Thursday, August 25, 2011

The Competing Views of Adam Smith and Karl Marx

Let's compare the competing views of Adam Smith and Karl Marx. Each urged different paths to a society's prosperity.

(1) Smith embraced the idea of the freedom of each individual acting in his own self interest as the path to general prosperity.

(2) Marx endorsed the authority of the collective whole as the way to general prosperity.

An Englishman, Adam Smith wrote "The Wealth of Nations" in 1776. This classic book marked the beginning of what is now known as the school of classical economics. Smith has influenced the movements of free market societies worldwide, and especially ours.

A German, Karl Marx was a socialist and is generally acknowledged as the father of communism. Along with Friedrich Engels, he co-authored "The Communist Manifesto" in 1848. His teachings have influenced socialist movements worldwide.

Suffice it to say that in a very fundamental way they saw things differently.

Smith's views were the ideological foundation for modern capitalism, individual freedoms and market based economies, whereas Marxism stands for socialism and communism.

We'll begin with Smith.

An important contribution of his is the example of the dramatic productivity effects associated with the division of labor in a pin factory (click here). This is a classic and is worth reading.

Although mentioned only once in "The Wealth of Nations", perhaps Smith's greatest contribution to our understanding of economics resulted from his description of the "invisible hand" at work. Smith described the invisible hand thusly:

"....every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Today something much more general is known by the words "invisible hand". It's the result of a process where the outcome is produced in a decentralized way with no explicit agreements between the acting agents. In addition, the process is not intentional. The actors' aims are neither coordinated nor identical with the outcome, which is a byproduct of the actors' aims.The process works even without the agents having any knowledge of it. That's why it's called invisible.

In another place, Smith offered another example of the invisible hand at work, "It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest."

To sum up Smith's thinking, the system in which the invisible hand works best is based on free individuals operating in a free market. Consumers want the lowest price, and entrepreneurs want the greatest profit. Thus, by making their excess or insufficient demand known through market prices, consumers "direct" entrepreneurs to invest in the most profitable industry.

Self-interested market participants make the world go around, and free markets make the world a better and more prosperous place for freedom loving individuals.

Now let's turn to Marx.

At the other end of the ideological spectrum from Smith, Marx is known as the father of socialism and advocated the collective ownership of society. He believed that the following economic system would best serve any society, "From each according to his ability, to each according to his need." His view was that an abundance of goods will be the result of a developed communist society. Therefore, the idea is that a collectivist approach or system of socialism will produce more than enough to satisfy everyone's needs.

Marx believed that capitalism will inevitably be replaced by socialism, thus leading to communism. In his view, private property ownership will be superceded by the cooperative and collective ownership of property. Marxism teaches that capitalism is oppressive, and workers will unite in revolution against it, thereby leading to a workers' paradise in the end.

The reality; Marxism never has gotten past the dictatorship stage, which supposedly precedes and leads to the promised workers' paradise.

The reason Marxism wouldn't work, even if ever tried, isn't very complicated. It's due to human nature. Simply stated, a person won't work hard and to his full ability if he will receive no reward for having done so.

To put it in personal terms, if you just sit there, I won't work harder than you do just so you can have everything that I have. Neither will you do the same for me. We're just too human, I guess.

Although socialism and communism are abject failures, capitalism clearly isn't perfect either. Not by a long shot.

Winston Churchill described the differences between the two competing systems as follows, "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries."

That sums it up nicely.

Thanks. Bob.

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