To explain economic development, the starting point is often Adam Smith’s The Wealth of Nations, which is taken to explain almost all modern economic growth. The long-standing Smithian paradigm, which posits that the development of trade and the division of labor unfailingly bring about economic growth, continues to provide the dominant foundations of most economic development theories.
Smith attributed economic growth to a “natural propensity” in human nature to maximize wealth or what he called “truck, barter, and exchange,” whereby individuals find it rational to carry out full-scale production by systematically cutting their costs through specialization, accumulation, and innovation. Individuals move towards larger- scale production by offering their products to potential partners for exchange, and partners are anticipated to do the same in return. As a corollary, that which is good for individual actors, Smith posits, is good for the aggregate economy. Indeed, Smith’s theory captures the essence of what induces economic development: the individual’s rational proclivity to maximize wealth. To make this process of individual self- maximization and subsequent market growth viable, Smith argues that there should be no force, not even state-intervention, disrupting the market, since intervention would only serve to distort the market. In other words, economic growth occurs when “the invisible hand” of the market regulate[s] itself. However, the experiments of rapid economic growth in the East Asian Tigers, namely South Korea, Taiwan, and recently China, seem to contradict Smith’s theory.