Adam Smith was born on the 16thJune 1723 in Scotland, also known as the father of classical free-marketeconomics. He was a Scottish economist and a professor at the university ofGlasgow. It is believed that Adam was the first thinker of the ClassicalPolitical Economy. In his book “The Wealth of Nations” he tries to show howpoverty could be eliminated. He measured poverty with the rate of mortality amongthe children of the common people, and found out that in almost all placeschildren die before 10 years of age. (page 27) According to him the eliminationof working class poverty could improve the society.
Another economist andphilosopher, whose ideas will be compared with Smith’s, Karl Marx, was born onthe 5th May 1818 in Germany. In his book “Capital: Critique ofPolitical Economy, vol 1.” he criticizes the main work of Adam Smith.
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Marxbelieved that in order to survive “we must work with what’s at hand in order tomake this today into tomorrow” and with this approach, he based most of hismain ideas. (page 52) Four main laws of ClassicalPolitical Economy were: law of self-interest; law of free competition; law ofsupply and demand; and law of international exchange. Adam Smith was one of thefounders of Classical Political Economy. He opposed the view of mercantilismwhich believed that “wealth consists in money or in gold and silver” (Sackr). Accordingto Smith this belief was the real reason why the working poor were prevented fromreceiving higher real incomes.
Hecontradicted that “wealth does not consist in money or in gold and silver, butwhat money purchases and is valuable only for purchasing” (page 33). Adam Smith’sthree main ideas were: free exchange; division of labour; and laissez-fair. AdamSmith believed that the government should not promote collusions, likegovernments during mercantilism, because it harms the economy. He said that, “wheneverthere is great property, there is great inequality” in which great propertyrefers to firms that collude.
He stated that the protection of the society fromviolence, protection of every its citizen should be the actual role of thegovernment. What is more, the state should provide public goods since they willnever be supplied by the private firms simply because they are seen asnon-profitable (page37). He also believedthat governments should invest in public education, in human capital, becausethat would stimulate economic growth and development. (Page 40) What is more,Adam Smith was in favour of free trade and came up with limited laissez fairewhich translates as “let do” or “let the market regulate itself”. It suggests thatthe government should not intervene with business and that a man is free to whateveris in their interest thanks to “invisible hand” which is an invisible marketforce that helps reach supply and demand of goods the equilibrium (The economictimes).
Smith seemsto assume that markets would always be sufficiently competitive to generate lowprices, new innovations, and enough competition for labour such that workerswould be treated well and paid fairly. (page 43) KarlMarx, and his critique of political economy main ideas were: class struggle, thelabour theory of surplus value and materialist conception of history, which “startsfrom the principle that production and with production the exchange of itsproducts is the basis of every social order”.(Marx) In his view of Marxism Marxargued that in capitalist economy there exist a phenomenon called the classstruggle between the bourgeoisie (the ruling class that own most of society’swealth) and proletariat (the working class). He said that the wealthy peoplewill get wealthier and that the poor people will get poorer. These changes inincome is what Marx meant by this struggle.
(page 51). Marx criticizes thecapitalist mode of production and says that competition would actually have badeffects on the economy. According to him competitors will corrupt and forcecapitalist, people that hire wage labourers, to “close theirfactories, reduce wages, break laws, buy the politicians or do anything thatwill maximize their profit.” (page 60). Furthermore, Marx argued that capitalistslimit human labour. According to him workers in a capitalist society arealienated meaning.
Capitalists through monitoring their workers were able tocontrol their labour. If someone was not working well then, he could beswitched with another unemployed worker also called the industrial reserve armyby Marx. In his view capitalists had access to the “pool of unemployed” andcould use them, since they were desperate to find work, whenever they neededto. Marx has seen the meaning of profit differently that other economists. Hebelieved that surplus value was the origin of profit.
For Marx, surplus valuewas the difference between the value of what the worker produces and what he ispaid. (page 64) If a worker is earning £2000 monthly salary but produces £6000of profit, therefore, the surplus value is the difference between those twonumbers. In Marx’s view the price of a good or service was determined by theamount of work out into its production.