The task of comparing Smith and the introduction of classical economics to Keynesianism and Marxism, or socialism, should begin with a description of Smith’s life and his influences. In 1723, Adam Smith was born to a mildly well-to-do family in Kirkcaldy, Scotland. Kirkcaldy was a small Scottish seaport on the Firth of Forth about ten miles opposite from Edinburgh. His parents were both well educated and descendants of wealthy middle class families. Adam Smith’s father, Adam Smith the elder, was a customs official in Edinburgh and achieved financial security, if not success, through various positions he held in government. Smith’s family was associated with the Protestant Whigs and they were fortunate enough to be the victorious party in recent wars that occurred in Scotland. Adam Smith the elder owed a great deal of his success to a frugal upbringing, his family’s political connections, and his own training as a lawyer. Researching the Smith family history in Scotland is akin to a nightmare for a genealogist, as at least four different Adam Smith’s lived in the same time period, held government or similar positions, and were related in one manner or another. Adam Smith the elder died shortly after his son’s birth and the younger’s upbringing was largely left to close friends and relatives. The younger Smith was cared for primarily by a devoted mother and by a quasi committee of those friends appointed in his father’s will. These guardians were some of Smith’s greatest influences as they represented men who had participated in the early enlightenment period of Scotland.
Adam Smith’s educational career was above average even for a boy of his stature and the wealth from which he descended. His excellent education was due, in large part, to the guardians who carefully guided him in his upbringing. Adam Smith’s education began in Kirkcaldy and when he was fourteen he attended the university at Glasgow. From 1737 to 1740, he studied at Glasgow and obtained his interest in Newton and stoicism that would later influence the reasoning he used in his successive works. Glasgow allowed Smith to learn more than those ideas he acquired in class or through his studies. Glasgow was a growing city that benefited from the lucrative trans-Atlantic trade that took place with the colonies. Kirkcaldy had been a city with a declining economy, a fact that worried his father as Kirkcaldy’s chief customs officer, and Smith was exposed to many of the benefits of capitalism and free trade that the merchants in Glasgow sought. After Glasgow, Smith attended Oxford seeking to further his education at one of Britain’s best universities. From 1740 to 1746, however, he discovered only disappointment with Oxford in comparison to his experiences at Glasgow. He found Oxford’s academia possessed little interest in teaching and most of his learning was on his own initiative and reading.
After his education at Oxford, Smith returned home to Scotland and spent most of his time in Edinburgh. It was at this time that Smith would begin to acquire his reputation and begin to articulate many of his ideas about the growing field of economics. From 1748 to 1751, Smith spent three years in Edinburgh working as a freelance lecturer. Smith’s lectures consisted primarily of the history of philosophy or science that included discussions on astronomy. While Smith was in Edinburgh, he met and formed a lasting friendship with philosopher and historian David Hume. Smith had gained some recognition for his lectures and was supported in Edinburgh by Scottish leaders who hired him to teach courses on English literature. Smith continued to pursue his interests in philosophical history and began to lecture on these topics. He began to teach and lecture on law or principles that influenced society. These lectures were successful and recognized among others in the academic field. In 1751 he became a professor at Glasgow were he held the Chair of Logic. Smith was well received at Glasgow and his courses were imitated across Scotland and in some American colleges. The chair of Moral Philosophy at Glasgow was ill and later died while Smith was teaching in the university. This absence allowed Smith to teach a few law courses during the colleague’s illness. The death of his colleague, in 1752, provided Smith the opportunity to assume the vacant position. It was in this employment that Adam Smith found his greatest pleasure and later recalled as some of the most productive years of his life (Ross, xxi). Smith would later compile the lectures he gave at Glasgow to form one of his better written works, Theory of Moral Sentiments. The work, published in 1759, directly challenged the theories presented by Hobbes and Mandeville on human selfishness. Smith argued that the legal and daily transactions of the individual for their own individual gain benefited society as a whole. Smith later refined and recast his ideas in subsequent revisions of the Theory of Moral Sentiments. Smith used these ideas extensively in his later works to support his conclusions. Hume read Smith’s first work and pushed him to further develop his exploration of morals. At the same time, Hume distributed Smith’s work to influential individuals who might assist Smith with his career. One such individual, who was interested in Smith’s ideas, was the politician Charles Townshend. Townshend convinced Smith to accompany his step-son, the Duke of Buccleuch, on a tour of Europe as a tutor for the boy. From 1764 to 1766, Adam Smith spent his time in southern France, Geneva, and Paris.
This excursion offered Smith an excellent opportunity to study the structures of foreign governments and their societies. Smith especially enjoyed his time in Paris where he was invited to many of the salons owned by the most respected women in France. The salons of Paris played host to some of the brightest thinkers of the time and Smith was greatly influenced by the thoughts and theories proposed in them. Smith’s ideas on morals, while not completely revolutionary, were proposed and used in a manner unlike any other that preceded them. Shortly after he was first published, he was actually compared to Newton, being described as “moral Newtonianism” (Ross xxi). Smith was well respected in France and had the opportunity to meet with many of the French philosophes. Smith had the ability to research economics in Paris, which possessed some of the world’s best economists. The Physiocrats were the primary school of thought followed by most French economists in the middle of the 18th century. Physiocrats believed that land and agriculture were the primary means to wealth. Industry and trade, they argued, were a fruitless portion of an economy. The Physiocrats supported and created the idea of lassez-faire economics in which the idea of completely free trade could only be achieved without the intervention of the government. French economists also envisioned a natural course to an economy that required the absence of government intervention for the economy to prosper. In retrospect, French thinkers had come a long way since the mercantilist beliefs of pre-enlightenment Europe. Smith would use the French ideas of lassez-faire and the natural course of an economy, but he rejected the Physiocrats’ dislike of industrialism and its unwarranted emphasis upon a purely agricultural foundation of wealth. In 1766, Smith was forced to return to England, however, when the Duke’s brother became ill in Paris and died suddenly.
Adam Smith had now formed and articulated a great deal of his ideas on an 18th century economy and his next endeavor, working for the British government, would provide him the material and knowledge necessary to apply his ideals to British policy at home and abroad. Smith’s return to London brought him a position of employment with the government researching matters of public finance for Townshend. The work lasted a year and afterward he returned to Kirkcaldy to begin work on his Wealth of Nations. From 1767 to 1773, Smith lived in Kirkcaldy with his mother. The solitude of Scotland brought Smith the time he needed to compile and reform many of his lectures from his teaching days at Glasgow. It was these lectures that he would use to form the primary basis of his most recognized work, An Inquiry into the Nature and Causes of the Wealth of Nations. Wealth of Nations included the notes from many of his jurisprudence courses at Glasgow and Smith worked endlessly adding illustrations and examples to support his theses. The most famous example, one that is frequently cited in almost any basic economics text book, involves the division of labor and the increased productivity with regard to the production of pins.
A workman not educated to this business, [...] could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly not make twenty. But in the way in which this business is now carried on, [...] it is divided into a number of branches [...and ten men] could make among them upwards of forty-eight thousand pins in a day (Smith, 5).Smith also used Wealth of Nations to postulate his ideas about the benefits of free trade and further the ideas on morals that he had put forth in Theory of Moral Sentiments, years earlier. From 1773 to 1776, Smith returned to London to guide his latest work through the presses and finish the last details of the work. Smith frequently attended the meetings of Parliament and he applied his own ideas about the rebellious American colonies and put them into Wealth of Nations. Smith saw the American colonies as a perfect example of a misallocation of resources and welfare loss due to the significant trade restrictions Britain placed upon her colonies. In 1776, Smith timed the release of his latest work to draw the attention of the Parliament and the colonies. Wealth of Nations contains a section that specifically dealt with the costs of maintaining the East India Company and its monopoly power over the colonies. Smith analyzes not only the explicit costs associated with the company but the welfare lost by restricting free trade with other nations.
In 1778, Smith had primarily retired to Kirkcaldy after having to create an initial round of defense to Wealth of Nations. His solitude and relaxation were not to last long, however, as he was subsequently appointed to Commissioner of Customs in Scotland. He moved to Edinburgh with his mother and found himself so busy with his position that he could not devote enough time to continuing what had been, to this point, his life’s work. By 1785, he was still in office but complained that old age was taking a toll and he was no longer able to work on his literary pursuits. He was, in fact, endlessly revising his Wealth of Nations and three further editions were printed according to his changes. Smith finished the sixth edition of Theory of Moral Sentiments in an attempt to perfect his works, to the best of his ability, before he died. Smith managed to begin a work on astronomy that only progressed to note form before his death. After his death in 1790, many of his notes were prepared for print and published by some of his close friends. Adam Smith studied and wrote about many more subjects than the classical economics for which he is widely remembered. The purpose of this paper will only entail a small example of Smith’s work, enough to understand his basic arguments and examine their application to policies that have influenced western civilization.
The ‘invisible hand’ is the fundamental metaphor that has an unparalleled place of importance in classical economics. Smith used the term to describe the methods by which individuals tend to make decisions with regard to their own self-interest that also benefit society or industry as a whole. Significant importance is placed upon the idea of individuals exercising freedom for their own accord and thus advancing the welfare of the entire society. According to Smith, individuals attempt to better themselves by maximizing their profit through trade and negotiation. This motive incites producers and consumers to co-ordinate their trade and meet supply-and-demand for goods through a market structure. The coordination of trade involves the search for an equilibrium price, at which all resources are properly and fully employed. The fact that individuals seek profit maximization and that the market involves the ‘greatest aggregation’ of knowledge ensures that assumptions about properly employing and allocating resources are maintained. Smith finds, and most would agree, that the accumulation of profits and wealth is good and beneficial with regard to the well-being of the individual who has earned them through free trade with others. The benefits to society of properly employed resources and trade are a necessary outcome of trade among merchants seeking to accumulate individual profits. Smith admits that merchants acting in their own interest produce an unintended outcome by not only accumulating their own wealth, but by assisting in the ability of other individuals to accumulate maximum profits through trade with both producers and consumers. Smith states, “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, [...] lead by an invisible hand to promote an end which was no part of his intention” (Smith, 400). The producer will seek to lower his costs, providing him with increased profits as a greater quantity is demanded and the consumer will benefit from the lower purchase price by enjoying either more of the producer’s good or the increased wealth as a result of lower prices. This is only one such example of a way in which individuals, acting out of their own self-interest, inadvertently create the desirous outcome of increased social welfare. Since the improvement of social welfare appears to occur without the direct intervention of governments, committees, or philanthropists, Smith chooses to describe the outcome as the result of the ‘invisible hand’ directing market resources in the most efficient manner. Most important to Smith’s ‘invisible hand’ theory is the presence of individual’s freedom to trade with whom and for what they desire. The complete freedom of trade, or what he terms ‘natural liberties’, thus becomes Smith’s primary focus in his subsequent works.
Socialism places a polar opposite emphasis upon the collective and society rather than the individual. Even the 20th century economist, John Maynard Keynes suggested the possibility of a benevolent dictator, an individual who cared more about the society than their own personal gain. Smith can find no merit in the idea of an individual working, at least to the best of their individual ability, for the public good. Smith stated, “I have never known much good done by those who affected to trade for the public good. It is an affection, indeed, not very common among merchants, and very few words need be employed in dissuading them from it” (Smith, 400). The ‘free rider’ problem depicts precisely the problem that Smith envisioned when personal interests were not involved. The difficulty of ensuring that each individual is not allowing society to help them along and thus ‘riding free’ can be a laborious and expensive task. Furthermore, working for the society seldom produces additional benefits to the individual who more fully employs their individual resources than others. There is no stimulus to make a larger profit or create a more efficient process when the benefits will not be received by the individual. A system in which all work is done for the state or the society as a whole merely provides incentive to the individual to expend the least amount of effort while continuing to receive the same benefits from the state. Smith bases his entire theory upon the decisions of individuals who are attempting to maximize their own profits. Self-interest and “self-love” are the predominant factors that tend to motivate the individual to this cause. Without self-interest, namely acting for the state or some sort of society, the individual no longer possesses the same level of motivation to accrue enhanced benefits. The use of the individual and exercising the ‘natural liberties’ are paramount in Smith’s beliefs. The protection of these ‘natural liberties’ comprises a significant portion of Smith’s works and Wealth of Nations.
The methods by which the ‘natural liberties’ may be violated inevitably involves the government on one level or another. Smith’s emphasis upon individuals making decisions purely for their own benefit and without influences or restrictions placed upon them deals, in large part, with taxes, quotas, and other such restrictions that governments tend to place upon the merchant or the market. Smith believed that the exclusive rights granted in a monopoly or the excessive import tariffs levied upon foreign goods only served to restrict trade. Since he has previously shown the benefits that trade bestows upon society, the tariffs or restrictions that a government may place upon trade only serve to hurt the society rather than protect or nurture its industry. Smith believed that the government had only three primary purposes and the best government was the one that levied the least oppressive taxes and allowed for the greatest freedom of trade. Government’s three primary purposes were:
First, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain (Smith, 180).Smith would certainly not agree with the extensive involvement of a government that Marx proposed. Smith believed that any interaction on the part of a government in a market would produce an outcome substandard to the society than if the government had left the market in its natural state, allowing the invisible hand to guide the market. Furthermore, the government was no better prepared or in possession of more knowledge than the individual about the individual’s affairs. Smith felt that no statesman or committee could attempt to help a merchant, without hurting others, better than the merchant could help himself. The government could create the best society, not by interacting with its markets, but rather by leaving them alone and following the first two principles of Smith’s purposes for a government. Namely, the government must insure that all ‘natural liberties’ are protected both domestically and abroad. This purpose primarily provides for the free trade and advancement of the society that Smith envisioned through the enactment of individual’s desires. As long as the desires of individual’s do not harm one another, the society receives a net benefit. Smith’s first two purposes are essentially lassez-faire in their nature, but Smith was not a true believer in a ‘hands off’ system in its purest form. The final purpose of the government is broad and ambiguous, deserving considerable attention to clarify its meaning.
Government’s final purpose was to develop certain public works or institutions that were impossible for individuals to maintain, but provided society with benefits that far outweigh their costs. Wealth of Nations spends considerable time on this issue in the section entitled “The Expenses of the Sovereign”. This book contains, in part, examples that Smith used to explain his third purpose of government. Smith commonly used the example of public roads or bridges to further his point. A bridge or road provides a benefit to society as a whole and to individuals who are now able to increase their own welfare. Transportation, in particular the ease with which it may be accomplished, promotes trade and the construction of bridges and roads would be a benefit that merchants would willingly pay for. Tolls are proof that such a benefit does exist. The difficulties associated with enforcing and charging a toll on certain roads is increasingly prohibitive. This is an example in which Smith would argue that the broad jurisdiction of the government combined with the power it already possesses to protect individuals can be used to ensure that the tolls are exacted from those receiving the benefits. Smith was describing ‘market failures’, or cases in which the benefits and costs are prohibitively difficult to obtain without the broad control that a government possesses. A ‘market failure’, he stressed, was far from the ordinary and was the exception to what proved to be a reliable and constant market system. The belief of limited government interaction is in stark contrast to the ideas proposed by both Keynes and Marx. Smith found the market system to be predominantly good and without errors, while Marx believed that the market was inaccurate and led to an unfair distribution of wealth. Keynes, as purely an economist, believed in the market, but the degree to which he confided in its outcomes would result in far different conclusions about government intervention.
Karl Marx lived from 1818 to 1883 and in that time undoubtedly amassed more fame and recognition than Adam Smith could ever hope to attain. Marx is best known for his Communist Manifesto that would spark many revolutions across Europe in the mid to late 19th century. Marxism formed the basis for Communism and the differences between Marx and Smith are too numerous to list in a paper of this length. The primary division, however, occurs at the beginning of Marx’s economic reasoning. Marx was not entirely original in his arguments; the root of his economic problems begin with an idea he has used from the economist and philosopher Ricardo (Schumpeter, 27). Marx began Das Kapital with what amounts to the Ricardian ‘labor theory of value.’ Both Ricardo and Marx argued that the value of a commodity is in direct relation to the amount of labor contained in the production of the commodity. This statement has two more assumptions that are important. One, the value of the commodity is that value at perfect equilibrium with perfect competition and secondly, the amount of labor is the ‘socially necessary quantity of labor’. This theory presents some particularly difficult problems. Immediately, the question of the difference in the quality of labor should be considered. This theory has been refuted by modern economists, who replace it with the marginal utility theory. Smith’s free-market system, however, could have rejected Marx at the very moment he wrote about it. Smith believed that a commodity was worth the ‘toil or trouble’ it removed from the party who was considering acquiring the commodity. This is similar to the marginal utility theory and its discussion of marginal benefits and marginal costs, although Smith did not use the idea of marginality in those exact terms. The Smithian rejection of Marx can be seen more plainly in the example of the production of pins from Wealth of Nations. Recall that the division of labor greatly increased the productivity of the pin manufacturer and thus resulted in a decreased amount of labor necessary to create the same pins. According to Marx’s theory in Das Kapital, the pin produced by the sole pin-worker should be equal in value to the thousands of pins produced by one worker for the manufacturer. Assuming the same amount of labor in both cases, the absurdity of the argument becomes more clear. Marxists would argue that Smith’s conclusions about the sole pin-worker defy their assumptions about the ‘socially necessary quantity of labor.' Now Marxists are left to determine that magical quantity through regulating production and resources while Smith has already proven that the ‘invisible hand’ determined the quantity through the manufacturer who sought to increase productivity with the division of labor. This example does not attempt to prove that the failure of Communism was due to one theory about labor and how it applies to pins. Communism failed for multiple reasons, but this is one example of the way in which Marxist theory complicated issues already aptly explained by Smith and created erroneous conclusions. A similar situation exists with Keynes. Both Smith and Keynes were economists and could find general principles to agree upon, but a few basic theories or assumptions will lead them to become polar opposites.
If Adam Smith may be described as representing the triumph of capitalism and Karl Marx represents the breakdown of capitalism, then Keynes could be described as the threat of a capitalism collapsing. Keynes lived from 1883 to 1946 and created a school of thought that nearly dominated economics in the 20th century. Keynes wrote many works in the 20th century and in 1936, his work culminated in The General Theory of Employment, Interest and Money. Keynes, in short, provided the right answer at the right time. His answer, in the 1930s, was public spending and public debt to confront the worldwide economic slump that was occurring. The answer was appealing and simply too good for politicians who pointed to Keynes to prove that they could have the best of both worlds. Keynes convinced a generation of economists that politicians and public servants could be trusted to act in the best interests of the public good. Monetarist Milton Friedman discussed this point by the use of a letter Keynes wrote to the Austrian economist Hayek. Keynes had recently reviewed Hayek’s latest work and Keynes stated,
What we need therefore [...] is not a change in our economic programmes, [...] no, what we need is the restoration of right moral thinking - a return to proper moral values in our social philosophy...Dangerous acts can be done safely in a community which thinks and feels rightly (Burton, 50).Keynes’s ‘public interest’ theory involves macro-economic theory that did not even exist during the life of Adam Smith. Yet, immediately the opposition between the two economists is clear. Keynes believed that the government could help the economy through its use of spending to spur the general consumer out of a recessionary cycle. Smith’s contemporaries seldom discussed a business cycle, but Smith’s Wealth of Nations and his lassez-faire approach directly refute what Keynes is arguing. Smith argued that no one knew the business of the merchant better than the merchant and said, “I have never known much good done by those who affected to trade for the public good” (Smith, 400). Ideas such as Smith’s have formed the ‘Public Choice’ economic school of thought in which politicians and civil workers are treated in the same manner as consumers and merchants. All individual’s, as Smith argued nearly 150 years before Keynes, possess the “self-love” that motivates them to act only in their own best interests. Regardless of whether the individual is the butcher described by Smith or the bureaucrat discussed by Keynes, the Smithian and classical assumptions still hold true.
Adam Smith lived during the highest point of enlightenment thought in Europe. His theories were based upon pure reason and desired to discover the laws that govern society and its actions. Smith’s ‘invisible hand’ is representative of the pinnacle of enlightenment thought and reason. Proof of this claim may be seen in the way that his ideas and rational conclusions still apply to economics and influence policy today. Smith was not fortunate enough to have the benefit of modern economic thought with its tested theories and multiple schools of thought. Smith dealt with a world much different from the globalized economies or industrialized nations that exist today. Yet, Smith’s rational ideals continue to effectively dispute the challenges of such men as Keynes or Marx. Keynes and Marx clearly influenced economic thought, but their contributions were not nearly as expansive. Adam Smith, conversely, has influenced multiple schools of thought, providing the foundation for Classical, Austrian, Public Choice, Monetarist, and even Supply Side Economics. Smith’s lasting contribution to economics and government policy, in particular, can best be summarized by the last sentence of Wealth of Nations, “[Great Britain should] endeavour to accommodate her future views and designs to the real mediocrity of her circumstances” (Smith, 430).
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