Adam Smith’s Factors of Production and Economic Growth
General Function of Production
- Kt: Amount of services economic capital employed in period t.
- Nt: Rate of use of natural resources
- Lt: Occupation of the workforce
- St: Knowledge technology applied
- Ut: Represents the sociocultural environment within which the economy works.
A position of equilibrium can be stable, unstable, or neutral. It is stable if a disturbance generates forces tending to restore the system to a stable position.
Adam Smith and Dynamic Growth
Smith’s central concern was the problem of dynamic growth and development. He sought to determine which factors were responsible for economic progress and what political measures could be taken to create an environment conducive to faster growth. While he considered labor as the only measure of value, he recognized the existence of three factors of production: labor, capital (stock), and land.
This feature is not subject to the restrictions of diminishing marginal productivity, but it finds increasing returns to scale. Smith introduced another course in relation to the determinants of productivity of labor and land: attribute productivity variation to differences in degree of division of labor, but even the division of labor where possible, be limited economic usefulness by the size of the market. And the size of the market in turn is a function of the amount of capital in existence and establishing institutional constraints on trade. You can add two new constraints to the specifications of the production function:
These restrictions respectively tell us that marginal productivity of labor and land are related functionally wings amounts of capital employed and the institutional structure of the economy.
Natural Resources and Institutions
Two of these factors can be eliminated with ease coambio rate of inbcremento institutions and land in the unit of time. I believe that Smith was determined exogenously, that is, their time course could be set arbitrarily, without regard to other system variables.
With respect to land, Smith never explicitly states q had a limited supply. Entnces could say that Smith said the amount of land is fixed.
The Labor Force
The growth of labor supply is related to the supply side with the population. In the long term, population growth is regulated by the funds available for human livelihood. Consequently, the wage rate plays a decisive role in determining population size. When wages are high, they encourage early marriage and births increase. The wage rate limit is one that is not high enough to allow an increase in the number, nor low enough to make a forced reduction in the base of the population. Call Smith at this rate, the subsistence wage that corresponds to a constant population. If current wages exceed the subsistence level, population would grow and vice versa.
On average labor supply is as much as might be possible, in proportion to the amount of work required demand
The demandea of wage labor necessarily increases with the increase of income and capital of nations, and can not increase but in that case. The increase in income and capital is to increase national wealth.
The first equation relates for Labour force growth with income growth and capital. Implies that in an expanding economy will grow population. The second equation tells us something about the course in the rate of wages: in the growing economy are high wage rates in the low and declining rates of subsistence level is characteristic of the stationary states. So what motivates the rise in wages is not the real magnitude of the wealth of the nation, but their steady growth.
Accumulation of Capital
As soon as capital accumulates in the hands of specific individuals, some of which regularly seek to use it in work industrious people, because each individual to continually strives to seek more advantageous employment for the capital you have. As a result while there are higher profits to offset the risk for the investor, capital accumulation continue.
In the course of economic progress, as the existence of capital of the economy grows, profits generally tend to decrease.