Prof. Adam Smith was primarily concerned with the dynamic problem of economic growth.

He analyses a number of economic problems faced by present day UDCs.

In such economies, the size of market is small and as a result, the capacity to save and inducement to invest are low.

The size of market is determined by the volume of production which, in turn, depends upon level of income. Since the size of market is small, productivity is low and low level of productivity implies low level of income. The level of real income is low in less developed and poor countries but the propensity to consume is high and every increase in income is spent on food. Little is saved and invested.


The political, social and institutional assumptions of the theory are not applicable to the conditions prevailing in UDC. Competition has been gradually replaced by monopoly which has tended to perpetuate and strengthened the vicious circle of poverty. Thus, development is possible only through government intervention rather than laissez-faire policy. Prof. Smith’s theory of economic development points towards certain factors which are helpful in the process of developing UDCs. Farmers traders and producers are three agents of growth.

They help in developing economy by raising productivity. In the absence of free market economy in backward countries, the state can induce them to produce more. Prof. Smith neglected the virtues of savings which is regarded as crucial factor for capital formation in under developed countries. He wrote, “Every prodigal appears to be public enemy and every frugal man a public benefactor”.

His emphasis on improved technology, division of labour and expansion of market in the process of development has become the corner stone policy in underdeveloped countries. Rostow has aptly remarked that the ‘Wealth of Nations’ is a dynamic analysis and programme of policy for an under developed country.

Prof. Myint has given a modern version of Smith’s theory of economic development for surplus, maintains that the theory is not only applicable to under developed countries but is also indispensable for initiating the process of development in underdeveloped countries. In modern age, economic development needs huge amounts of foreign exchange and foreign aid being inadequate, the only way left to an UDC, at least in short period is to earn foreign exchange by expanding traditional exports.