Comparing the Theories of Adam Smith & Karl Marx

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  • 0:02 Who Were Adam Smith…
  • 0:56 Adam Smith's Theories
  • 3:00 Karl Marx's Theories
  • 5:05 Lesson Summary
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Lesson Transcript
Instructor: Emily Cummins
Adam Smith and Karl Marx are perhaps two of the best known social and economic thinkers in history. Find out more about each man's theory on the economy and capitalism.

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.

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