Who Were Adam Smith and Karl Marx?

Adam Smith and Karl Marx both wrote about capitalism, or an economic system in which industry is
controlled largely by private companies meant to generate profits. However, they came to very
different conclusions about how the economy and society function.
Adam Smith was born in Scotland in the early 1720s, and is considered the father of modern
economics. He attended University in Glasgow, Scotland, and developed the theories that continue
to inform modern economic thought. He died in 1790. Karl Marx was in born in 1818, to a wealthy
and educated family in Germany. He attended University to study law but quickly turned his attention
to philosophy. Karl Marx is considered one of the most important social and economic thinkers of all
time, and his work is still used to critique modern capitalist systems.

Adam Smith's Theories

Adam Smith's book The Wealth of Nations is considered one of the most important contributions to
economic thought of all time. In this work, Smith argues that the most efficient type of economy is
one in which individual producers produce as much as they want and then charge consumers any
price they see fit. Adam Smith's rationale for this is the concept of the invisible hand. We can think of
the invisible hand as a mechanism that regulates the economy without intervention; the idea is that
this system will work because each person will try to maximize his or her own benefit. Although
Smith could not directly observe this, he found examples in society to support this phenomenon. For
example, since everyone is self-interested, producers would only sell goods for as much or more
than they cost to produce, and consumers would only pay as much as the benefit they feel they
would get out of the goods.
This is known in contemporary economics as equilibrium, or a state in which all economic forces
(such as supply and demand) are totally balanced. In the state of equilibrium, benefits would be
maximized for both consumers and producers. In Smith's theory, there is little room for
government involvement in the management of the economy.
To illustrate this concept of the invisible hand, think about the following example: say you like to go
for a coffee on your way to work. You stop into a coffee shop in your neighborhood, plunk down
$3.00, and head off to work with your hot cup of coffee. Smith would characterize this as the invisible
hand at work. The coffee is worth more to you, the consumer, than those 3 dollars, and the owner of
the shop, the producer, valued your 3 dollars more than the cup of coffee. You're both getting
something out of this deal.
Adam Smith advocated for what we today call a free market economy. A free market economy is
one in which Individuals can freely pursue their own benefit through being both a consumer and a
worker. Smith believed that economic benefits in a society would spread out to everyone. For
example, when a consumer purchases something, it helps a producer, who in turn might hire
another worker. This is known as the trickle down effect.

Karl Marx's Theories

Karl Marx wrote about capitalism in a very different way than Adam Smith. Whereas Smith saw the
maximizing of self-interest resulting in a state of equilibrium, Karl Marx saw exploitation, or a
situation where an individual is not receiving benefits to meet his or her needs.
Marx believed that capitalism provided an advantage to those who are already wealthy because
these individuals are able to own the means of production, or the facilities or resources required to
produce goods. Poorer members of society don't have the resources to make a living in this way, so
they're forced to sell their labor to the owning class. Marx termed these two classes
the bourgeoisie (the wealthy owners) and the proletariat (the working class). In other words, under
a capitalist system the bourgeoisie takes advantage of, or exploits, the proletariat. In contrast to
Adam Smith, Karl Marx did not believe that capitalism was the most efficient way to organize an
economy. Marx believed that the bourgeoisie would seek to maximize their own interests by keeping
the wages of the proletariat as low as possible, furthering poverty.
Karl Marx believed that the solution to the problems of capitalism was a revolution by the proletariat
in which they overthrew capitalism, creating a social order that did not allow individual owners to
exploit labor. Marx envisioned a society in which the proletariat, or the working class, owned the
means of production. Marx believed this society would be communist. Now, you may hear this term
thrown around a lot, but Marx meant a society where land and labor are owned by everyone. Wealth
would be shared among all of the people and, very important for Marx, the class structure would be
completely eliminated.
Remember the coffee shop example from above? Marx would have said that the barista who sold
you the coffee is being exploited because he is forced to sell his labor to the owner of the coffee
shop. In Marx's ideal society, that coffee shop would be collectively owned by workers, and profits
would be shared equally among everyone.

Lesson Summary
Adam Smith and Karl Marx both wrote about capitalism (which is an economic system in which
industry is controlled largely by private companies meant to generate profits) but had very different
theories about how the system works. Adam Smith contended that the invisible hand was a self-
regulating mechanism and that individuals within the economic system would pursue their individual
interests to maximize their own benefits, creating a state of equilibrium, which is a state in which all
economic forces (such as supply and demand) are totally balanced. He believed that this would lead
to a completely free market economy, in which Individuals can freely pursue their own benefit
through being both a consumer and a worker, where a trickle-down effect (or when a consumer
purchases something, it helps a producer, who in turn might hire another worker) is created.
In contrast, Karl Marx believed that capitalism was a form of exploitation, or a situation where an
individual is not receiving benefits to meet his or her needs. Specifically, that it was an exploitative
economic system that disadvantaged the workers who sell their labor (the proletariat) at the expense of
the bourgeoisi (the business owners). Marx believed that the proletariat should control the means of
production (the facilities or resources required to produce goods), wherein the society would become
communist(a society where land and labor are owned by everyone). These men couldn't be more
different in their approaches, but they both hold very strong views on the economic system in which we
live today, and their words are just as valid today as they were hundreds of years ago.