Category: Adam Smith

When the great economist and philosopher Adam Smith wrote ‘The Wealth of Nations’ and ‘Moral Sentiments’ he could not have foreseen the profound and enduring impact these works were to have on society. Yet, a quarter of a millennium later, students are exploring his work and examining their impacts on society. How can this be? As these books contained countless economic and philosophical ideologies, I shall focus on just two of the most important: division of labor and free markets as these have had the most sustained impacts and are the most relevant today.

Division of labor is a concept introduced to us through ‘The Wealth of Nations’, published in 1776, and describes how the production methodology of goods and services is optimized when each stage of the manufacturing process is divided into individual tasks, carried out by an individual(s). Its impact is best summarized by Smith himself as “a proportionable increase of the productive powers of labor”, and goes beyond simply reducing the costs of production. Division of labor means workers become specialists and ultimately contributes to sustained economic growth of an economic entity. This idea has been adopted widely in modern society, for example China’s rapid economic growth came from the efficiency and low production cost of their factories where the Division of labor principle was applied to their manufacturing processes. The result? China transformed itself from one of the world’s poorest countries to become the economic superpower it is today in just 30 years. However, as the global economy shifts from manufacturing dominance towards being services led, the principle’s reputation has waned as workers resent the monotonous repetition it requires of them. Still, it remains true that the division of labor had a profound impact on economic principles and undoubtedly catapulted modern economic progress forward.

Moving on, another hugely influential aspect of Smith’s economic principles is the importance of free markets in benefiting society, businesses, and consumers alike. A free market is a system where there is minimal government interference and prices are determined through the nature of rationing self-regulation. The idea of a free market has evolved and remained in importance since first championed by Smith. A great example of this is the on-line marketplace eBay, which is founded on this principle of economic democracy. eBay has 182 million users worldwide and is able to connect users across the globe from over 190 different markets. The principle of connecting buyers and sellers without government interference is directly reflected in Smiths principles and the creation of micro-multinationals (individual sellers) aligns with Smiths ideas on international trade.

However, Smith could not have foreseen the damage these concepts would have on the environment or on human rights through modern slavery. Without intervention, these two concepts have contributed to a climate catastrophe that is poised to wreak havoc on society and the situation today, with human labor being exploited as a means of production, is a profound an issue now as it was during the slave trade during the 18th-19th centuries.

Without a doubt, Smith’ principles are important as they have fueled economic growth and that society has prospered as a result with over two centuries of raised living standards and wealth across the globe. But as what cost, as these negative costs hold equal importance as the benefits?

Introduction: The Economic Titans – Adam Smith and Karl Marx

Only a few people in our history can be credited to have radically transformed the functioning of societies and systems. Among them are Scottish philosopher, Adam Smith and German revolutionary, Karl Marx. In 1776, Smith published his magnum opus entitled “An Inquiry into the Nature and Cause of the Wealth of Nations”. His publication aimed to revolutionise the economy and provide both, the rich and the common man, with a more prosperous economy, better pay and independence from the traditional market structure of Mercantilism which had its clutches deeply embedded in the commerce and politics for many centuries. Adam smith set in motion, the ‘wheels’ of modern economics. The latter, Karl Marx, was born 28 years after Smith died and authored the monumental book “The communist Manifesto” in 1848 which blazed the trail for a new social and political system called “communism”. He is considered to be a revolutionary and not just a philosopher or an economist.

Marx Skousen author of ‘The big three in economics’ points out that “Marxism has become a quasi-religion, with its slogans, symbols, red banners….and definitive truth” (pg 67). If Smith is the pioneer of “Laissez Faire” and ‘natural liberty’ then Marx in his classic work ‘Capital’ contrasted his notions. Smith was one of the leading proponents of Capitalism and contrarily Marx is well known to have developed the communist ideology. Even though, Marx is considered to be the greatest critique of Adam Smith, the two geniuses do share similar outlook on some theories. This essay is aimed at discussing some of the key similarities and differences between Adam Smith and Karl Marx. Moreover, it will further evaluate the relevance and impact of their economic beliefs in modern day.

Capitalism: A Tale of Two Perspectives

Both Marx and Smith wrote about Capitalism, however, they both reached different conclusions about the benefits and workings of capitalism. Smith wrote about capitalism around 50 years prior to Marx was born which meant that the society Smith lived in was far less complex than what the society was during Marx’s time, making Smith’s work and ideas about free market, free trade as well as minimal government intervention more basic and straightforward. Smith considered Capitalism to be the most efficient and ideal economic system. He proposed the concept of “Free Markets” in which producers can produce as much as they want and charge the consumers as they desire without any government intervention. He argued that individuals are driven by their self-interest and aim to maximise the benefits they can obtain. He explained it further with his famous doctrine of “Invisible Hand” wherein the producers will demand as much cost for their products according to the time spent in producing the goods and the consumers will pay the amount according to the benefits they will derive from the goods which will create a state of equilibrium in market resulting in no surplus, deficit supply or demand. Thus, both producers and consumers derive the maximum benefits with minimal government intervention. Smith highlighted that the human self-interest and the tendency of competition leads to an optimum economy.

Though, Marx has famously been against capitalism, he indeed recognises and credits the capitalists for successfully breaking the stagnant economy under Mercantilism, thereby generating new markets and wealth. He writes in his book The Communist Manifesto, “The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all the preceding generations together.” (Marx and Engels, 1964[1848], 12-13). However, Marx objected to this free market system and inherent self-interest and competition by reasoning that such a system would lead to inherent class struggle, inequality and exploitation of workers by the capitalists. He argued that the Bourgeoisie being the wealthy powerful capitalists and the Proletariats being the working class would inherently be stuck in their classes and the only way to break free from this would be for the Proletariats to rebel and bring about a revolution to change the social order.

Additionally, Marx held a contradictory notion against Smith’s claim that a capitalist economy generates a state of equilibrium and equal benefits to capitalists and workers. He argued that if the value of a product is directly proportional to the amount of labour, what happens with the interests and profits?(is it a question?) Marx claims profits and interests as ‘surplus value’. He pointed out that in the spirit of competition and maximising benefits, the capitalists obtain the cheapest labour possible and extract more hours of labour than they pay to the workers thus, leaving them with surplus value which Marx concludes, the capitalist obtain from working class through exploitation instead of distributing the surplus value equally among the working class. He argued that capitalists exploit the proletariat and derive maximum labour in minimum wages by employing women and children who are ready to work at a lower wage than men. Marx concluded that capitalism was an exploitative, competitive and greedy system with ‘definite class struggle’. (Skousen, 2006, pg, 85). According to Marxist John E. Roemer, the main difference between Smith and Marx is, “Smith argued that the individual’s pursuit of self-interest would lead to an outcome beneficial to all, whereas Marx argued that the pursuit of self-interest would lead to anarchy, crisis, and the dissolution of the private property-based system itself. Smith spoke of the invisible hand guiding individual, self-interested agents to perform those actions that would be, despite their lack of concern for such an outcome, socially optimal; for Marxism the simile is the iron fist of competition, pulverizing the workers and making them worse off than they would be in another feasible system, namely, one based on the social or public ownership of property” (Roemer 1988. 2-3). Marx and his successors have continued to compare capitalism with imperialism because of its nature of exploiting domestic and foreign labour and resources. One of the most famous anti-capitalist argument has been “The hallmark of Capitalism is Poverty in the midst of plenty.”

The Role of the State: Minimalism vs. Revolution

When it comes to the state, both Marx and Smith mirror some opinions. According to Smith, the rich and powerful greatly influence the workings of the state in their favour. Therefore, Smith contends a minimal role of the state in a capitalist society in order to protect the other powerless sections of people. Both Smith and Marx agree that the state has certain functions to perform, including protecting private properties. Historically, both Smith and Marx have had quite distinct understanding of the state and development of property with Smith predominantly banking on the stage if social development whereas, Marx focused more towards relying on production methods.

Division of Labor: Efficiency or Exploitation?

Smith went on to explain the process of capitalism and free market economy in terms of division of labour. He explains this with an example of a pin factory where the production is greater if one person is skilled in making only a particular part of the pin rather than each person trying to make the complete pin.

Marx recognised the concept of division of labour and built on it by pointing it out to have two parts; ‘the social division of labour’ and ‘the technical division of labour’ wherein the former entails creating specialist occupations and the latter involving the breakdown of a whole task into smaller tasks. However, despite the increase in efficiency and more output due to division of labour, both Smith and Marx are on the same wavelength here when they point out that this mechanism can lead to severe detrimental ramifications on the mental welfare of the workers in a capitalist industry because they are confined to a fatuous monotonous soul-destroying work day in and day out. Smith writes in his wealth of nations (1776). “In the process of the division of labour, the employment of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two…[he] generally becomes as stupid and ignorant as it is possible for a human creature to become”. Marx, in his Economic Philosophic Manuscripts (1844), echoes the same observations, where he writes, “In his work…he does not affirm himself but denies himself, does not feel content but unhappy, does not develop freely his physical and mental energy but mortifies his body and ruins his mind”.

Paganelli, Smith and Pack in their paper highlight that one of the difference between Smith and Marx is their point of reference. They point out that Smith mainly looks back in the history of Feudal Mercantilism and claims that the society is much better than before with free market and capitalism. Whereas, Marx looks into the future, claims it to be largely better than the present, and advocates Communism for a better future. Marx strongly urged people to replace capitalism with Communism claiming it to be more equal and uplifting for the working class. He and the Marxists in the following generations claimed that capitalism will eventually die out and communism will flourish. Michael Harrington in 1976, following The Great Depression and energy crisis predicted the demise of Capitalism. Marxist Ernest Mandel wrote, “it is most unlikely that capitalism will survive another half-century of the crises which have occurred uninterruptedly since 1914” (Mandel 1976[1867], 86]. However, all the predictions have time again been failed to materialize. Capitalism continues to have a strong hold on our society. Leszek Kolakowski, former leader of Polish Communist Party, said “All of Marx’s important prophecies turned out to be false” (Denby, 1996, 339). Marx and Marxists’ major argument against capitalism involved the class struggle and inequality between the upper class and working class. On contrary, the distinct separation between classes has collapsed. No longer are workers stuck in their monotonous work earning minimum wages. They invest in the companies they work for and many start their own companies and become capitalists themselves. Furthermore, there are set minimum wage laws in every nation. The conditions of the working class have not declined further as predicted by Marx and their standard of living has dramatically improved and continues to get better. Paul Samuelson writes, “The immiserization of the working class . . . simply never took place. As a prophet Marx was colossally unlucky and his system colossally useless” (1967, 622)

Smith’s work was more dominant in the west in an uprising industrial revolution whereas the East followed Marx’s communism. In the present age since the onset of 21st century, US has been one of the biggest capitalist nations along with Germany and a few other nations. These capitalist countries follow a very free trade economy with international trade and booming large multinational corporations.

The Evolution and Relevance of Capitalism and Communism Today

Supporters of Capitalism argue that it provides political freedom which would not be possible in a system like communism where the state is the all-powerful authority. Margaret Thatcher, a pro-capitalist, famously once said, “There is no alternative”to capitalism. Her government, by 1980s, began selling and privatising all nationalised industries. She successfully, privatised many major former state owned industries like British Airways in 1987, British Gas in 1986, Electricity distribution in 1990 and British Rail in 1995 and many other former public enterprise. Her attempt to privatise all major industries came with a lot of backlash from the working class. However, despite the booming capitalism since the onset of 20th century, people’s attitudes towards it have changed. According to a recent poll conducted in 2016 by The Washington Post, with young people between the ages of 18 to 29, 51 percent of them rejected capitalism.

The ‘Occupy Wall Street’ movement in 2011 in New York, protested against the vast wealth gap between the 1% rich capitalists and the rest of the citizens. According to a survey conducted by Oxfam, it was estimated that India’s 1% population own a humongous 73% of the c the only country to be completely communist in the strictest sense.

In the 1950s, Mao formulated the “Great Leap Forward” campaign in China, aimed at pushing farmers into communities, annexing their land thereby driving them into slave labour.

In present day China, the state controls a thriving manufacturing sector that yields astronomical profits by exporting electronics, toys as well as consumer goods across the globe.

Though China is generally considered to be a communist state, there seems to be uncertainty whether it can be considered as an absolute communist state, more so if we revisit Marx’s original ideas about communism.

Despite the Chinese private sector contributing a higher percentage of GDP than the state owned sectors, it is still extremely responsive to the state. Due this interference the World Trade Organisation does not recognise China as a market economy.

Conclusion: Bridging the Gap Between Capitalism and Communism

Professor Shaun Breslin from the University of Warwick argues that modern day China cannot be labelled communist because the country’s design has no element of class which is the one of the central themes of communism and Marx. He says, “The communist Party is there to deliver what they deem to be national goals and priorities and objectives, so there is no class-based analysis at the heart of this.”

According to renowned American professor and CEO, Ann Lee, China in reality is more capitalist than some western countries, rather than socialist. To quote her views on this subject, “I would say it’s in many ways much more capitalist than other self-proclaimed countries like the US, because if you look at the percentage spent on say, federal government, the US spends a larger percentage of its GDP on federal government than China does.”

Cuba is another prime example where the state monitors hospitals, medical professionals, drugs and medical supplies but unlike China, is battling a major economic crises.

This essay discussed the similarities and differences between two revolutionary thinkers Adam Smith and Karl Marx. Their respective schools of thought, Capitalism and Communism is still prevalent in our world but have evolved int take different shapes so there are not many nations which can be called completely capitalist or completely communist, as we discussed above. If we were to compare which of the two principles are more predominant in the present age, then capitalism takes the lead. In 2007, the Bank Of England, issued £20 notes with Adam Smith’s portrait on the back along with the illustration of workers in a pin factory. Smith’s ideas about Division of Labour and free trade continues to be central to many of the nations. However, he would be horrified to witness the wealth gap that capitalism brings with it today and the amount of government intervention that has come to take over in many capitalist nations. Though, Communism has not been able to set its foot down in the strictest sense, there are some eastern countries following Marxist principles but they have some elements of capitalism in their economy. The ideal situation would be to find a middle ground between capitalism and communism however, that seems a distant future