KARL MARX VS ADAM Smith PDF

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KARL MARX VS ADAM SMITH

Karl Marx (1818–1883) Karl Marx was an extremely influential thinker whose ideas ignited the movement by a third of the world’s countries towards communism in the 20th century. Marx provided a criticism of capitalism. Capitalism is a system where the small minority – the ‘bourgeoisie’ (the owners of capital such as machines and factories) – are the ruling class, and the masses – the ‘proletariat’ (the labourers) – provide the labour to produce goods and services . Marx essentially believed that economic systems progress through different stages – capitalism is just one stage in this development process and, due to its weaknesses and flaws, will eventually selfdestruct, leading to the final stage of communism. Marx believed that capitalists (the owners of capital), whose objective is to make a profit, must end up exploiting workers to achieve this objective. This means that workers will earn wages lower than their true value. Capitalists will also have an incentive to replace labour with machines, creating both more monotonous jobs as well as unemployment. The combined effect will be to create an exploited He also believed that competition would cause many firms to go bust, leading to a few firms holding monopoly power which would allow them to further exploit both workers and consumers. This would also lead to owners of the bust firms joining the ever-increasing proletariat majority, causing social tensions to further increase. The capitalist economic system is also weak, Marx said, since it is an unplanned system which causes one crisis after another. This impacts most negatively on the proletariat. Marx believed that revolution among the proletariat was inevitable Revolution would enable workers to seize the capital (so that ownership would be among the majority). Economic planning would direct economic activity. As the economic system moves towards communism, there would be abolition of private property replaced by common ownership of resources. However, although Marx wrote a lot criticising capitalism, he wrote relatively little on how communism would work. Marxism has had a resurgence lately. Many global problems, such as the Global Financial Crisis and growing inequalities observed in many economies, may have their root cause in the free market system. Socialism a theory or system of social organization that promotes: 

that the community as a whole should own and control of the means of production (factories / land)

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profits from production should be divided amongst the community as a whole

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Believe capitalist take advantage of workers

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Community or state (gov’t) must act to protect workers

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Unequal distribution of wealth is unfair (caused by capitalism)

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Goods should be divided according to each person’s needs

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Bourgeoisie = owners of business, capital and means of production

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Proletariat = working classes, own nothing

Karl Marx (and F. Engels) The Communist Manifesto 

Radical Socialism or Marxism. Workers will seize control of the government and businesses

Socialism  Communism 

“From each according to his ability, to each according to his need” (all must work, all share in profits)

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Economic equality (no more classes)

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No government or police would be needed in a community of equals where all is shared government would fade away  Communism

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Communism” = Dictatorship

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never moved passed Marx’s Dictatorship of the Proletariat stage

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Examples –

Former USSR (Soviet Union)

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China

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Cuba

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North Korea

Socialist Countries Today 

Tend to be democracies

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Major Industries owned by the people (Railways, Telephones, TV stations etc.)

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Government taxes provide benefits to all citizens (healthcare, free higher education, pensions (retirement), Social security

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Examples: France, Canada, England

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Socialists - All means of production and all profits are owned by the community together (Owen, Marx)

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Laissez-Faire Capitalism - Government should keep its hands off business and allow owners to act in their own self interest to seek profit (Smith, Malthus and Ricardo)

Adam Smith (1723–1790) Adam Smith is viewed to be the founder of classical economics and was a key advocate of the market economy. The Wealth of Nations, which Smith wrote in 1776, remains a classic book in economics. His key conclusion is that, by pursuing their own self-interest, individuals would be led ‘as by an invisible hand’, with resources allocated in such a way that is in the best interests of society. He was writing at a time when most firms were owned and run by single individual capitalists who had an active, hands-on approach to running their businesses. 

individuals own the means of production (factories, machines, land) and reinvest profits as capital to expand business

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Capital – wealth that is invested in order to create more wealth

Like today, most capitalists ran their businesses with the self-interested aim of maximising profit. Consumers also had their own self-interest at heart when making decisions about what to buy. Smith argued that these self-interest objectives, via the operation of the price mechanism, leads to the optimum resource allocation and therefore the best outcome for society. The ‘invisible hand’ enables consumers and producers to interact in the market so that both can achieve their objectives. For example, if consumers suddenly want more robot vacuum cleaners, then this will push up the price in the market: consumers are competing with each other for the existing number of robot vacuum cleaners. 

Free Market Economy – One in which consumer choice, the law of supply and demand and competition drives companies decisions regarding what products to produce and the prices of those products.

Firms currently in the market will react by wanting to supply more of the product since there is greater scope to make higher profits, while new suppliers will be enticed into the market to take advantage of the profit opportunity. (Smith said low barriers to entry were essential to make this happen.) More resources are then being allocated to the production of robot vacuum cleaners, which is precisely what consumers wanted. Therefore everyone is happy. Smith believed that competition in markets ensures that firms, whose main objective is to maximise profits, produce their goods at the lowest possible cost. This benefits society and ensures markets will use resources efficiently. Smith recognised the dangers of monopoly power but at the time of his writing this was not viewed as being too significant. He also believed prices would end up being ‘fair’ but that competition was essential in achieving this (low barriers to entry are necessary to prevent firms from gaining monopoly power). Smith also wrote about the process of specialisation and the division of labour, and how this production method could increase production and create wealth. By breaking down the production process into smaller, specialised parts, productivity rises. This is because this process helps incorporate some automation into the production process, which speeds up production. Workers also spend less time switching between tasks and the repetition of tasks makes their efficiency increase

LAWS OF ADAM SMITH Law of Economics:- It is called law of self interest, it shows that generally people work for their own good being. Everyone wants to be happy and satisfy themselves which leads to the man willingness to to perform activities to earn Money. In respect to earn money and satisfy themselves people tend to search for new places and chances, which leads to Globalization, The world is a global village we can exchange ideas, technologies, workforce of different different country. 2. Law of Economics:- It is called law of competition. it means people are competitive in nature if we have competition we have the best results. Competition between two companies creates better product design at right price and eliminates monopoly( single seller) for the public..no doubt the benefit of the competition goes to the public at large so it is good for the society , Adam smith Emphasized that competition plays a vital role in the economy. 3. Law of Economics:- It is called law of Supply and Demand. It means something is demanded more its production will increase so that supply can match the demand and vice-versa. As demand increases people shift their jobs to satisfy as a result of their own self interest. so these laws are interconnected to each others we still now follow these laws..we can come to a conclusion that PEOPLE + STUFF = HAPPY, the more stuff people have the more happy they are and vice-versa .

Milton Friedman in Capitalism and Freedom On Principles & Values: Free men use gov't to serve people; not to serve country President Kennedy said, "Ask not what your country can do for you--ask what you can do for your country." It is a striking sign of the temper of our ties that the controversy about this passage centered on its origin and not on its content. Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic "what your country can do for you" implies that government is the patron, the citizen the ward, a view that is at odds with the free man's belief in his own responsibility for his own destiny. The organismic, "what you can do for your country" implies that government is the master or the deity, the citizen, the servant or the votary. To the free man, the country is the collection of individuals who compose it, not something over and above them Source: Capitalism and Freedom, by Milton Friedman, p. 1-2 Nov 15, 1962

On Budget & Economy: Government's role is only to determine the rules A major source of objection to a free economy is precisely that it does this task so well. It gives people what they want, instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself. The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the "rules of the game" and as an umpire to interpret and enforce the rules decided on. What the market does to reduce greatly the range of issues that must be decided through political means and thereby to minimize the extent to which government need participate directly in the game. The characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity. Source: Capitalism and Freedom, by Milton Friedman, p. 15 Nov 15, 1962

On Government Reform: Economic power decentralizes; political power does not Economic power can be widely dispersed. The growth of new centers of economic strength [isn't] at the expense of existing centers. Political power, on the other hand, is more difficult to decentralize. There can be numerous small independent governments. But it is far more difficult to maintain numerous equipotent small centers of political power in a single large government than it is to have numerous centers of economic strength in a single large economy. There can be many millionaires in one large economy. But can there be more than one really outstanding leader? If the central government gains power, it is likely to be at the expense of local governments. There seems to be something like a fixed total of political power to be distributed. Consequently, if economic power is joined to political power, concentration seems almost inevitable. On the other hand, if economic power is kept in separate hands from political power, it can serve as a check and a counter to political power. Source: Capitalism and Freedom, by Milton Friedman, p. 15-16 Nov 15, 1962

On Principles & Values: Socialist economics are incompatible with democracy The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather, "What can I and my compatriots do through government" to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: How long can we keep the government we create from becoming a Frankenstein, that will destroy the very freedom we establish it to protect? Source: Capitalism and Freedom, by Milton Friedman, p. 2-3 Nov 15, 1962

On Civil Rights: Real freedom means freedom to promote Communism One may believe, as I do, that communism would destroy all of our freedoms, one may be opposed to it as firmly and as strongly as possible, and yet, at the same

time, also believe that in a free society it is intolerable for a man to be prevented from making voluntary arrangements with others that are mutually attractive because he believes in or is trying to promote communism. His freedom includes his freedom to promote communism. Freedom also, of course, includes the freedom of others not to deal with him under those circumstances. An example of the role of the market in preserving political freedom was revealed in our experience with McCarthysim. What protection did individuals, and in particular government employees, have against irresponsible accusations and probing into matters that it went against their conscience to reveal? Their appeal to the 5th Amendment would have been a hollow mockery without an alternative to government employment. Source: Capitalism and Freedom, by Milton Friedman, p. 20-21 Nov 15, 1962

On Technology: Private monopoly easier to remove than regulation In practice, monopoly arises from government support or from collusive agreements, [and should be dealt with via] anti-trust laws. However, monopoly may also arise because it is technically efficient to have a single producer. When technical conditions make a monopoly the natural outcome of competitive market forces, there are only 3 alternatives that seem available: private monopoly, public monopoly, or public regulation. All 3 are bad so we must choose among evils. I reluctantly conclude that, if tolerable, private monopoly may be the least of the evils. If society were static so that the conditions which give rise to a technical monopoly were sure to remain, I would have little confidence in this solution. In a rapidly changing society, the conditions making for technical monopoly frequently change and I suspect that both public regulation and public monopoly are likely to be less responsive to such changes in conditions, to be less readily capable of elimination, than private monopoly. Source: Capitalism and Freedom, by Milton Friedman, p. 28 Nov 15, 1962

On Government Reform: No need to maintain post offices as a public monopoly There is no way to justify our present public monopoly of the post office. It may be argued that the carrying of mail is a technical monopoly and that a government monopoly is the least of evils. [That does not] justify the present law, which makes it illegal for anybody else to carry mail. If the delivery of mail is a technical monopoly, no one will be able to succeed in competition with the government. If it is not, there is no reason why the government should be engaged in it. The only way to find out is to leave other people free to enter. The historical reason why we have a post office monopoly is because the Pony Express did such a good job of carrying the mail that, when the government introduced transcontinental service, it couldn't compete effectively and lost money. I conjecture that if entry into the mail-carrying business were open to all, there would be a large number of firms entering it and this archaic industry would become revolutionized in the short order. Source: Capitalism and Freedom, by Milton Friedman, p. 29-30 Nov 15, 1962

On Environment: City parks justifiably public; national parks can be private

Almost everyone at first sight regards the conduct of National Parks as obviously a valid function of government. In fact, however, neighborhood effects may justify a city park; they do not justify a national park, like Yellowstone National Park. What is the fundamental difference between the two? For the city park, it is extremely difficult to identify the people who benefit from it and to charge them for the benefits which they receive. The entrances to a national park like Yellowstone, on the other hand, are few; most of the people who come stay for a considerable period of time and it is perfectly feasible to collect admission charges. This is indeed now done, though the charges do not cover the whole costs. If the public wants this kind of an activity enough to pay for it, private enterprises will have every incentive to provide such parks. I cannot myself conjure up any neighborhood effects or important monopoly effects that would justify governmental activity in this area. Source: Capitalism and Freedom, by Milton Friedman, p. 31 Nov 15, 1962

On Budget & Economy: Government caused Great Depression, and recessions since "Full employment" and "economic growth" have in the past few decades become primary excuses for widening the extent of the government intervention in economic affairs. A private, free-enterprise economy, it is said, is inherently unstable. Left to itself, it will produce recurrent cycles of boom and bust. These arguments were particularly potent during and after the Great Depression of the 1930's. These arguments are thoroughly misleading. The fact is that the Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy. A governmentally established agency--the Federal Reserve System--had been assigned responsibility for monetary policy. In 1930 and 1931, it exercised this responsibility so ineptly as to convert what otherwise would have been a moderate contraction into a major catastrophe. Source: Capitalism and Freedom, by Milton Friedman, p. 37-38 Nov 15, 1962

On Free Trade: Tariffs & trade restrictions impede economic growth Governmental measures constitute the major impediments to economic growth. Tariffs and other restrictions on international trade, high tax burdens and a complex and inequitable tax structure, regulatory commissions government price and wage fixing, and a host of other measures give individuals an incentive to misuse and misdirect resources, and distort the investment of new savings. What we urgently need, for both economic stability and growth, is a reduction of government intervention, not an increase Source: Capitalism and Freedom, by Milton Friedman, p. 38 Nov 15, 1962

On Principles & Values: Concentrated power threatens individual freedom A classical liberal is fundamentally fearful of concentrated power. His objective is to preserve the maximum degree of one man's freedom that is compatible with not interfering with other men's freedom. This objective requires that power be dispersed. He is suspicious of assigning to government any functions that can be performed through the market, both because this substitutes coercion for voluntary co-operation, and because, by giving government an increased role, it threatens freedom in other areas. Source: Capitalism and Freedom, by Milton Friedman, p. 39 Nov 15, 1962

On Budget & Economy: Fed should grow money supply by 3%-5% and nothing else My choice at the moment ...