Adam Smith and Karl Marx: Contrasting views on Capitalism

June 22, 2018 Economics

Adam Smith’s “Inquiry into the Wealth of Nations”, published in 1776 along with his “Theory of Moral Sentiments” were the defining works as far as the body of thought known as Capitalist theory is concerned. In the first book, Adam Smith laid out a comprehensive method of conduct of human affairs along economic lines. He firmly believed in the individual who seeks to maximize his “self interest” in his dealings with others. According to Smith, we do not get our bread every morning due to the munificence of the baker but by his tendency to earn a living and a profit.

Thus, if society were to comprise of individuals who work towards their self interest, society on the whole gains. In Smith’s words, “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it”. Adam Smith’s famous assertion of the “hidden hand” guiding the market economy has been quoted an infinite number of times by economists who support free markets and place their belief in the efficacy of the same. According to this view, the dynamics of demand and supply dictate the prices of goods. Thus, if there are two products, A and B and product A is in demand and more people are willing to buy it, the price of A rises and the supply would go up. This creates a condition where the demand for B decreases and hence the price of B falls.

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Eventually, a situation arises where the producer of B moves his capital and other factors of production to a product that is in demand. Thus, the allocation of resources follows the principles of the market. This view of Adam Smith has been the most popular and has been used as a model for the market economies that have followed the capitalist path. The underlying premise of this concept is that individuals act on perfect information and seek to maximize their self interest. Thus, the twin bases of rationalist behavior and perfect knowledge have become the cornerstones of the market economy.

However, the first decade of the 21st century has seen these tenets come under attack from those who aver that the market mechanism is not infallible and there needs to be regulatory oversight over the workings of the market to restore equilibrium. For Smith, Individual liberty was paramount and he contended that an economic system based on competition and the right of every individual to own property and earn a living in a way he or she desires is the ideal one. Thus, Smith’s work that was concomitant with the birth of the United States led to it adopting the free market ideology as its economic system.

Karl Marx
Karl Marx’s theory of the economic system is in direct opposition to that of Adam Smith. Where Smith saw the virtues of production, Marx saw it as another form of oppression. While both saw the utility of production in an economic system, they differed on the value that individuals and society place on the method of production. Marx saw production in a Capitalist society as one that benefits the rich owner and makes the factory workers poorer.

He decried the profit seeking behavior of capitalists and averred that in the capitalist system, All the bourgeois economists are aware of is that production can be carried on better under the modern police than . . . on the principle of might makes right. They forget only that this principle is also a legal relation, and that the right of the stronger prevails in their ‘constitutional republics’ as well, only in another form”. Thus, Marx believed that the Capitalist system is inherently biased against the poor was loaded in favor of the rich.

Another notable facet of Marxist thought was about the “alienation of the workers”. He had trouble reconciling to the production/labor function under Capitalism. He believed that as the worker labors for long hours, he or she becomes alienated from the society at large and hence becomes degraded. Marxist thought is also know for proposing the “labor theory of value”.

According to this theory, the value of goods produced lies in the amount of labor that went into it and under capitalism, the profits derived from the sale of goods is measured in the value added by workers but not paid to them as wages. This is a fundamental opposition to the Capitalist thought where the entrepreneur or the capitalist is rewarded for investing capital and forming the entity required for production of goods.

Contrasting views
The 20th century witnessed the competition between the two ideologies espoused by Adam Smith and Karl Marx in the form of the US led Capitalist market systems and the erstwhile USSR led Communist bloc. At the end of the century, it was clear that the capitalist system had triumphed. Thus, Adam Smith with his concept of the market economy based on individual liberty seems to have carried the day. With the benefit of hindsight, it is easy to state that Marxist thought and his predictions were flawed. However, it has to be remembered that Marx wrote his magnum opus, Das Kapital at a time when the working conditions of the laborers were inhuman and there was no chance of them breaking out of the system of exploitation that they were in.

The enduring legacy of Marxist thought today is the criticism of the economy based on “self interest” that retains its appeal even today. Adam Smith’s views on Capitalism have come under attack as well. His concepts of rational seeking behavior and perfect knowledge as the basis of market economics have been questioned. Every downturn in the economy between alternating periods of contraction and expansion has seen much criticism of Smith and his ideas. This is particularly relevant to the present world wide financial meltdown when commentators are pointing to the inherent flaws of Capitalism.

However, the essentially optimistic note of the material society reaping benefits and rewards for the participants has ensured that the vibrancy and vitality of Capitalism remains intact and rebounds from failures. In conclusion, it is not the brief of this paper to vilify either theory. We have just presented the views of both on Capitalism along with their high points as well as short comings. It is hoped that future evolution of market dynamics incorporates the best of both.

Muller, Jerry Z. (1993). Adam Smith In His Time and Ours. Princeton: Princeton University Press.

Twigg, Lauren M. (2002). Karl Marx Versus Adam Smith Rebirth of Reason. Retrieved Nov 1, 2008, from


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