Introduction
In the world’s history of economic theories, both Karl Marx and Adam Smith emerge as the most influential contributors, particularly given their contributions towards their respective theories of economic value. Both of them are highly original thinkers, with their economic theories having a direct impact on the world’s economies for numerous generations now ever since they were practically integrated into economic studies and management (Kurz, 2010). On the other hand, these two economists differ in other aspects, especially regarding their respective investigation of the capitalist economy. This happens because of the result of significant differences drawn from their individual historical contexts, as well as their unique personal backgrounds (Zelby, 1992). The divergence in the way capitalism has been analyzed by both theorists resulted in different conclusions concerning the concept. As a result, there exists theoretical, as well as academic value about their theories and ideas. This essay begins by discussing the key doctrines that constitute the mindset of each of these economic thinkers, placing more emphasis on the labor theory of value. The essay will cover the main similarities and differences of the two views, including highlighting the inherent implications and consequences. Finally, the essay will mention about the applicability of these two economic theories with respect to the present-day economic system.
The Main Tenets of the Two Theories
“The Invisible Hand vs. Labor Theory of Value”
The idea of the “invisible hand” forms the backbone of the economic theory that was promoted by Smith. Smith argues that the wealth of the nations is founded on the economic theory. In his argument, Smith holds that free markets comprise of the invisible hand that guides individuals in making their own decisions (Gregg, 2010). It implies that there is an “invisible hand” that guides people in making decisions that are profitable to them, as well as the entire economy. It is a process that happens without the realization of the individual. In so doing, each person labors to deliver or achieve a greater share of the society’s collective annual revenue. Unfortunately, the individual seeks his own, but not the interest of the society. In fact, the individual has very minimal interest, if any, in knowing about his contribution to the welfare of the society. Rather, his intentions focus on the particular gain that he will make personally. The invisible hand leads him to achieve the result that was initially not part of his intention (Gregg, 2010). Surprisingly, the interests of the public are enhanced more when the individual follows his own desires and ends up benefitting the society unknowingly, than when he purposes to promote the welfare of the society.
From the arguments and descriptions about the invisible hand, Smith explains the fact that the economy is interconnected (Gregg, 2010). If the economy is comprised of industries, then it ends up employing laborers who work in the industries, with the main purpose of targeting to achieve their personal interests. However, as they work towards their individual ambitions, the society also benefits from the economic contributions of the industries at large. The idea of a free economy was anchored on the labor and workers’ productivity as the key tenets. Smith elaborated the idea of the exchange value of labor, as well as the use value of labor in coming up with the theory. Here, Smith proposed that a given number of hours dedicated as labor input results in value that is equivalent to the number of hours invested.
The “law of value” was a contrary argument that was forwarded by Karl Marx to counter the “invisible hand” concept. In particular, Marx described value as nothing more other than the fragment of the entire labor potential that exists in a given society over a definite period, such as a month or a year (Gregg, 2010). The labor results in the output of a particular commodity under the prevailing average social labor productivity, divided by the overall number of the commodities produced. Labor input is, therefore, in terms of hours, which can be further described in terms of days and so on. Marx argued that value is said to be social because value is determined by the results that are seen after a producer invests their effort into doing something productive. In terms of objective, value is provided immediately after the production of a particular commodity, thus it remains independent from the personal valuations made by customers in the market. Finally, in terms of historic relativity, value transforms over time with each important change that is experienced, whether progressive or regressive. This mainly relates to the average labor in branches of output, such as transportation and agriculture (Gregg, 2010).
From the assumptions and arguments fronted by Marx, it is critical to point out the fact that feedback given by consumers about their behavior and wishes concerning value is constantly reconciled by the changes witnessed in allocating labor input in the production process. Marx looks at labor in the sense of being categorized into two groups of living and dead or dated labor. The producing units are influenced by the signals sent in the market, as explained in the labor theory. The reactions cause the change in value to be seen. Although changes such as fluctuations of market prices may occur in reality, even before changes in value are noted, Marx holds that values only determine prices within the medium-term sense. Price changes in the short terms are only expressed as axes. It is important to note that Marx was not opposed to the market dynamics of demand and supply (Whitaker, 1904).
Division of Labor
Smith further elaborated on the annual labor concept of his theory. He defined it as being made up of several important constructs, including skill, dexterity, as well as judgment of laborers and the ratio of laborers providing what is considered as useful and less-useful labor (Skousen, 2007). The notion of labor, as introduced by Smith categorizes, workers who are engaged in agriculture and manufacturing sectors as useful laborers, while those operating within the service sector of the economy as non-useful laborers. This underscores the importance that Smith envisioned the growing manufacturing industry at the time, with respect to the Industrial Revolution when workers were employed in factories, unlike during the preceding agrarian economy. In essence, Smith postulated that it was possible to attain a multiplication of the annual labor results or performance by dividing the labor.
Smith acknowledges the division of labor concept as the force perpetuating, as well as supplementing the productive capacity of labor. He argues that dividing workers and allowing them to specialize in specific tasks or roles results in improved skill, dexterity, in addition to their individual judgment. The production level measured on a daily basis is likely to increase exponentially in instances where specialized workers are involved, as opposed to a situation where artisans are involved in the production (Otteson, 2013). From this analysis, Smith concluded that the division of labor concept results in increased productivity, owing to the time that is saved by the workers as they move from a single task to the other. Moreover, the division of labor results in an innovative way of labor saving technology that minimizes factory costs in the end. However, Smith also stated an important constraint that separated the productivity increase idea from the division of labor concept. He noted that it is generally within the manufacturing sector where productivity is often multiplied, even with the inputs being held constant upon labor specialization. However, within the agriculture sector, he notes that the scope for growth is less because of the comparatively lesser scale for organizing the division of labor (Zelby, 1992). In essence, Smith gave a general argument with effect to the prices of corn remaining the same in all nations, notwithstanding their comparative industrial progress because their agricultural productivity is equivalent.
Marx’s analysis regarding the division of labor holds that the willingness to own private property amongst individuals resulted in the division of labor, which in turn gave rise to the separate social classes (Muller, 1995). The importance of economic classes was emphasized by Marx by explaining that it is only through classes that states are founded. In essence, those in higher economic classes in the society use their positions to control and rule those in lower socioeconomic classes in the society. Marx further believed that with the coming of the Proletarian Revolution, the state would be used conveniently by the proletarian class to eliminate the remnants of the expanding capitalism, together with its inherent ideology. Therefore, Marx was of the opinion that the place of the state could be wiped out by removing the opposition and leaving the proletariat class only.
In comparing Smith’s notion of the division of labor to Marx’s, it is actually notable that the latter believed in the communist culture living beyond the Revolution, where the division of labor would be destroyed completely. Marx strongly held the notion that all specialization would eventually disappear after the world undergoes revolution. Marx assumed that all human beings are equal since the creation, regardless of their geographical location, to support his arguments and the dying of the division of labor viewpoint. Marx did not see the importance of division of labor as a concept because he argued that within the communist society, no individual enjoys an exclusive sphere of activity (Otteson, 2013). Instead, he held that individuals could be accomplished in several areas they wish to because of the general regulation of production in society. Accordingly, it is possible for any individual to do several things throughout, without necessarily confining themselves to the specialized roles advocated for in the division of labor concept (Muller, 1995).
Free Trade
Adam Smith championed the existence of free trade when he wrote “The Wealth of Nations”. In particular, Smith realized the importance of having a more efficient economy, as he argued that it would benefit every citizen, as well as the entire nation as a whole (Skousen, 2007). He suggested a free trade system as the ideal option, noting that it would give a chance to every individual in the society to own personal property and sustain a perfectly fitting lifestyle. In the event that an individual became dissatisfied with the particular choice that he made, Smith argued that a free trade system would allow the individual freedom, as well as the ability to shift unrestrained to another occupation.
In contrast, Marx differed with the free trade notion, pointing out that it would create a capitalist society that would turn out to be the source of major ills. Marx’s position against a free trade system of society was informed by his strong belief of the fact that a person will remain in the same class that he was initially born to. He further argued that capitalism is dangerous to the world because individuals cannot own property or initiate businesses and live their lives as they desire without harming, at least, someone. Secondly, Marx’s view of capitalism as evil was informed by the endless terrible working conditions that most workers endured during the time. However, the changes in time and acquisition of modern technology have since transformed the working conditions in most factories. Most workers today can easily drive to work, even if they reside far away from the location of the factory where they work. Moreover, workers unions are now a common characteristic of the contemporary work environment. Workers are also legally safeguarded from employer exploitation, as well as harsh working conditions.
Similarities
Both Smith and Marx agree on their respective economic theories that the labor hours involved in production result in the actual value, as well as the worth of the produced object. A critical evaluation of the theory of value points to the notion that products can only possess value if valuation is conducted to approve the same. Both Marx and Smith insist on the need for the object being useful in multiple ways to the consumer, for it to be considered as valuable indeed. Most importantly, the consumer’s feelings and subjective analysis will play a prime role in determining whether the object is of value to the consumer. Based on the market law of supply and demand, both Smith and Marx agree that the role or the subjective analysis gives the object its value (Gregg, 2010). The market supply and demand laws ensure that if an object is considered to warrant a higher value, then it will be proportional to an equally higher exchange value. This forms the best explanation of the theory in explaining price and value.
Applicability of these two economists’ theories of value to the contemporary economic system
Modern economics can be considered as either positive or normative. The positive economics offer a descriptive analysis about the operations of the economy, while normative economics focus more on performance evaluation. Consequently, Smith’s theory of the invisible hand falls under normative economics (Solomon, 2010). Through this theory, Smith asserted that market mechanisms have a tendency to promote the interests of the public, a notion that has since guided many economists after Smith to explore further on the concepts of competitive markets, as well as public interest measures to ascertain Smith’s claims. More importantly, Smith’s invisible hand theory has resulted in a new concept of welfare economics, which seeks to establish equality between competitive equilibrium, on the one hand, and the Pareto optimum, on the other hand (Gregg, 2010). A competitive equilibrium refers to a scenario where the interaction of the profit-maximizing producers and the utility-maximizing consumers operating within a competitive market constituting freely determined prices will result in an equilibrium price. The equilibrium price reflects an equivalent quantity supplied and quantity demanded. The Pareto optimum, on the other hand, refers to a situation where the economy does not experience any waste. The outcome for a given individual can hardly be improved without somebody else suffering worse repercussions. In essence, the market economy operating in ideal conditions produces a situation where there is no wastage, which points at an efficient way through which the resources of the society are used.
Taking Marx’s law of value into consideration, it is notable that every production system requires a regulatory framework to determine how much is spent in terms of people’s labor to produce one thing against another, which is important because it offers guidance to the society, not to use its labor on useless activities. In the modern day economy, where nations are competing against each other in terms of their respective production, Marx’s theory is critical in helping nations to plan and optimize their labor effectively. Additionally, the modern day capitalism system has seen nearly all the products resulting from human labor being produced purposely for sale (Solomon, 2010). Marx viewed this trend as a commodity production system, where the market provides everything individuals require in meeting their needs. In essence, people produce only what others need or require and proceed to sell their products in the market. Basing these kinds of arrangements to Marx’s theory, it underscores the fact that allocation of labor needs to be regulated by the law of value (Solomon, 2010).
Conclusion
The contemporary economic concept that is applied throughout the world borrows heavily from the theoretical assumptions that were postulated by Karl Marx and Adam Smith. These early scholars of the economics subject provided their respective concepts on the aspect of economic value, which diverged, as well as converged at various points. Concerning the labor theory of value, Smith holds that the free market notion comprises of an invisible hand that guide individuals in making their own decisions. Resultantly, people make decisions that affect them, as well as the society at large unconsciously. Marx’s counterargument to the invisible hand concept is the value concept, which he equates to the fragment of the entire labor potential that exists in a given society over a definite period, such as a month or a year. Furthermore, Smith also differed with Marx about division of labor, with the latter acknowledging it as the force perpetuating, as well as supplementing the productive capacity of labor. However, Marx insisted that division of labor would be destroyed completely following a revolution that would abolish the existence of the states. Despite the various divergences in views, both Smith and Marx had similarities in their findings, especially in terms of the labor hours involved in production, resulting in the actual value, as well as the worth of the produced object. They believed that products could only possess value if the valuation was conducted to approve the same.
References
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