Adam+Smith

After reading the brief essay on Adam Smith and his economic theory, start a discussion. The discussion should deal with the following questions:

1. Whose legacy is more prevalent today in the world--Smith's or Marx's? 2. Which economic theory do you see at work more in Costa Rica? 3. Whose theory do you think is more suitable for the 21st century world?

The comparison between Karl Marx and Adam Smith is interesting because each man has been placed in the classical school of economic thought, but the former is a champion of communism and the latter a champion of capitalism. The goal of this essay is to compare and contrast these political philosophers’ economic theories and find the point at which their ideologies differentiated. Now on to Smith, a classical economist whose reputation has fared far better than Marx’s in the 20th century.
 * Adam Smith **

Adam Smith was born on an unknown date in 1723. He studied moral philosophy at the University of Glasgow and Balliol College, but eventually left the latter and made a name for himself as a traveling lecturer. He later became a professor of logic, ethics, rhetoric, jurisprudence and political economy. In Europe in 1776, Adam Smith released his Inquiry into the Nature and Causes of the Wealth of Nations; concurrently, the United States of America came into being. “A political democracy was born on one side of the ocean; an economic blueprint was unfolded on the other.” Adam Smith not only created an “economic blueprint” that defined the natural mechanisms of a free economy, but he was also a moral philosopher.

In addition to the //Wealth of Nations//, Smith also wrote the //Theory of Moral Sentiments// in which he discussed his moral theory about the nature of man and the world. In his writing, Smith demarcates a system of virtues, commercial and noble. The commercial virtues are self-interested and should be applied to reap success in the business world: prudence, justice, industry, frugality, and the like. The noble virtues are the more important out of the two types: generosity, gratitude, love, friendship, compassion, kindness, and the like. These types of virtues can be applied in both the personal and economic spheres of life separately, but in order to be a virtuous person, they must be applied in accord with one another. The most important virtue according to Smith is self-command. This allows a person to act with moderation within both the economic and personal spheres.

Adam Smith began writing on the importance of a free-trade economic system while he lived in mercantilist England. Smith had the foresight to realize that the mercantilist system was flawed. Mercantilism stressed the need for “large reserves of bullion (gold and silver)” 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 had or what the king acquired, Smith discussed how each individual person could successfully reap his or her own economic benefits and thus add 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 purchase 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.

Like Marx, Smith realized the importance of production. Smith contended that production was the key to a growing economy. In Smith’s ideal, free trade society, average persons could start businesses, free from government intervention, and consumers would purchase from these producers at a price determined by the laws of supply and demand. Smith asserted that the innate function of the free market was determined by the simple laws of supply and demand. For example, if there is an increase in demand for product A, and a decrease in demand for product B, the price of product A will increase. The increase will occur because as consumers flock to producers to purchase A, the supply will become limited. This higher prices caused by the limited supply allows only the consumers, who are most willing and able to pay, to purchase the product.

Concurrently (as previously stated) the demand for B has decreased; its price has decreased as well, hopefully enticing customers to purchase it merely to take it off the shelves of the producer’s storage. Eventually, the producer of product B will stop producing and move his land, labor, and capital to another, more lucrative business—perhaps in the arena of product A. This simple connection between supply and demand is the inherent free market mechanism that allows for the natural flow and efficiency of the market. Left to its own devices, 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. This is clearly why Marx was wrong about the necessity of central planners. In the free market, central planning is more burdensome than any naturally occurring problem in the market.

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 person is guided in his or her decision making by an invisible hand. The invisible hand leads us to make decisions that benefit us and the economy without our knowing 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 which 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.//

Smith’s theory about the invisible hand explains the way in which the economy is interconnected. He gives the example of the amount of industries and thus laborers that each play a part 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.

The importance of labor and productivity was the key to a free trade economy, for Smith. 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. According to Smith, “the spectator sympathises [sic] 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.”

Smith asserted that capitalism was the most logical, lucrative, and moral political and economic system. In this system, individual people are free to own property and do with it what they wish, they can also spend and earn in the manner 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 private property exists, has the chance to own, create, and earn their own living. Because of Smith’s extensive virtue theory he relies heavily on the idea that ideally, many capitalists will master the higher level of virtues as to avoid becoming greedy and selfish. But, on the chance that they do not, the virtue of self-command, both a noble and lower virtue, will reign in any selfish desires. Smith’s capitalist ideals are based on a moral system; he, unlike Marx, wants to avoid revolution at all costs and seek peace and justice at all times. “The peace and order of a society is of more importance than even the relief of the miserable.” It is clear that Smith would in no way agree with a revolution of the proletariat; but in his eyes, one would never be necessary. Because of the natural and logical benefits of capitalism, each person- from the poorest to the richest has the potential and the capability to better him or herself in the capitalist economic system. For Smith, the answer to a highly functioning civil society is a free market—it is the most natural economic system.

After concluding this research, it is rather simple to see where and how Karl Marx and Adam Smith diverged from one another’s political and economic theories. 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 at the same time. A system of free trade was the most obvious answer to this because it allowed every citizen the opportunity to own their 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. Well, that is how it is supposed to be. Smith merely envisioned the free society, he did not actually live it—and that is where he and Marx differed. Marx wrote in the late 1800s, when the industrial revolution was in full swing. He personally saw and studied the filthy and dehumanizing conditions in which British factory workers labored. It is really no wonder that Marx thought capitalism was the source of every ill in society. He was only exposed to workers who labored long hours for meager wages while rich factory owners’ reaped benefits. In addition to his geographical and historical background, there are two key reasons as to why Marx indicted capitalism for all the problems in the world, these also exemplify his error: 1) He believed that the class in which a person is born is the one in which he or she will remain. He blames capitalism for the very thing it seeks to change. The beauty of a capitalist system is that it is free—we can own property, start a business, and live our lives as we so desire, provided we are not harming anyone.

This freedom allows even the poorest person the chance to become successful. Our status at birth does not necessitate a particular outcome. Using free will and reason, we have the ability to make ourselves into what we so desire. What Marx asserted about the capitalist society was faulty, if in any system, it is the capitalist system that allows people the opportunity to rise above a lowly birth status and reap the benefits that society has to offer. 2) He could not foresee the end of terrible working conditions (for the most part) thanks to government safety regulations and labor unions. There are two solutions that people in poor working conditions are presented with 1) quit 2) change it. In Marx’s time, factories were located in small towns, people had to walk to their place of work, and most often worked in a place that was in the closest proximity—meaning, if he or she quit the job, he or she would not work at all. Quitting was out of the question. Therefore, Marx saw factory work as punishing, dehumanizing, and coercive. This is no longer the case. The 20th century saw the inception of incredible innovation and technology, one example is the automobile. It allowed people to expand their horizons, so to speak. If the working conditions in one’s town’s factory did not meet the laborer’s needs, he or she could now drive to a different factory and seek employment there. The automobile increased freedom for people in way that allowed them to not merely settle for a dissatisfying work environment. The other option mentioned was to change the circumstances in which one is in; we now have labor unions and laws that seek to protect workers from hazardous and exploitative working conditions. Some people do not agree with this government intervention—Smith would not, but Marx probably would. Labor unions and laws protect the worker from mistreatment by the employer. Laborers no longer have to work sixteen hours a day for measly cents. Working conditions have improved dramatically, though there is debate as to the legitimacy of government intervention, which has generally kept both employer and employee content. Perhaps if Marx could have foreseen these potential improvements in society, he would not have encouraged a violent overthrow of the bourgeoisie. Of course, there is no way he could have predicted the changes that occurred in the 20th century. After being exposed to the filthy and depressing conditions of the working class, he simply made an ignorant accusation against capitalism.

Though Marx and Smith diverged drastically in their political ideologies, their economic theories were similar. 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. This theory was successfully refuted by the Austrian school of economics’ theory of subjectivity. From this theory, it follows that a product possesses value only if there exists a valuer. The object must be useful to a consumer in some way; if it is not, it is not valuable. The consumer’s feelings or subjective analysis give the object its value. Because of the laws of supply and demand, if an object warrants a high use value it will be commensurable with a high exchange value. We have seen that the more desirable or valuable an object is, the higher the price will be. This is the most logical theory about price and value. The labor theory of value is incorrect because even though hours of labor might have gone into building an object, if no one wishes to purchase it, it has no worth and cannot be made commensurable with anything else.

In writing this essay on Marx and Smith I learned a great deal in regard to how much our current economy was affected by their ideas, mostly Smith’s though. Marx had brilliant insights into the workings of an economy and thought extensively about the mathematical side of economics. His radical political theory and influence on past violent communist leaders has placed a dark cloud over the teaching and study of him. Political theory aside, however, Marx’s writings are valuable and insightful in regard to the specific mechanisms of an economic system. Smith is not called the “father of modern economics” for naught. The idea of the laws of supply and demand and the invisible hand can be found in high school and college economics text books around the globe. Aside from the mistaken labor theory of value, Smith’s economic and moral theories are respected and employed in teachings, analysis, and application of modern free trade economic systems today.