B416: The Evolution of Global Economies

Lecture 4 : Capitalism, Adam Smith & Marxism

Learning Outcomes – Adam SmithAdam Smith

- Criticism of Mercantilism

– Absolute Advantage, Basic Principles & Assumptions of Capitalist Model

– Evaluation & Critique of the Classical Model

Carl Marx

- Background

– Evolution

– Characteristics

– Critique

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Adam Smith (1723 – 1790)

Scottish philosopher, considered by many to be the founder of modern economic science as we know it. Famous for the ‘invisible hand’, that is how people pursuing their own self-interest actually benefit the society as a whole, and the advantages of increasing ‘specialisation’. Major publications are ‘The Theory of Moral Sentiments’ (1759) and ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ (1776).

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The Wealth of Nations (1776)

Adam Smith’s Criticism of Mercantilism• He was making a political argument, NOT an economic one.

– Part of the argument was for new economic policy, but.

– An essential part of the argument was for new social and political arrangements.

• He argued that the basic unit for social analysis should be the nation, not the state.

• He was against the belief that trade was a zero-sum game

– It was a positive-sum game.

– Both nations gained.

• Argued that mercantilism lowered a country’s standard of living.

• Advocated free international trade.

• Emphasized advantages of specialization and international division of labor whereby nations specialize in the production of only a few goods.

Adam Smith’s Basic Capitalist Principles 1

1. Goods and services are produced for profitable exchange.

2. Division of Labour is key.

3. Laour is the basis of wealth.

4. The division of Labour implies economic interdependence

5. Human labor power is a commodity for sale LABOR IS THE SOURCE OF VALUE

Businesses Households

Goods & Service

Labor & Investments

Consumer Spending

Wages

Adam Smith’s Basic Capitalist Principles 2

6. The “Invisible Hand” of the market

• Problem How do we survive in a world where we must depend on many others, but where humans are by nature self-interested individuals??

• Solution the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called “invisible hand.”

• Therefore, the basic market mechanism is self-regulating!

Adam Smith’s Basic Capitalist Principles 3

7. Individuals seeking success are driven by self-interest Profit Motive

8. The Law of Supply and Demand

• Individuals who are free to pursue their self-interest will produce goods and services that others want, at prices others will be willing to pay.

Adam Smith’s Basic Capitalist Principles 4

9. Law of Competition

The competitive market system compels producers to be increasingly efficient, and to respond to the desires of consumers.

10. A social division of labor will maximize the satisfaction of individual wants and needs, given scarce resources.

11. Government should interfere minimally with the free and efficient workings of the market

– Laissez faire [“Leave things alone.”]

Adam Smith’s Classical Capitalist Model Assumptions

• Resources cannot move between countries.

• There are no trade barriers.

• Exports must pay for imports, i.e., trade must be balanced.

• Markets are self-regulating systems for the orderly coordination of the division of labour.

• Labor is the only relevant resource.

– Labor Theory of Value states that the pre-trade price of a good is determined by the amount of labor it took to produce it.

• Constant returns to scale between labor and output prevails.

– Constant returns implies a fixed ratio between the labor used and the output level produced.

Absolute Advantage• Absolute advantage is the ability of a country to produce

a good using fewer productive inputs than is possible anywhere else in the world.

• Since country A’s workers can produce S in less time than B’s workers, then A has an absolute advantage in production of S.

Adam Smith’s Principle

• Adam Smith’s principle—countries should specialize in the production of goods in which they have an absolute advantage.

• By following Smith’s principle of absolute advantage, total world output will rise even though there are no new resources.

Summary of Smith’s Principle

• For various reasons such as different technologies and climate, countries will produce different goods.

• World output will increase if countries specialize in their absolute advantage products.

• This situation is the natural outcome of market forces combined with free trade. A good is cheapest in the country that has absolute advantage in its production.

Critique of Adam Smith Capitalist Theory

• Carl Marx – The Conflict Theory

• John Maynard Keynes - The General Theory

Karl Marx (1818-1883)

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• Karl Heinrich Marx (May 5th, 1818 – March 14th, 1883) was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist.

• Ideas played a significant role in the development of social science and the socialist political movement

• Studied at the University of Bonn and the University of Berlin

• Marx progressed to journalism in October 1842 and became editor in Cologne

• Marx met his wife, Jenny Von Westphalen, at the University of Bonn

• After his studies he moved to Paris with his wife

• Worked with fellow German revolutionary socialist, Friedrich Engels, whom he met in Paris

Background (1)Marxist Theory from Adam Smith

• social relationships are generated by exchange

• a person can produce more than he requires for his own subsistence

• the power conferred by the ownership of money is the power to buy other people’s labour

• while supply and demand may cause the value of a good to fluctuate, its true or natural value is determined by the cost of the labour required to make it.

Marxist Theory

• Wrote Capital during the Industrial Revolution in Britain

• Much of his analysis is directed at explaining the processes which give rise to capitalist society

• One of the primary concerns with modes of production

• Each mode of production has three aspects.

– A distinctive principle determining property

– A distinctive division of labour

– A distinctive principle of exchange

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Background (2)

• Marx regarded social systems as inherently unstable, rather than normally existing in a stable condition.

• He found the driving force of instability in the capacity of human beings to produce, by their own labor more than they needed to subsist on.

• He found that the way in which a social system controlled people’s access to the resources they needed was equally fundamental.

• Marx argued that the market created inequalities

• History is marked by the growth of human productive capacity, and the forms that history produced for each separate society is a function of what was needed to maximize productive capacity.

• Much of the work of Marx and Engels examined the conflict generated by the increasing wealth of the capitalists (Bourgeoisie) at the expense of the working class (proletariat) who only sunk deeper into poverty

• Marx and Engles viewed history as a sequence of evolutionary stages, each marked by a unique mode of production

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Background (3)• the history of Europe seen in terms of the transition from feudalism to

capitalism and eventually to communism

• Under the feudal system, which preceded capitalism, surplus was secured by the legal power of the feudal lords over the serfs and peasants who worked in their lands.

• Violence and repression could reinforce legal power if the peasantry resisted handing over the surplus.

• Under capitalism, the extraction of surplus is managed more subtly through the mechanism of the wage.

• The wage is only equivalent to some of the value of the worker performed but the labourer;

• the remaining ‘surplus value’ is taken by the capitalist in the form of profits.

• Thus, in a capitalist society, the power and wealth of the dominant class is seen as legitimate, rather than simply backed by coercion as it was in feudal societies.

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Background (4)

• What is going on is concealed from the labourers under the idea of a fair wage for a fair day’s work. – bourgeoise ideology - class have a vested interest in maintaining their power and will seek to resist such change

• especially through elaboration of mystification in the ideology, which results in the false consciousness of the lower class

• Marx and Engles viewed social change as an evolutionary process marked by revolution in which new levels of social, political and economic development were achieved through class struggle

• A class is defined in terms of the relationship of people's labour to the means of production

• each mode of production produced characteristic class relationships involving a dominating and a subordinate class.

• These two classes were linked together in a relationship of exploitation in which the subordinate class provided the labour and the dominant class then appropriated the surplus

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Background (5)

• Capitalism produces a relationship of mutual dependence between the bourgeoisie and the proletariat (without labourers the capitalist cannot make a profit), which is also inherently antagonistic: the interests of the two main classes are opposed.

• Marx and Engels saw a history of class relationships in which those who work have been polarized in opposition to those who control the means of production

• Class in itself vs a class for itself

• Marx also maintained that self consciousness is an attribute of class existence

• Consciousness lead to one's group's collective solidarity, and common interests in relations of production.

• Marx viewed peasants as ambiguous

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Background (6)

• Marx believed that various tendencies in capitalism would promote class conflict.

• The progressive development of technology would bring deskilling of jobs,

• creating more homogenised and potentially united labour force;

• the relative gap in wealth between the dominant and subordinate classes would steadily increase;

• processes of capital accumulation and competition would combine to produce ever more extreme crises of capitalism,

• propelling processes of class conflict towards an ultimate social revolution.

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Background (7)

• Marx believed that various tendencies in capitalism would promote class conflict.

• The progressive development of technology would bring deskilling of jobs,

• creating more homogenised and potentially united labour force;

• the relative gap in wealth between the dominant and subordinate classes would steadily increase;

• processes of capital accumulation and competition would combine to produce ever more extreme crises of capitalism,

• propelling processes of class conflict towards an ultimate social revolution.

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Evolutionary Marxism (1)

• Engles states that socioeconomics develops in a series of stages from primitive communism, slave society, feudalism, capitalism and finally communism unilineal evolutionism T

• The first stage, primitive communism was an aspect of savagery

– characterized by a public control and ownership of the means of production

– and an absence of exploitation and social class.

• The next stage, slave society is related to barbarism.

– Property is identified with people, to own people is to have some control and ownership to the means of production.

– Yet, the notion of private property in relation to land did not exist at this stage of development

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Evolutionary Marxism (2)

• The third stage, feudalism can be seen in Medieval Europe

– There is a class distinction made between aristocrats, those who own land and serfs the subjects of the aristocrats.

– Aristocrats own the land and distribute it among their loyal serfs. Thus, there is property related to land, and to control and own this property is related to the control and ownership to the means of production (i.e. the serfs)

• The capitalist stage is the current stage of society. The final stage (Communism) is yet to come

• At this stage there are two classes: the bourgeoisie, the ones who control and own the means to production;

• and the proletariat, those who most sell their labour to the bourgeoisie.

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Evolutionary Marxism (3)

• believed that Morgan’s evolutionary stages of human culture with material achievements and technology validated their evolutionary theory

• Marx and Engels gave currency to the idea of primitive communism.

• argued that the real basis of social and political inequality was property,

• and that since there was no private property in primitive societies, there was no state and no class or inequality

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Characteristics of Marxist studies

1. A focus on issues of structures of power and exploitation

2. A concern with conflict and change

3. A starting point in the material system of production and ownership of property

4. An analysis of action as political power struggles between social groups defined by their control of property

5. Various ways in which class, identity, and local struggles intersect

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Critique of Marxism (1)

• How important is class and inequality in social life

• in many societies, kinship, religion, and ethnicity seem to have provided stronger connections than has class

• Has been criticized on its definition of ideology which puts it forth as a plot created by the ruling class to mystify the lower class; this is not likely since the rulers also subscribe to the ideology.

• Further, how the ideology spreads is also unclear, as its relation to other forms of knowledge

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Critique of Marxism (2)

• Another problem that Marxism has faced is in the evaluation of societies that do not possess any classes; how and why did 'primitive communism' change without a conflict of classes?

• Marx’s framework cannot deal adequately with other dimensions of inequality. To conceptualize a society as mode of production is inevitably to privilege economic relations over other aspects of inequality. There is more than simply the class struggle going on in society

• Links of kinship religion, ethnicity and nation, have all tended to seem more powerful than links of classs.

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And Now…Work Outside the Lecture

Preparation

For

Padagogic

Style

Preparation

Time Budget

Individual

TaskGroup Task Output Week 4 Preparation Activity

Read Chapter 3 to Chapter 4 from Core Text

Book: The Age of the Economist

An outline of the history of economic thought by

SCREPANTI & ZAMAGNI, Section 1 and Section 4

Seminar 4 30 Minutes Read above Material + Seminar material

Workshop 4 1 HourOnline Collaboration Activities relating Group

Presentation in Week 6

2 HourLecture 4

End of presentation

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