This pulls up the standard of living. If only one input is going to increase, it is better to increase capital than to increase labor. It is best to increase both inputs, as well as improve technology, though. Smith never really considered that marginal productivity would decline as labor increased. The greater division of labor causes a systematic increase in labor productivity.
People get better at their specialized tasks, and marginal product increases.
Smith didn't see everything clearly, though. He never foresaw the problem of labor crowding up against fixed capital, and therefore causing the marginal product of labor to decline. The situation with accumulation of capital he pretty much got right. More thrift increases saving, which increases loanable funds and the rate of capital accumulation. That is a way to systematically increase labor productivity.