Adam Smith Theory

Adam Smith, the father of microeconomic theories, puts faith in a virtually unregulated, free market that maximizes the dynamic efficiency. In his view, an ideal system of market should be based on free competition, increasing size of market, and considerable capital accumulation. He believes the production function is an increasing return to scale that would expand the market, lead to internal and external economies of scale, and ultimately, lower the cost of production. With the foundation of the division of labor, a free market delivers an optimal output of goods that suit consumers’ needs. Nevertheless, Adam Smith’s basic tenet merely offers a restricted and incomplete view of the market optimality, and many later-generation thinkers shed …show more content…
The Neo-classicals, although similar in their faith of a free market, challenges the situation of both constant and increasing returns. Based their theory on utilitarianism, Neo-classicals calculate mathematically the marginal aspect of production and consumption. J. B. Clark summarizes that while wages are determined by the productivity of the final unit of labor added, labor itself is subject to diminishing marginal returns. Each new worker added into the production would yield less productivity. Therefore, the final unit added would presumably produce very tiny and insignificant portion of the good. Under this circumstance, the production function shows a downward slope, not an upward slope in Adam Smith’s case, a direct contrast. In the phase of specialization, though the workers may be trained to handle standardized tasks in a routinized manner with an increasing quantity of output, the labor force as a whole possesses a diminishing productivity, making the economies of scale tough to be realized, and the size of market uneasy to be …show more content…
Notwithstanding, Neo-Classicals disapproves Smith by attacking the increasing nature of productivity because diminishing returns outweigh economies of scale. Marx denounces competition as a means to reach natural price because capitalists compete to create labor-exploiting monopolies. Schumpeter simply elaborates that the seemingly beneficial side of capitalism brings an end to capitalism itself. Adam Smith’s view should not be analyzed merely on its own: the additional insights from his juniors disturb the simplistic and idealistic Smithian concept, yet complement to generate a more holistic interpretation of the classical