Compare And Contrast Adam Smith’s Optimistic Account Of The Benefits Of Laissez-faire Capitalism With Marx’s Account Of The Fate Of The Worker Under Capitalism.

Abstract

This essay seeks to look into the works of two influential economists/theorists Adam Smith and Karl Marx who both developed very different ideas on capitalism. This essay looks into the Wealth of Nations and Capital to analyse and contrast the optimistic account of the first and pessimistic account of the latter author on laissez-faire capitalism. This essay will be rich in literature, as I will reference from many influential secondary literature, including a few from my lecturer, Professor Werner Bonefeld. However, these will only be to supplement the main texts of the two authors above. The main texts we will look into within this essay are Smith s Wealth of Nations (1981) edited by Campbell, Skinner and Todd, and Marx s Capital (2004) edited by Mandel and Fowkes. This essay will begin by looking into the first author, followed by section two, which looks at the second. We will look at many different descri ptive concepts and theories, such as the invisible hand theory, supply and demand, centralization (both horizontal and vertical), the nature of production under laissez-faire capitalism, and many more within this essay. By the end of the essay, I hope the reader can see how starkly different the accounts of Smith and Marx is from each other. The first is a strong supporter and admirer of this system due to the positive results he believes will arise as a result of it, whilst the latter argues this is false. Marx s Capital was a response to Smith s Wealth of Nations , thus, we will begin with Smith, followed by Marx, and then conclude this essay by understanding that both authors have complete opposite images of laissez-faire capitalism based in their theories.

Keywords: Laissez-faire Capitalism Capitalists Bourgeoisie Proletariat Free-market Invisible Hand Centralisation Wages of Labour Accumulation Means of Production Supply and Demand Commodity Surplus Capital Machinery.

Introduction

Adam Smith and Karl Marx are arguably the two most influential economists in the last few centuries. However, Smith and Marx s account of laissez-faire capitalism are almost the opposite. Smith never once used the term laissez-faire capitalism within his Wealth of Nations but his account is clearly in favour of an unregulated capitalist system. Smith s account is almost identical to the classical liberal theory of laissez-faire, which isn t surprising because the pioneers of the theory, John Locke and David Ricardo, both was influenced by and drew up on Smith s account. Marx on the other hand is very critical of capitalism because according to him the workers lives a horrible fate under this system. We will look into the works of both these two influential economists, as well as several secondary literatures, to compare and contrast both of their accounts. In the first section we will indulge in Smith s work by looking at his ideas such as the invisible hand , the division of labour, his theory of supply and demand, and so much more. In the second section we will analyse Marx s account by looking at his theories on centralisation, machinery, the nature of production, and many more too. By the end we will see that both Smith and Marx differ in whether this system is good for society or not.

Section One: Adam Smith

Smith is optimistic about laissez-faire capitalism and the creation of the division of labour that arises as a result of it. He begins his Wealth of Nations by talking about unregulated capitalism and the division of labour as the greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment (Smith et al 1981:13). Smith is a strong supporter of the division of labour because according to him the production levels are much higher when labour is divided into distinct operations (Smith et al 1981:15). Under laissez-faire capitalism and the division of labour, the full potential of labour productivity and stock production is achieved. Laissez-faire capitalism leads to an increase in dexterity, saving of time, and the invention of a great number of machines, therefore, Smith says that under these conditions even a industrious and frugal peasant will live like that of an African king (Smith et al 1981:24).

According to Smith this division of labour is inevitable due to human nature. Humans, unlike animals, are dependent on each other. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from his or her own self-interest. Therefore, Smith believes that when all humans are allowed to strive for their own self-interest in a laissez-fair capitalism that is unregulated, this will soon benefit everyone else in one-way or another (Smith et al 1981). The only role the state should have in a commercial society is to facilitate fair exchange by creating money coins with a publick stamp upon certain quantities of such particular metals (Smith et al 1981:40). Smith also supported the public laws that were introduced by the states to regulate the values of metals used for exchanging commodities (Smith et al 1981:62-63). Therefore, it is important to note that Smith does not endorse zero state intervention and complete laissez-faire because he does endorse some sort of limited state regulation to allow fair exchange, but, this should only be to make exchange fair and protect property rights (Smith et al 1981 Clarke 1991).

In chapter 6, Smith starts talking about the component parts of the price of commodities. Smith argues that the commodities produced in a capitalist society benefits everyone and is divided between many different people. Stock that is produced overtime is not the property of one single class but instead owned by all classes (Dahrendorf 1959). A stock of commodity pays for the rent of the land, wages of the workers, and profit of the owner. Therefore, Smith says that one man does not own the stock produced by labour. This stock produced under a laissez-faire capitalism benefits everyone because it is divided between rent, wages, and profit (Smith et al 1981). Wages, profit, and rent, are three sources of all revenue as well as the exchangeable value of that stock, so all have a percentage in that stock. This rejects the Marxist theory of alienation that we will discuss in the next section.

All commodities in society will involve one, two, or all three of these components. Smith says that some commodities are more expensive than others because they have more components involved. For example, the value of bread does not only involve the wage, profit, and rent of the baker, but also includes the wage, profit, and rent of the famer who gathered the wheat, also those who turned it into flour, and so on (Smith et al 1981 Clarke 1991). So the more manufactured something is the more it costs. The wealthiest nations are the ones who produce more than what they consume so the stock and profit is greater. They can invest more and generate even more wealth. Smith says that the more a society produces than what it consumes the better its economy would become. This is the key to a striving economy and this is only achieved through laissez-faire capitalism! (Smith et al 1981).

Market prices of commodities in a commercial society are based on supply and demand. Commodities are not usually sold for their natural price they are more likely sold for their market price, which is slightly higher. The market price is determined by the quantity of that commodity in the market and the demand for it in society. The less quantity and more demand means higher market price, the higher quantity and lower demand means lower market price. People who demand these commodities are willing to pay the rent, wage, and profit they are called effectual demanders (Smith et al 1981:72-74). When the quantity of a commodity is lower than the effectual demand, men will be willing to pay more than the natural price, which automatically starts competition between demanders. The market price can rise drastically over the natural price based on how much people are willing to offer (Smith et al 1981).

When the quantity brought into the market is much higher than the effectual demand it cannot all be sold. The extra ones must be sold to those who want them for a lesser price and the low price they give reduces the price of the whole stock - this is when the market price will drop below the natural price. When the quantity in the market is exactly the same as the demand, then the market price is very similar to the natural price. Therefore, the effectual demand and quantity determines the market value. It is important that a commodity should never exceed the demand but also the quantity should not be less than the demand either it is best for it to be equal. If it exceeds over the demand then the rent may not be paid, leading the landlord to withdraw his land. You may also not be able to pay the wages of your workers and therefore reduce your employees. If quantity is less than demand then the employer should rent out more land and employ more labour, which then balances everything out into equilibrium (Smith et al 1981). Therefore, it is best when the market price and natural price is equal as this shows that quantity matches demand (Clarke 1991).

How does Smith s supply and demand theory relate to laissez-faire capitalism? Again, Smith never uses the term laissez-faire within his book but he refers to the concept when he talks about the supply and demand principle we discussed above. Smith says that businesses should be left alone and not interfered with. Businesses will always naturally make sure that the market price is going towards the natural price because even if the demand is high and quantity is low, leading to higher prices, the total revenue is much higher if the quantity and demand is equal. This is natural most commodities will always try to be equal to demand, not less, not more (Smith et al 1981 Clarke 1991). When quantity is low in the market more labour is required and so wages are higher. When quantity is high in the market then people lose their jobs and wages reduce. When the effectual demand increases on a certain commodity, owners of stock would employ more labour and start the same business to make the same commodity, creating competition, increasing stock even more, and also reducing the price back to the natural, or even below sometimes. According to Smith, it is best and safe to just leave the market to operate itself in this manner because the market will naturally balance everything out. Governments should not regulate this supply demand principle or interfere with this market functionality (Clarke 1991).

Furthermore, Smith tries to convince the reader that governments should not create legislations or regulations to increase wages of labour, again, they should just leave this to the market because wages will increase with demand for labour as businesses grow (Clarke 1988 Clarke 1991). This will always occur in a laissez-faire capitalism because Smith says their will always be demand for labour with the increase in stock production. Demand for workers increase when capitalists make more profit than they require, which they then invest part of this revenue or surplus into more labour and more land to produce more stock. Smith says, the demand for those who live by wages, therefore, necessarily increases with the increase of revenue and stock of every country, and cannot possible increase without it (Smith et al 1981:87). According to Smith, the increase of revenue and stock is the increase of national wealth. There is nearly always more demand for workers when stock is high. Wages increase when the demand for workers is there. Thus, the better the economy, the better the wages. The economy performs this way when it operates under a laissez-faire policy with no interference, which is why Smith says that everyone, including workers, benefit from laissez-faire capitalism (Clarke 1988 Clarke 1991).

In summery, Smith is arguing that laissez-faire capitalism leads to more production, which this then creates more stock, which then creates higher revenue and national wealth. When there is more revenue and national wealth there is more investment into production, which automatically creates demand for workers, leading to higher wages (Smith et al 1981). Therefore, allowing businesses to produce in an unregulated society will benefit the whole society by creating more stock and higher wages of labour. Under this theory, wages are at its highest point when businesses perform well and is left unregulated. Therefore, in a thriving economy everyone benefits, not just the bourgeoisie (Clarke 1988). Smith says national wealth does not mean being a wealthy country it means the country that is growing the fastest. England is richer than North America but workers in New York earn more than the workers in London. Smith says, in the province of New York, common labourers earn three shillings and sixpence currency, equal to two shillings sterling, a day ship carpenters, ten shillings and sixpence currency, with a pint of rum worth sixpence sterling, equal in all to six shillings and sixpence sterling house carpenters and bricklayers, eight shillings currency, equal to four shillings and sixpence sterling journeymen tailors, five shillings currency, equal to about two shillings and ten pence sterling. These prices are all above the London price and wages are said to be as high in the other colonies as in New York (Smith et al 1981:87). Therefore, Smith s optimistic account of laissez-faire capitalism is due to the efficiency, productivity, and growth that come with the system when left unregulated.

North America is not wealthier than England but its capitalist system is less regulated and its population is increasing much faster than of England. Smith endorses marriage and birth because population increase is very positive on the economy. As population increases so does demand for commodities, leading to scarcity of hands in the means of production, which then leads to more workers, which then leads to higher wages. Even if wages do not increase, Smith argues that prices of commodities will decrease over time as production in a laissez-faire capitalism increases. For example, Smith says, Grain and potatoes have become half the price they were 30-40 years ago All garden stuff too has become cheaper , as well as most other household items (Smith et al 1981:96). Therefore, laissez-faire capitalism has led to the decrease in the price of commodities, which improved the circumstances of the lower ranks of people - industrious and frugal peasant will live like that of an African king (Smith et al 1981:24). Smith has an optimistic account of laissez-faire capitalism because he truly believes it makes society better. Smith encourages all states to adopt a laissez-faire capitalist system because it is the most productive approach. Smith says that a progressive state that is advancing is the one that is happiest and most comfortable. In a stationary state or declining state it is difficult and miserable to live in. Smith says the stationary state is dull and the declining is melancholy (Smith et al 1981:99).

Smith s optimistic account grows from his idea of a invisible hand , which is the idea that the unobservable market forces help the demand and supply of goods in a free market to reach equilibrium automatically (Hirschman and Sen 2013). Smith talks about how beneficial it will be if all individuals are allowed to work for their own interest because this will benefit everyone. The governments should leave the market alone and let people work and sell freely. Smith believes that if the economy is left alone, people will compete against each other. This competition will be good because people will buy from whomever is cheaper, forcing sellers decrease their prices (Dobb 1981). The result of everyone pursing their own interests will be the maximisation of the interests of society as a whole. Advocates of Smith s free market capitalist position believe the invisible hand of the market is far more efficient than, say, a government-directed planned program, such as the one that existed in the Soviet un ion (Dobb 1981 Hirschman and Sen 2013). The theory of the invisible hand is the concept explaining market functionality if left alone without interference. According to this idea, a capitalist society should function without anyone in control of it (Smith et al 1981 Dobb 1981 Hirschman and Sen 2013).

Overall, Smith argues that when the economy is striving masters have more money to invest in more employment and grow their business. Laissez-faire capitalism is the best system for economic prosperity and for this reason he argues it benefits all classes (Smith et al 1981). Smith s optimistic account comes from his belief that laissez-faire capitalism is the most productive method of economic growth. If the capitalist system is regulated and not allowed to function properly the economy will shrink, reversing the whole cycle discussed above. After reading Smith s Wealth of Nations and understanding his optimistic account of laissez-faire capitalism, I have constructed and came to the simple conclusion below:

Laissez-faire capitalism = higher productivity = higher revenue and national wealth = more investment into production and labour = higher wages and cheaper prices.

Section Two: Karl Marx

Marx rejects Smith s optimistic account discussed above throughout Capital . Chapters 9-11 show us how laissez-faire capitalism is exploitive towards the proletariat by analysing the working day (Marx and Arthur 1992) however, I will not discuss this within this essay. The main contradiction comes from chapters 23-25 and in this section we will look into these three chapters of Capital to understand how Marx s account of laissez-faire capitalism contradicts with Smith (Heinrich and Locascio 2012). In chapters 23-25, Marx starts to oppose laissez-faire capitalism because he starts to critique the continuous motion of producing and creating wealth. Marx agrees with Smith that laissez-faire capitalism does produce a lot of wealth but he is not optimistic about this in the same way Smith is (Marx and McLellen 1972).

Marx disagrees with Smith that laissez-faire capitalism is beneficial for everyone. He argues that wealth and stock is created by the unpaid labour of the proletariat. Marx argues, every social process of production is at the same time a process of reproduction (Marx et al 2004:711). This means that laissez-faire capitalism must maintain a master-worker relationship to produce stock for the bourgeoisie. Marx rejects Smith s argument that the worker too has a stake in the commodity/stock he produces through wages (Harvey 2010). He says that the capital-labour relationship alienates the worker from his/her product and strengthens the dominance of the capitalist over the worker (Marx and McLellen 1972 Marx and Arthur 1992 Marx et al 2004). The wealth produced by the worker becomes the instrument of the worker s own oppression (Heinrich and Locascio 2012). Smith s optimistic account comes from a classical liberal view of laissez-faire capitalism but Marx argues that this is a mere illusion because laissez-faire capitalism does not benefit the workers as Smith believes it to be (Rubin and Filtzer 1979 Heinrich and Locascio 2012). Marx argues that the capitalist system requires radical transformation and regulations from the government in maintained by a constant change in the person of the individual employer, and by the legal fiction of a contract (Marx et al 2004:719).

Capital is self-valorising value it needs to be reinvested back into production to generate new surplus value (Marx et al 2004:725). Under laissez-faire capitalism, the capitalist will continuously reinvest and accumulate more because this is the only way to create more capital. Marx has a pessimistic view of this process because he says the bourgeoisie invests for the sake of accumulation accumulate, accumulate! (Marx et al 2004:742). As long as this continues, which under laissez-faire capitalism it will always continue, the capitalist will just gain more economic power and political advantage. There is nothing to stop the bourgeoisie under laissez-faire capitalism so the more the capitalist has accumulated, the more is he able to accumulate (Marx et al 2004:729). The accumulation of wealth by the capitalist, therefore, is a direct result of the unregulated system and lack of government control. Marx says that it will not make the working class live like an African king as Smith argued, in fact it will be the opposite (Dahrendorf 1959 Harvey 2010 Heinrich and Locascio 2012).

Marx then moves on to discuss the means of consumption for the means of production. He agues that under laissez-faire capitalism the worker has a necessary expenditure in the process of production, just like machines, which is vital under laissez-faire capitalism if the bourgeoisie wants to make profit (Bell and Cleaver 1982 Harvey 2010 Weeks 2014). He says that the workers means of consumptions are then merely the means of consumption of a means of production his individual consumption is directly productive consumption (Marx et al 2004:717). Laissez-faire capitalism requires this productive consumption to create capital. Smith agrees with this but says that this benefits everyone, whilst Marx says it only benefits the bourgeoisie. The bourgeoisie spends on unproductive consumption such as luxury goods that drain on the system, whilst the workers spend on productive consumption (Marx et al 2004:735).

The only way the capitalist can exist as capital personified is by keeping up with the latest machines and technology. The system requires continues accumulation in order to exist, thus, Marx says laissez-faire capitalism seeds its own destruction by creating its own gravediggers (Marx, Engels and Wood 1998). Smith argued that laissez-faire capitalism will benefit the worker too but Marx says the share of income going to labour has fallen steadily even though wealth has increase. Laissez-faire capitalism does generate wealth but Marx disagrees with Smith on the redistribution of this wealth (Dobb 1981). Smith said that as production increases the worker too would live better but Marx says that as production develops capital-relations would create bigger capitalists and more wage-labourers with lower wages (Marx et al 2004:763).

Marx acknowledges the fact the wages can increase with the theory of supply and demand as discussed in section one. However, he says that the increase would not be as much as Smith makes it out to be. Also without any government policies or laws, the capitalists will never increase the wages of the worker, as this will mean decreasing their profit (Harvey 2010). Thus, Marx says that the slight small increase in the wages of the worker due to demand for labour in the free market has only allowed the golden chain of the wage-labourer to be loosened somewhat (Marx et al 2004:769). Therefore, Marx s pessimistic account of laissez-faire capitalism comes from his belief that inequality is inherent within capitalism. The process of accumulation is self-reinforcing because every accumulation becomes the means of new accumulation (Marx et al 2004:776). This will only concentrate wealth in the hands of the capitalist and not the worker, so workers will not live like an African king . This is a necessary result of laissez-faire capitalism (Clarke 1994 Heinrich and Locascio 2012).

Centralisation of the means of production is another inevitability within laissez-faire capitalism. Businesses and capitalists will go through a process of horizontal and vertical integration in the language of bourgeois economics, which in turn will create new and powerful levers in social accumulations (Marx et al 2004:780 Booth 2014). The free market unregulated, by its nature, therefore, turns into the dominance of monopolies in every sector and across sectors (Booth 2014). As this takes place more and more machinery is invented, which is when society finds itself in a position where men and woman are surplus to the needs of capital a surplus population (Marx et al 2004 Booth 2014). This population of the unemployed, Marx notes, acts as an industrial reserve army (Marx et al 2004:785). In this sense, the reserve army of labour becomes a condition for the existence of the capitalist mode of production and laissez-faire capitalism (Marx et al 2004:784).

In laissez-faire capitalism the capitalist are free to determine the demand for labour, giving all decision power relating to employment to the hands of the elites. Hence the capitalists avoid and seek to abolish any regulations imposed by trade unions, and the whole might of the bourgeois state is used to eliminate any barrier to the supply of labour (Booth 2014). Advances in production and technology, therefore, do not liberate us as Smith argues, but are used under laissez-faire capitalism to enslave us. Man is in race against machine. Under laissez-faire capitalism we do not control production production controls us (Marx et al 2004 Booth 2014). Smith says that as production increases and society develops things get better for workers, Marx says it s the opposite as things develop and machines are created things get worse (Rosdolsky 1977 Booth 2014).

Overall, Marx defines laissez-faire capitalism as, Accumulate, accumulate! That is Moses and the prophets! Therefore save, save, and i.e. reconvert the greatest possible portion of surplus value or surplus product into capital! Accumulation for the sake of accumulation, production for the sake of production: this was the historical mission of the bourgeoisie in the period of its domination If, in the eyes of classical economics, the proletariat is merely a machine for the production of surplus-value, the capitalist too is merely a machine for the transformation of this surplus-value into surplus capital (Marx et al 2004:742). Without any government control, both the worker and capitalist are forced by the invisible hand of competition under laissez-faire capitalism to constantly reinvest and accumulate rather than enjoy the fruits of labour (Clarke 1994 Heinrich and Locascio 2012). Laissez-faire capitalism needs to be regulated because its own immanent laws of production are external and coercive (Marx et al 2004:739). Marx s says a socialist/communist system would be fairer, just, and more equal than an unhindered capitalist system without government intervention.

Conclusion

In conclusion, we have arguably looked into the accounts of the two most influential economists in the last few centuries, Adam Smith and Karl Marx, who both differ in their perceptive of laissez-faire capitalism and the free market. Smith argues that laissez-faire capitalism is the more efficient and desirable economic system for everyone due to the invisible hand (Smith et al 1981). The rationale behind his account is that when individuals try to maximise their own benefit, it will also maximise the benefit of the whole society. Markets should be left free because it would always be in equilibrium only a limited role for governments is endorsed in Smith s account. Marx s account of laissez-faire capitalism differs starkly with Smith s because Marx argues that the increase in wealth and productivity do not translate into an increase in living standards and leisure time as Smith makes it out to be. As wealth increase and laissez-faire capitalism develops, workers work harder to accumulate even more but the wealth is concentrated in the hands of the capitalist, allowing them to centralise their means of production even more. The growing machinery and technology is making things worse for the proletariat as unemployment rises and creates a reserve army of labour. Overall, Marx s account of capitalism is negative because he believes the worker would be exploited, the rich would become richer, poor would become poorer, and the two classes in society bourgeoisie and the proletariat will forever be stuck in their respective classes (Dahrendorf 1959 Bell and Cleaver 1982 Weeks 2014). One endorses this system whilst the other wants a revolution towards it for it to be replaced with state controlled communism.

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