Smith’s Economic Theory of Economic Welfare Essay

Smith's economic theory of economic welfare was, above all else, policy-oriented theory. His principal concern was to ascertain what social and economic forces were most conducive to increasing human welfare, and, by this, to recommend policies that would best promote human happiness. Smith's definition of economic well-being was quite simple and straightforward. According to Smith, Economic welfare depends on the amount of the annual produce of labour and the number of consumers (Hunt 22). In every economy, welfare increases as the composition of productive output and conforms to the needs and desires of those who procure and use the output.
In analysing the forces that tended to increase economic welfare, Smith developed a model that delineated the most important social and economic components of capitalism and made explicit the principal motivation that propelled the system. Capitalism comprises of two primary sectors. That is agriculture and manufacturing. Additionally, land, labour and capital enable the production of commodities in every economy. Corresponding to these three groups of inputs were the three principal social classes of capitalism. That is landlords, labourers and capitalists. The legal and social basis of this class division were the laws of property ownership and the distribution of actual ownership among the people. The three social classes each received a distinct form of monetary return rent, wages and profits. These forms of class income primarily correspond to the three parts of the production costs and determines the prices of commodities. However, Smith assumed that selfish and acquisitive motives characterized all economic behaviour despite his admission that in noneconomic behaviour, people had other motives, including those considered altruistic. The assumption that all economic behaviour depends on selfish, acquisitive motives was to become the foundation of neoclassical economics beginning in the late nineteenth century.
Within the context of Smith's theory of history, capitalism represented the highest stage of civilization, and capitalism would reach its greatest height when in had evolved to a state in which the government had adopted a laissez-faire policy. It allows the forces of competition and the free interplay of supply and demand to regulate the economy, which would be almost entirely unhindered by government interventions. According to Smith, the level of production in any society depends on the number of production labourers and the level of their productivity. Productivity, in turn, depends on specialization. According to the same scholar, specialization is the greatest improvement in the productive power of labour, and the greatest part of the skill. In most instances, there exist two principles that govern the extent of the division of labour. First, there is a need for a well-developed market to promote extensive specialization. Secondly, the degree of specialization depends on the size of the market. Since the power of exchanging gives occasion to the division of labour, it is important to limit the extent of this division by the extent of that power.