For centuries, philosopher-economists have given rise to a myriad of theories in an attempt to find that which perpetuates the most effective and profitable economy. Albeit contested, a famous school of thought in this field is Classical Economics. It school is deemed the first modern school of economic thought. Two economists belonging to this genre are Adam Smith and Karl Marx, who were advocates of capitalism and socialism, respectively.
Dubbed as the father of economics as a science, Smith merged economics with moral theory as a standard for man’s lifestyle. More importantly, his explanation of market forces and the state’s role in economics serves as the foundation of the capitalist economic system of modern times. In 1700s, at a time when a mercantilist society persisted, Smith authored An Inquiry into the Nature and Causes of the Wealth of Nations, which is the first comprehensive defense of free market policies. In the book, Adam Smith identified three pillars of free market economics, namely: division of labor; pursuit of self-interest; and free trade.
Karl Marx, on the other hand, finds fault in the ideology and practice of capitalism, as it breeds class-consciousness and is inherently unfair because it favors the wealthy and exploits the poor. In 1800s, Marx authored Das Kapital, which condemns capitalism because of its desire and ability to achieve maximum profits, private ownership, lack of central planning, and exploitation of labor.
Although extreme opposites in political perspective, Marx and Smith belong in the same school of economic thought – such classification indicates that their respective ideologies are parallel despite their glaring contradictions to one another. The former is a champion of communism and the latter a proponent of capitalism. This paper provides comparisons and contrasts of these economic theories, and finds the point at which their ideologies differentiated.
This paper is divided into four sections. The first section discusses the importance of production and labor in the economic process. The second section compares and contrasts Marx’s and Smith’s take on the labor theory of value. The third section discusses Smith’s rationale about capitalism and Marx’s indictment of it and his corresponding solutions found in communism. Lastly, the fourth section the theory of the invisible hand.
Importance of Production & Labor
Marx advocated a historical materialist view of society and the world – he believed that men create change in their lives and in their environment through practical activity in the practical world (Wolff, 2002). Such activity leads to the desire to meet the needs of people in society. The need to meet these desires leads to production. In this relation, Marx identified the four-part economic process, namely: 1) production; 2) distribution; 3) exchange; and 4) consumption.
Consumption cannot exist without production. According to Marx, production is “twofold consumption, subjective and objective: the individual not only develops his abilities in production, but also expends them, uses them up in the act of production, just as natural procreation is a consumption of life forces (as cited in Pilling, 1980).” Therefore, the act of production is in all its moments also an act of consumption. These acts exist in a circular relationship – In order for an object to be produced, raw materials must be consumed; for an object to be consumed, it must first be produced.
Like Marx, Smith acknowledged the importance of production. He asserted that production was the secret to a growing economy. In Smith’s epitome of a free trade society, an ordinary person could start business, free from government intervention, and consumers would purchase from these producers at a price determined by the laws of supply and demand.
Consequently, for production to occur, someone must produce. Hence, the one common element among all goods is labor. Prior to the Industrial Revolution, production of goods relied heavily on human hands. Today, machines have replaced much of the human capital.
Smith maintained that the biggest improvement in the productive capacities of labor, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labor. These divisions were the driving force behind diversification of the trades and industry, and this diversification was greatest for nations with more industry and improvement.
Smith identifies three causes arising from division of improved productivity, namely: 1) the laborer’s dexterity – due to specializing, year-round, in a specific task; 2) time not wasted passing from one task to the next – as in agriculture – as well as the more consistent and focused effort when working in just one area; and 3) the machines and tools that have evolved in conjunction with increasingly specialized labor.
Marx disapproved of the labor system of the capitalist society because he viewed that under it, the rich accumulate more wealth, and the poor suffer (Pilling, 1980). Marx’s dislike may be summarized in five central ideas (Wolff, 2002). First, the wages of the workers are literally minimal. To avoid starvation, a worker would accept the lowest wages. Second, work is punishing – a laborer suffers inhumane overwork and early death. Third, labor is degraded and one-sided. As the division of labor becomes more complex, labor becomes more machine-like. Fourth, labor has become a commodity. It is bought and sold like any other commodity. Lastly, the worker’s life has become subject to alien forces. The demand on which the worker’s life depends is founded on the desires of the wealthy and the capitalists.
Labor Theory of Value
The simplest definition of the labor theory of value states that “the value of an exchangeable good or service lies in the amount of labor required to produce it; the source of profits under capitalism, then, is value added by workers not paid out in wages.” This theory dictates that a specific commodity possesses value because of the labor that went into creating it. Marx claimed that just as value presented itself in two forms—use value and exchange value—labor had two forms as well. First is concrete labor; this creates goods for a particular purpose, which translates into use values. Second is abstract labor; the main feature of the object created in this type of labor is its price, which translates into exchange value (Wolff, 2002).
The types of labor, according to Marx, ultimately cause conflict for individuals as productive beings in a capitalist society. Members of society want to make quality items so that consumers can use them, but are also concerned with selling those same items in the future and reaping revenue from its consequent exchange value. If the item lasts for an extended period, a consumer will not be likely to purchase another one in the short run and therefore the producer’s potential to earn a profit from the exchange value is stifled. This, according to Marx, is against our productive nature as people and is another one of his indictments of capitalism.
However, according to Smith, “the spectator sympathizes with the claim that bestowing time and pain on an object creates a reasonable expectation of use such that depriving the possessor of the object would constitute injury (Young, 1997).” In Smith’s view, as consumers, we understand and sympathize with the labor put into the object and thus accept that it warrants its specific exchange value. (Young, 1997) found that, “a labor theory of value is, therefore, a logical outgrowth of the spectator’s sympathy with time and pain.” In accordance with this theory, Smith also maintained that the natural price must compensate for the “time and pains of acquiring a skill along with the risk.” To Smith, a natural price of an object exists. This natural price or value is dependent on the labor hours and effort that went into creating the object.
Communism versus Capitalism
Marx and Smith created their respective political-economic theories to improve on the existing system of their time. In this case, of Marx, he argues that the way we are each born to a specific set of parents is parallel to the way in which we are each born into a certain class. These classes were the bourgeoisie and the proletariat – the bourgeoisie are the wealthy capitalists while the proletariat is the poor working class. In 1800s, he advocated a revolution to overthrow this system and ton instill a new ideology: Communism.
To exhibit the infirmity of capitalism, Marx created the theory of surplus value. The surplus value is the gap between the value a worker produces and his or her wages. The seeking and earning of profit by the capitalist led Marx to believe that the entire system of capitalism led to greed and inequality and would eventually crumble to the revolutionary proletariat. He believed there existed internal contradictions in the capitalist system that doomed it from the beginning. For Marx, competition implies winners and losers and causes the rise of monopoly capitalism. Moreover, the lack of centralized planning results in the overproduction of some goods and the underproduction of others, causing inflation and depression. He also asserted that the wealthy control the state.
Adam Smith, on the other hand, began writing on the importance of a free-trade economic system while he lived during 1700s mercantilist England. Smith had the foresight to realize that the mercantilist system was flawed. Mercantilism stressed the need for large reserves of bullion to reap economic benefits. Smith disagreed with mercantilist theories and expounded on the importance of free trade. The Wealth of Nations sought to discuss just that, the wealth of the nation as a whole. Rather than focusing on how much land the rich owned or what the king acquired, Smith discussed how each individual person could successfully reap his or her own economic benefits, thus adding to the nation’s wealth. He cited that in a free trade economy, a person has the ability to earn money and should then use it to buy other goods or capital to create their own business, which will then lead to growth in the economy. Smith believed that by earning and spending money, the economy would be stimulated and thus grow.
Furthermore, Smith asserted that the innate function of the free market was determined by the simple laws of supply and demand. This connection allows for the natural flow and efficiency of the market. Left on its own, the market will allow only the most competitive consumers and producers stay afloat. The free market fixes errors on its own. If there are shortages or surpluses, the market, left to its own devices, will ensure that that the economy eventually returns to equilibrium.
Theory of the Invisible Hand
One of the most revolutionary aspects of Smith’s economic theory in The Wealth of Nations was the Invisible Hand. Smith suggested that in the free market, each individual is guided in his or her decision-making by an invisible hand. The invisible hand then leads people to make decisions that benefit the economy and without being aware of it. In Smith’s own words:
Every individual necessarily labors to render the annual revenue of the society as great as he can. He neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own gain, and he in this, as in many other cases, led by an invisible hand to promote an end, this was no part of his intention. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it (Heilbroner, 1999).
Smith’s theory about the invisible hand explains the way in which the economy is interconnected. He gives the example of how each laborer plays in producing a wool coat. From the shepherd to the spinner to the sailor who transports the finished coats, each, in merely performing his or her own job augments the economy through productivity. Like Marx, Smith recognized the importance of labor and productivity was the key to a free trade economy. He discussed both exchange and use value, and thus his labor theory of value. In Smith’s case, the labor theory of value stems from spectator sentiment. If a producer puts labor hours into the production of an object, it warrants a particular exchange value depending upon those hours.
In the competitive market, however, the natural price may not necessarily be the market price. Competition, nonetheless, was expected to push the market price towards the natural price. Smith asserted that capitalism was the most logical, profitable, and moral political and economic system. In this system, individuals regardless of station or rank are free to own property, as well as spend and earn as they see fit. Privately owned property combined with the desire to earn, spend, and act productively leads to the natural market functions of the free market economy. The free market economy is dictated by competition, which leads to the fairest prices and causes only the most efficient producers and consumers to benefit.
Capitalism, for Smith, is not a political/economic philosophy that only benefits the rich. In his mind, everyone, because of the right to own private property, has the chance to own, create, and earn his or her own living.
The divergence of Marx’s and Smith’s theories can be attributed to the century in which each of them existed. Smith wrote The Wealth of Nations during the late 1700s, during which a mercantilist society still existed. He realized the need for a better and more efficient economy that would benefit each citizen and the entire nation. Smith averred that a system of free trade would result in a more efficient economy because it allowed every citizen to own property and seek a living in the way he or she saw fit. If the person was dissatisfied with the choice he or she made, a free trade society allowed the freedom and ability to move unrestrained from one occupation to the other.
Marx wrote in Das Kapital in the late 1800s, when the Industrial Revolution was in full swing. He was exposed to workers who labored long hours for meager wages while rich factory owners’ reaped benefits. He champion communism to replace capitalism, which favors the wealthy and exploits the poor. For him, the ideal political and economic situation would be a classless, stateless society, in which the means of production are held in common, thereby eliminating competition. He constantly referred to a class struggle between the bourgeoisie and the proletariat and identified capitalism as the cause of all the ills of society.
Though Marx and Smith diverged drastically in their political ideologies, their economic theories were similar in certain ways. Both men held the labor theory of value. Each believed that the number of labor hours put into an object created the value and thus the worth of the object. Both men recognized production as the secret to a thriving economy. Lastly, Marx and Smith had they same objective in principle: they strived to improve society by fleshing out theories on the perfect system for the economy.
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Heilbroner, Robert (1999). Adam Smith and the origin of capitalism. In The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers.
Pilling, Geoffrey (1980). Marx’s ‘capital’ philosophy and political economy. London: Routledge and Kegan Paul.
Wolff, Jonathan (2002). Why read Marx today? New York: Oxford UP, 123.
Young, Jeffrey (1997) Economics as a moral science. Cheltenham, UK: Edward Elgar Publishing, 87.
 Classical Economics is a school of thought that emerged during the transition from feudal to capitalist society. Throughout this transition, economists were met with the task of deciding how the new system would meet the needs of producers and consumers alike. This task was daunting. The economists had to discover how most consumers familiar with feudal society—in which barons, bishops, peasants, and other classes of citizens made a living in exchange for working on a fife owned by a member of the noble class—would now be the owners of their own property and finally possess the freedom of making and acquiring their own living. Classical economists held various theories regarding natural prices, value theory, and monetary theory that hinged on the new economic dynamic produced by capitalism. Each individual, classical economist shared similar thoughts on these topics, with an occasional theoretical variation.
 Production creates the objects that correspond to the given needs; distribution divides them up according to social laws; exchange further parcels out the already divided shares in accord with individual needs; and finally, in consumption, the product steps outside this social movement and becomes a direct object and servant of individual need, and satisfies it in being consumed.
 Britannica Great Books translation. (2007). Capital (Das Kapital) (Vol. 1) by Karl Marx