TOPIC: Outline in your own words, the three conditions on which the success of the market explanation of long term economic change is based.
Smith, 1776 states that economic development is based on three conditions: the provision of incentives for individuals to engage in productive activity, responsive system of supply of goods and services, and concentration of demand.
The market offers opportunity and powerful inducement to an individual to increase their productivity. The hope of gain and fear of loss provide constant incentive for economic units to produce, use resources efficiently, innovate, save and invest.
The market is a disaggregated system of economic control which permits rapid adjustment of production patterns to incorporate new techniques or to meet new demands. These changes are part of economic development, thereby; growth in output cannot be sustained in the long term without changes in the structure of the economy.
By concentrating demand, a market permits an individual, firm or region to increase productivity by specialization. Concentration upon an activity in which an inefficient unity has a comparative advantage over other units brings improved productivity through technical development and the cost reducing benefits of economies of scale.
Indeed, it can be seen that the market fulfils all these requirements based on three conditions on which the success of the market explanation of long term economic change is based.
References:
1. Anderson, J.L. ‘Explaining Long-Term Economic Change’. 11 – 20.
2. Knack, Stephen and Philip Keefer. 1995. Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures. Economics & Politics 7(3): 199, 207-27.