What Karl Marx Did and Did Not See in Adam Smith

political economy division of labor wealth of nations karl marx marxism communist manifesto

by Pedro Schwartz for AdamSmithWorks

October 15, 2018
Poor Adam Smith! Marxism has so captured economic historians that in some circles it has become almost commonplace to present Smith (1723-1790) as a forerunner of Karl Marx (1818-1883). You would be surprised to see how often historians argue that essential elements in the Marxist view of the world—the accumulation of capital as a precondition of economic growth; the inevitability of class conflict in human history; the alienating effects of economic competition; the immiseration[1]  of the working classes under the bourgeoisie; the forcible defence of private property of the capitalists as the single role of State—were formulated by Marx (and Engels) as better versions of the doctrines of Adam Smith and other classical economists such as David Ricardo and James Mill.

From a Marxian perspective, Smith and his disciples laid bare the structure and laws of capitalism, thus setting down important stepping stones on the road to the communist revolution. I want to show that, contrary to the analytical connections claimed by Marx, Smith’s intellectual legacy is profoundly different from that of Marxism. Smith’s political economy has proven much more fruitful than that of his unexpected German disciple and his “system of natural liberty” much less costly in terms of human welfare (and lives) than the cruel path to Marx’s communist commonwealth. 

The economic and philosophical manuscripts of 1844
We are lucky to have the greater parts of the notebooks Marx filled when first studying the classics as we analyse the similarities and differences in the economic thought of Marx and Smith.[2] Marx met Engels in Paris in 1844 and was greatly impressed by Engels’ ”Outlines of a Critique of Political Economy”.[3] Engels attributed the sickness of bourgeois society to unbridled competition and ultimately to the institution of private property. This motivated Marx to study political economy and the texts of its classical founders in depth to turn their doctrines toward revolutionary use.[4]

After reading these manuscripts again after so many years and comparing their spirit to Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (hereafter Wealth of Nations), I am more confident than ever that Smith and Marx lived in different worlds with no possibility of mutual understanding. 

Marx, even when trying to learn economics from the best masters, did so with unshakeable preconceptions. He wanted to show that the categories of value, price, capital, labour, profit, and property used by the classics revealed that capitalism was a system that grew only by expropriating the economic value created by the working class and exploiting the workforce to speed up the accumulation of capital. This was only one idea that Marx wanted to foist upon Smith and the classics. The sober analysis in texts of Smith or Ricardo was used as evidence of their incomplete of understanding of social reality. Marx was not looking for instruction but ammunition.

The division of labour
Wealth of Nations is a fascinating work. It is primarily a polemic against the ‘mercantilist’ writers of Smith’s time, to show that the “system of natural liberty”, as he called it, resulted in more effective progress for a nation than the current interventionist policies. But he also redefined the notions and reformulated the theories of economics in ways that, while striking in their novelty at the time, have become commonplace today.

Smith started by defining the prosperity of a nation not in terms of the amount of treasure it had accumulated, but of its annual flow of production, or rather its ongoing ability to generate wealth. “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniencies of life”, to which one must add the imports from other nations. This yearly amount, he proceeded, must be reckoned relative to the population. Its size depended on what we would today call productivity.

Smith then took two steps: he declared the division of labour to be the original cause of the improvement of the productive powers of labour, then, in consequence, addressed the difficulty of calculating the actual amount of that yearly flow so as to compare it year on year within a country or at a given moment between nations.

 Productivity growth began with the division of labour (for which he gave the famous example of the pin factory featured on this site's homepage), which is based on the “propensity to truck, barter, and exchange” in human nature, becomes more prevalent as the extent of the market grows, and was greatly facilitated by the invention and use of money. 

These fundamental notions of the division of labour, the free trade of goods and services, and the usefulness of the institution of money—still of the essence of our understanding of the open society—were radically attacked and rejected by Marx and Engels from the beginning of their careers as revolutionists. 

Both Engels in The Condition of the Working Class and Marx in his study notes condemned the division of labour as the curse of capitalist society. Marx quoted Smith at length to say that the productive powers of labour are multiplied by their division into repetitive small operations, that this division is becomes finer with widening exchange, that wide exchange depends on money, and that money cannot exist without private property. Marx concluded that society cannot be truly humane until the powers of production unleashed by the division of labour are socialised by the dismantling of private property. 

Prices, wages, and profits in Smith’s calculation of wealth
Smith, with his orderly mind, saw that he needed reliable prices to calculate the annual product of a nation and compare it with that of other nations. As if he were one of our contemporaries, he distinguished “nominal prices”, or prices in money, from “real” prices”, or prices in labour. 

Now, Smith never claimed that the reason for the difference in price between two goods was the amount of labour expended on the production of each. He knew that the price of a good in equilibrium had to cover the whole cost of production, wages, profit and rent.[5] 

Smith was interested in labour as a measure of relative prices. In other words, he was interested not in the labour used in production of a good but the amount of labour that can be purchased with a produced good. In economic parlance, Smith was interested not in inputs but in purchasing power. This is not what Marx wanted. He wanted to stress that what gave value to a good was the labour input. If all value comes from labour input, any profit in the market price was value expropriated by capitalists that in truth, he argued, belonged to the worker.

Regarding wages, Smith unfortunately had two theories. Wages as a whole he thought were determined through haggling between the labourer and the capitalist. But when comparing wages, for example those of a jeweller’s apprentice and those of a navvy,[6] he attributed reward to productivity and reliability. Marx highlighted the first theory, the clash of interest between employers and employees in the aggregate. This laid the ground for one of the most famous sentences in The Communist Manifesto (1848): “The history of all hitherto existing society is the history of class struggles.” To this he added the inevitability of the growing misery of the worker. “Whilst the division of labour raise the productive power of labour and increase the wealth and refinement of society, it impoverishes the worker and reduces him to a machine”. (page 27)

As for profits, Smith and the other British classical economists came to a conclusion that Marx used in his own way. In secular terms the rate of profits unavoidably fell, said Smith and Ricardo. Marx used this idea to construct an explanation of economic cycles: the falling rate of profit led to waves of bankruptcies. These bankruptcies allowed larger capitalists to take over the weakest firms in the market. This process would repeat and continue until eventually the whole of the capitalist economy fell into the hands of a few monopolists. This accumulation would divide society into a small bunch of the super-rich and a numerous proletariat. 

The incredible productivity of capitalism
Marx was such an interesting thinker in part because he was courageous enough to make bold predictions about capitalist societies. But knowledge advances through the elimination of error. Those predictions were refutable and have been proved wrong. 

It is simply not the case that workers in market societies have become progressively poorer. Neither is it true that proletarians are more and more alienated—and quite a number of them contribute “to the wealth and refinement of society”. It is institutions, ideas, inventions, science, and technology, not the accumulation of heavy industrial capital, that brings about the development and wealth of nations and has lifted billions in the world out of poverty. 

On one important question Marx improved our understanding of free societies. While classical economists believed that market economies inevitably moved towards a stationary state, Marx (and Engels) knew that markets were not stabilising, but disruptive. A glorious paragraph in The Communist Manifesto opens our eyes to a new vista of capitalism.
The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature’s forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalisation of rivers, whole populations conjured out of the ground—what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?

Smith was writing too early to understand the true import of the Industrial Revolution. It would soon take place, not initially in England, but in Smith’s native Scotland. The example of the pin factory Smith, which he took from the Encyclopédie française, was quite different from the application of water power to the movement of textile machinery or the use of steam to combat the nuisance of water in coal mines. It wasn’t until Nassau William Senior’s Lectures in Oxford in the 1830s that an established economist would speak about increasing returns in industry.

The importance of capitalist competition
Alas, Marx went wrong again despite his intuition regarding the disruptive nature of capitalism. He did not connect the incredible productive powers of capitalism with technical and industrial progress.

Instead, Marx claimed that once private property and competition disappeared under communism, productive progress would continue unimpeded and the social machinery of production would move automatically of its own accord. Capitalists were important in his tale, but they were not entrepreneurs. 

I often quote a utopian passage in their German Ideology (1846, unpublished until 1932). In a communist society nobody would have 
one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner, just as I have in mind, without ever becoming hunter, fisherman, shepherd or critic.

The simple system of natural liberty was best.

Related Links
An Animal That Trades video series, Part 3: Division of Labor
Pedro Schwartz's collected Articles at Econlib

[1] The relative impoverishment of wage laborers as competition drives down wages but overall wealth continues to grow, concentrated in the hands of capitalists.

[2] I find it ironic that these ephemeral notes, known as the “Manuscripts of 1844”, were published under the aegis of the Institute of Marxism-Leninism of the Central Committee of the USSR, also ephemeral. Sic transit gloria mundi.

[3] The slim volume of Marx’s Economic and Philosophical Manuscripts of 1844 (Moscow 1961) includes Engels “Outlines” as an Appendix.

[4] Engels, Friedrich (1845): The Condition of the Working Class in England.

[5] The influence of demand on price presented a conundrum that was not fully solved until the 1870s.

[6] A labourer building roads, railroads, or canals.