Adam Smith, who was born in 1723, was a student in Balliol College and University of Glasgow, where he studied moral philosophy. Later, he became a professor of rhetoric, ethics, jurisprudence, logic and political economy. Smith wrote the Nature and the Causes of the Wealth of Nation, which became an economic blueprint that explains the mechanism of a free economic system. Karl Marx, on the other hand, was born in Germany in 1818 and later joined Berlin, Bonn and Jena universities, where he studied history, law and philosophy. He is referred to as the father of communism based on his book Das Kapital, where he expresses his views with regard to the economic theory. The legacy of Karl Marx shows him as quite controversial, despite living in the mid 19th century. The works of these two economists are used in the study of classical economics (Smith, Cannan & Lerner 1937).
As for now, the quest to understand the theories by the two economists still exists with the need to determine the one that perpetuates a lucrative and efficient economy. Their ideologies vary to a considerable degree with regard to political-economic perspective. The emergence of classical economist is a market with the transition of feudal to capitalist society. The new challenges that were posed to economist at this transition period were matching the needs of producers and those of consumers.
The famous contribution by Smith includes The Wealth of Nations and The Theory of Moral Sentiments, where he provides details of his moral theory with regard to the nature of mankind and the world (Smith 1955). He demarcates commercial virtues from noble virtues. In the commercial virtues, he includes values such as frugality, justice, prudence, industry that should be realized from self-interests. He notes that noble virtues are superior and consist of love, generosity, friendship, gratitude, kindness and compassion among others. Furthermore, Smith emphasizes the significance of self-command and its impact on moderating one’s personal or economic behavior.
The impact that Smith had on mercantilism, while he lived in England, where it was practiced, made him come up with the free-trade economic system, because of the thought that the mercantilist system had a problem. Mercantilism was based on “large reserves of bullion” that would help in getting some economic benefits. In The Wealth of Nations, Smith gives the details of the relevance of free trade by focusing on the welfare of everyone within a nation and not on how much the king or the rich had accumulate the terms of wealth. In his support of free trade, Smith explained that an individual has the capacity to make money and then acquire his or her own capital that will contribute to the growth of capital. Therefore, his ideology were guided by the belief that earning and spending would stimulate growth.
Smith believed that production was the basis of economic growth. Therefore, he noted that in a free trade system, where no government interventions were present, business would start, and consumers would make purchases at a market price that are determined by the forces of demand and supply. He further indicated that the market prices were a function of demand and supply and were based on the law of demand and supply. The law of demand states that there exist a negative relationship between the prices of goods and the quantity demand as long as other factors remain constant (Smith, Cannan & Lerner 1937). The law of supply, on the other hand, looks at the reaction of producers at different prices and states that as prices of goods increase, so will be their supplies, while holding other factors constant. According to Smith, the law of demand and supply was an inherent mechanism in a free market to ensure efficiency and natural flow. He perceived the free market to have the capacity to fix any problems that arise automatically, without the need of the central authority.
A phenomenon that dominates the theory of The Wealth of Nations is the presence of the ‘invisible hand’. He describes this as an invisible force that guides decision making within an economy. He asserts that in pursuit of individual’s interest, an individual ends up serving the interest of the entire society as opposed to the case if he purposely wanted to serve the interest of the society. This, according to Smith, is the work of the ‘invisible hand’. This results from the interconnections that exist within an economy.
In the free trade economy, labor and productivity were the variables that Smith considered most. He asserts that the exchange value of goods produced by the producer depends on the amount of labor hours used in the production (Smith 1955). He based this on the argument that consumers sympathize with the amount of labor used and are willing to part with the exchange value.
According to Smith, capitalism was a lucrative, logical and moral economic system. This system is characterized with the freedom to own property and dispose them at will or put them into any other use. Private property, when joined up with the need to earn, produce and spend, leads to the free market operation. He believes that most of the capitalists will embrace virtues and, hence, avoid becoming selfish and greedy (Wood 1999).
Karl Marx, on the other hand, perceives capitalism as a fundamental factor, upon which market failures occur. He perceives it as a system, where the producers who are rich people in the society work to their best interest at the expense of factory workers. In this regard, Marx refutes the existence of the ‘invisible hand’ that ensures the whole society benefits, when one party pursues its own interest. He perceives the capitalist system as an exploitative system, aimed to impoverish the poor, while making the rich accumulate even more riches.
According to Marx, production of products in a civilized society occurs among individuals. Such production would be aimed at meeting the needs of the individuals in a society. He notes that production occurs through co-operation and mutual exchange of activities among individuals. There exist social connections and relationships, within which natural actions take place. He based this on the belief that people bring changes in their lives and their environment by engaging in practical activities within the practical world. Such activities, according to Marx, make the society develop the desire to meet the needs of the society, which eventually leads to production (Beaud 2001). His perception of the different economic process is that production creates product, corresponding to society needs; distribution shares these based on the social laws; exchange parcels the divided shares based on specific individual needs, while consumption is where the products become direct servants or objects to satisfy individual needs.
According to Marx, the relationship between production and consumption is that production is perceived as an act of consumption, while consumption is the last stage of production. There is a circular relationship between consumption and production. In this case, for product to be consumed, they must be produced first; meanwhile, any production involves consumption of resources and raw materials, which must first have been produced.
According to Marx, as people provide multiple hours of labor, they become alienated. In this case, laborers become more separated from their society, human race and also the object that they produce (Wood 2002). Marx notes that workers in a capitalist system get minimal wages. The reason for this is that capitalists have better bargaining power and would, therefore, give wages that comprise a sufficient amount to sustain workers and their families alive. In addition, workers are forced to work and must be willing to accept whatever the working conditions and, hence, their early deaths. The workers’ services are one-sided and degraded and at an advanced level, labor becomes similar to machine. He also notes that in a capitalist system, labor is like any other commodity which is bought and sold.
Marx notes that for a fair exchange to take place between the parties, it must be possible to commensurate the exchange item. This can only occur based on similarity in the elements among the goods and, hence, difficulty, when such changes do not exist. Marx perceives labor in two forms. Concrete labor is the one that transforms raw materials into goods which possess the use values. On the other hand, abstract labor constitutes the feature of a product, which is mainly the price and, hence, the exchange value of the product. According to Marx, this is a source of conflict, given that production is started by capitalists. He attacks capitalism on the fact that capitalists will produce goods for the temporary use by consumers with the fear that if they sell quality goods that are durable, then they will only benefit from the current exchange value and do not expect much in the future. According to Marx, the laborers’ power rests on their ability to produce goods and services. However, they must be fit to execute their responsibilities in production. In this context, he described such things as rest, food, shelter, cloths among others.
Marx perceives capitalism with the capacity to breed consciousness and unfairly being in favor of the rich, while exploiting the poor. He asserts that each group has a right for their interest, but the problem arises from the force by one. Producers need to maximize their profits, but also the workers’ welfare must be considered. The three ingredients for the problems associated with capitalists include the private ownership of property, desire and the capacity to achieve maximum gains and absence of the central planning.
Marx believed that the competition insinuated by the free market system created a situation, in which there would be losers and winners; winners would take the form of monopoly. Absence of central planning in terms of regulating the market operation would result into over and underproduction of some goods and, hence, depression and inflation. Furthermore, one of the implications would be states that are controlled by the rich.
The solution to whether Karl Marx provides a better analysis for the capitalism can be borrowed from the abovementioned perspective of each one of them. In terms of the analysis, it is essential to use the contradiction approach into the Smith assumptions.
First of all, the operation of the free market that leads to prices of goods and services is determined by market forces. This is an assumption that is believed to take place where there are efficient market players and information symmetry. Nevertheless, the reality is that the world economies have been characterized with surpluses and shortages, where the market forces are left to operate independently, according to an observation made by Marx. This is especially common in the foreign exchange market. As observed in various cases, a floating regime will always face the problem of surpluses or deficits. For this reason, countries have been forced to deal with flexible exchange rates or rather use them together with the fixed exchanges to avoid crises as experienced in East Asia in the mid 1990s.
Government interventions are another feature that characterizes the modern economies. This can be seen through such things as subsidies, taxations, price floors and ceilings and quotas among others. Other may include the fiscal policies that are aimed at controlling the aggregate demand with the interest of maintaining healthy levels of inflation. The location where goods are being produced, is not the best interest of consumers. In case a certain product is overproduced, the government intervenes and reduces production. Those are the goods with positive externalities; their production are encouraged through subsidies and tax exemptions. The government also intervenes, where the free market operation results into undesirable terms of trade.
The unfair competitions in the market have also resulted into the existence of monopolies and monopsonies in the market. These act as a source of market failure, because the markets do not operate efficiently as observed by Karl Marx. Monopolies exploit consumers by draining their surpluses. Consumers have to pay more for less; and continued competition is inhibited, unless governments intervene.
Another weakness in the analysis by Adam Smith is the assumption of the profit maximization by producer. This fails to explain the existence of welfare firms that exist today all over the world. This is, however, in line with the Marx observation of a market system that looks into the welfare of everyone within the production cycle without exploitation.
According to Karl Marx perception of the capitalism, it is exceptionally easy to explain the causes of disparities between the rich and the poor. Capitalism will always make such gap and continue to increase day by day as owners of capital accumulate more wealth at the expense of the poor. This has called for intervention through indirect systems of transfers, such as taxation, and also the welfare organization in the modern economy.
Adam Smith did marvelous contribution in the field of economies, especially when it comes to law of demand and supply. However, a close scrutiny of his work and that of Karl Marx with regard to capitalism allows concluding that Marx provides a better analysis due to its applicability in terms of the modern economy.