disappears when the falling rate of profit prevents further accumulation of capital. It is at this stage that the economy slumps down into stagnation.

Propositions of classical theory

Technological progress depends on investment Investment depends on profits Profits depends, upon labour supply and level of technology Size of labour force depend upon level of investment