Adam Smith vs. Karl Marx

Written by Frank Li

The dramatic rise of China over the past four decades not only has rocketed China’s economy to the top of the world (in terms of PPP – purchasing power parity), with no end in sight, but also is ending western dominance over the past 200 years, at least.

What does that mean to the world? Everything, from politics (End of Democracy?) to economics!

This post is about economics. It highlights two giant economists: Adam Smith behind the West’s economy and Karl Marx behind Chinese economy.

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1. Who is Adam Smith?

Below is an excerpt from Wikipedia – Adam Smith.

Adam Smith FRSA (16 June 1723 NS (5 June 1723 OS) – 17 July 1790) was a Scottish economist, philosopher and author as well as a moral philosopher, a pioneer of political economy and a key figure during the Scottish Enlightenment era.[1] Smith is best known for two classic works: An Inquiry into the Nature and Causes of the Wealth of Nations (1776) and The Theory of Moral Sentiments (1759). The former, usually abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics.[2]

Smith laid the foundations of classical free market economic theory. The Wealth of Nations was a precursor to the modern academic discipline of economics. In this and other works, he developed the concept of division of labour and expounded upon how rational self-interest and competition can lead to economic prosperity. Smith was controversial in his own day and his general approach and writing style were often satirised by Tory writers in the moralising tradition of William Hogarth and Jonathan Swift. In 2005, The Wealth of Nations was named among the 100 Best Scottish Books of all time.[3] The minor planet 12838 Adamsmith was named in his memory.[4]

For more, watch the video below.

2. Who is Karl Marx?

Below is an excerpt from Wikipedia – Karl Marx.

Karl Marx (5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, political theorist, sociologist, journalist and revolutionary socialist.

Born in Trier to a middle-class family, Marx studied law and Hegelian philosophy. Due to his political publications, Marx became stateless and lived in exile in London, where he continued to develop his thought in collaboration with German thinker Friedrich Engels and publish his writings, researching in the British Museum. His best-known titles are the 1848 pamphlet, The Communist Manifesto, and the three-volume Das Kapital. His political and philosophical thought had enormous influence on subsequent intellectual, economic and political history and his name has been used as an adjective, a noun and a school of social theory.

Marx has been described as one of the most influential figures in human history, and his work has been both lauded and criticised.[11] His work in economics laid the basis for much of the current understanding of labour and its relation to capital, and subsequent economic thought.[12][13][14][15]Many intellectuals, labour unions, artists and political parties worldwide have been influenced by Marx’s work, with many modifying or adapting his ideas. Marx is typically cited as one of the principal architects of modern social science.[16][17]

For more, watch the video below.

3. Adam Smith’s 2 famous books

3.1 What is “The Theory of Moral Sentiments”?

Below is an excerpt from Wikipedia – The Theory of Moral Sentiments.

The Theory of Moral Sentiments is a 1759 book by Adam Smith.[1][2][3] It provided the ethical, philosophical, psychological, and methodological underpinnings to Smith’s later works, including The Wealth of Nations (1776), Essays on Philosophical Subjects (1795), and Lectures on Justice, Police, Revenue, and Arms (1763) (first published in 1896).

For more, listen to the audiobook below.

3.2 What is “The Wealth of Nations”?

Below is an excerpt from Wikipedia – The Wealth of Nations.

An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith. First published in 1776, the book offers one of the world’s first collected descriptions of what builds nations’ wealth, and is today a fundamental work in classical economics. By reflecting upon the economics at the beginning of the Industrial Revolution, the book touches upon such broad topics as the division of labour, productivity, and free markets.

It is the second most cited book in the social sciences published before 1950, behind Karl Marx‘s Capital.[1]

For more, listen to the audiobook below.

4. Karl Marx’s 2 famous books

4.1 What is “The Communist Manifesto”?

Below is an excerpt from Wikipedia – The Communist Manifesto.

The Communist Manifesto (originally Manifesto of the Communist Party) is an 1848 political pamphlet by the German philosophers Karl Marx and Friedrich Engels. Commissioned by the Communist League and originally published in London (in German as Manifest der Kommunistischen Partei) just as the revolutions of 1848 began to erupt, the Manifesto was later recognised as one of the world’s most influential political documents. It presents an analytical approach to the class struggle (historical and then-present) and the conflicts of capitalism and the capitalist mode of production, rather than a prediction of communism’s potential future forms.

The Communist Manifesto summarises Marx and Engels’ theories concerning the nature of society and politics, that in their own words, “The history of all hitherto existing society is the history of class struggles”. It also briefly features their ideas for how the capitalist society of the time would eventually be replaced by socialism. Near the end of the Manifesto, the authors call for “forcible overthrow of all existing social conditions”, which served as the justification for all communist revolutions around the world.

For more, listen to the audiobook below.

4.2 What is “Capital”?

Below is an excerpt from Wikipedia – Das Kapital.

Das Kapital, also known as Capital. Critique of Political Economy (German: Das Kapital. Kritik der politischen Ökonomie, pronounced [das kapiˈtaËl, kÊiËtɪk deËÉ pÉ”liËtɪʃən øËkoËnoËmiË]; 1867 – 1883) by Karl Marx is a foundational theoretical text in materialist philosophy, economics and politics.[1] Marx aimed to reveal the economic patterns underpinning the capitalist mode of production, in contrast to classical political economists such as Adam Smith, Jean-Baptiste Say, David Ricardo and John Stuart Mill. Marx did not live to publish the planned second and third parts, but they were both completed from his notes and published after his death by his colleague Friedrich Engels. Capital is the most cited book in the social sciences published before 1950.[2]

For more, listen to the audiobook below.

5. Discussion

Both Smith and Marx were great men, who changed the world with their pens.

Let’s focus on economics only.

Simply put, they both wrote extensively about capitalism. However, because Smith was about 100 years older than Marx, the capitalistic society he lived through was much less advanced than the one Marx did. As a result, Smith’s works are more basic, addressing such issues as free markets, free trade, and [national] wealth building (when Britain was an ever-expanding Empire).

Marx, on the other hand, wrote about capitalism much more insightfully. Highlighting the “class struggle†between the majority (i.e. “the Proletariansâ€) and the minority (i.e. “the Bourgeoisâ€), Marx not only tried to thoroughly explain capitalism, but also boldly proposed a solution: socialism and eventually communism.

Most importantly, Marx was fully aware of Smith’s works, He accepted it and proved it wrong: a totally free market (i.e. a market without socialism, or government invention) will not lead to a “utopian†society as Smith envisioned, but a society full of inequality and “class struggleâ€.

Unfortunately, Marx was also wrong in believing in a revolution to achieve socialism (and eventually communism).

5.1 More differences between Adam Smith and Karl Marx

This is a great article: Difference Between Adam Smith and Karl Marx. Below is an excerpt.

While Adam Smith contended that the most ideal economic system is capitalism, Karl Marx thought otherwise. Adam Smith also opposed the idea of revolution to restore justice for the masses because he valued order and stability over relief from oppression. Marx strongly adhered to the idea that capitalism leads to greed and inequality. Inherent to the idea of competition is greed, opined Karl Marx, which would cause inherent instability and injustice in a society. Communism offered the best model – both political and economic – with its collectivist ownership, production and central planning features intended to distribute wealth equitably and eliminate the distinctions between the bourgeoisie and the proletariat altogether, according to Marx. Smith did not put the spotlight on the land holdings or the riches of the aristocracy like Marx. Smith elaborated on how a person could reap economic benefits commensurate to his effort and thus add to an economy’s aggregate wealth. He believed that in a free market economy, an individual would be able to earn and spend in a market freely, and it would allow a worker to act as a consumer as well. When a worker would purchase goods and services, it would then lead to profits for some other economic agent – a producer or a consumer of economic goods or services – and further boost economic activity. According to Smith, the benefits to an individual economic agent would be enjoyed by many other members of society through a “trickle effect†as the original worker would spend money, which would be earned by some other producer of goods or services, which would allow the second economic agent to earn and then spend money, and the cycle would continue which would help the economy multiple times more than what it may appear at first sight.

5.2 The West vs. the East

Smith’s works were certainly more appealing at home (i.e. the British Empire), as well as to the up-rising America. As a result, it has been prevailing in the West.

Marx’s works, on the other hand, were more appealing to the working class. As a result, it was widely adopted in the East (e.g. the USSR and China) as the theoretical foundation in their proletarian revolutions.

Overall, because the West triumphed over the East for the past 200 years, it has been mostly Smith over Marx.

Now, with the rise of China and the decline of the West over the past few decades, their fortunes may soon be reversed. Four highlights:

1. Free market: “Communist†China with a planned economy has been doing much better, over the past few decades at least, than “Capitalist†America with a free market economy, with no end in sight.
2. Free trade: Nowadays, China appears to like it better than America does.
3. Wealth of nations: China has already surpassed America in terms of PPP (purchasing power parity), with no end in sight.
4. Government: The one in America focuses on different things from the one in China. The image below is worth more than 1,000 words.

5.3 Summary

A successful nation requires both capitalism and socialism, balancing them optimally. Three highlights:

1. Capitalism creates extra-ordinary wealth for the able and lucky folks, while socialism, for which the government is responsible, provides the less fortunate with a safety net, thus creating and maintaining a “harmonious†society.
2. Public works (e.g. infrastructure) must be carried out by the government via some kind of central planning.
3. The government has a role in the national economy bigger than any individual capitalist. Therefore, every effort must be made Towards an Ideal Form of Government, with competent people working in, and leading, the government.

Both Smith’s works and Marx’s works are valuable, but neither alone is adequate for today’s world. Two highlights:

1. Smith: Capitalism, based on his free market theory, alone does not work. Rather, some kind of government intervention (or socialism) is necessary. The challenge is to balance between the two, not just having one without the other.
2. Marx: His call for the need of violent proletarian revolutions is wrong. A society can peacefully evolve into a mixture of capitalism and socialism, without a bloody revolution, like China did in recent decades.

So, let’s study both of them, and further develop them, dogmatism notwithstanding.

Tip: Other than the call for a proletarian revolution, Karl Marx might have got everything right, in my humble opinion.

5.4 History 2.0

In a previous post (History 2.0), I suggested and started re-writing the history from 1492 on. The re-writing should of course include economics, of which both Adam Smith and Karl Marx are a part. Furthermore, once we start re-evaluating Smith’s works, what does that mean to the other western economists, such as John Keynes and Milton Friedman? The same thing can be said about the eastern economists.

Four informative readings:

1. End of Democracy?
2. History 2.0: Western Liberal Democracy is a Big and Fat Lie!
3. Human Rights: Yet Another Big and Fat Western Lie!
4. What is China’s State Capitalism, Anyway?

6. Closing

Both Adam Smith’s works and Karl Marx’s works are important to us today. This post has shed some light on both, hopefully.

Now, please sit back and read this book, as Smith’s works and Marx’s works may intersect in America, today and tomorrow. You can read the first 56 pages on-line, FREE (by clicking “look inside”). Enjoy!