Demand and structural change in Adam Smith's view of economic progress

Abstract

Previous studies suggest that demand forces (as well as widely accepted supply-side factors) work in Smith’s ‘historical’ account of economic development. Expanding on this line of inquiry and yet giving corrections of misinterpretations, this article claims that ‘endogenous’ demand is at play in Smith’s theory of natural progress, providing a historical case study of early modern England for an illustration of the demand-based model of natural progress. Smith drew attention to the dynamics of growth with respect to the role of demand and the changing sectoral structure of economies in the model of natural progress as well as in that of historical progress. In this vein, Smith’s approach to economic development differs from Hume’s historical account of it. First, it is significant that Smith was concerned with a change in income distribution and expenditure pattern brought about by economic growth. With the general expansion of income, changes in patterns of income distribution and consumption (i.e., a larger share of wages and profits in national income at later stages of development) that favour manufactured items boost economic growth and lead an agrarian economy to move towards manufacturing and commercial economies. Second, it is now worth noticing that along with the progress of wealth an endogenous demand grounded on a part played by socio-psychological power as distinct from material motives furnishes a taste for manufactured goods more than for agricultural goods.