Smith’s theory has the great advantage of pointing out ‘how economic growth comes about and what factors and policies impede it’.
He discussed the importance of parsimony in saving and capital accumulation, improved technology, division of labour, expansion of market in production and of the process of balanced growth in the interdependence between farmers, traders and producers.
Despite all this, it has certain drawbacks which are discussed as next:
1. Static Model:
According to Hicks, this model looks like a growth model but in the real sense, it is not a growth model. It does not exhibit a sequence. Thus, it is a static model.
2. Neglect of Entrepreneur:
Smith does not emphasize the role of entrepreneur while developing the theory. Prof. Schumpeter points out that the entrepreneur is the focal point of development. It is entrepreneur who brings about innovations thereby leading to capital formation.
3. Ignores the Role of State:
Though the policy of laissez-faire developed by him was in tune with the prevailing conditions, but state interference is deemed necessary in present changing circumstances. Thus, the role played by state cannot be challenged in the present complex society.
4. One Sided Saving Base:
Since capitalists, landlords and money lenders save but this is one sided base of savings because the major source of savings in an advanced society was income receivers and not the capitalist and landlords.
5. Rigid Division of Society:
Smith theory is based on the socioeconomic environment prevailing in Great Britain and certain parts of Europe. It assumes the existence of rigid division of society between capitalist and labourers and neglects the middle class which occupies a significant place in the modern society.
6. Unrealistic Assumption of Perfect Competition:
Another defect is that Smith’s whole theory is based on the unrealistic assumption of perfect competition. The laissez-faire policy of perfect competition is not found in any economy. A number of restrictions are imposed on the private sector and on internal and international trade in every country.
7. Unrealistic Assumption of Stationary State:
The end of the capitalist economy is the stationary state. It implies that change in such an economy which is near the point of equilibrium. There is progress but it is steady, uniform and regular like a tree. But this process of development is not satisfactory because development takes place by fits and starts and is not uniform and steady. Thus, the assumption of stationary state does not seem to be true and logical.
8. Role of Improved Technology:
Smith skipped the role played by improved technology and position relative between increasing real wages and labour productivity.