This lecture focuses on Capitalism, Adam Smith & Marxism

1. B416: The Evolution of Global
Economies
Lecture 4 : Capitalism, Adam Smith &
Marxism

2. Learning Outcomes – Adam Smith
Adam Smith
- Criticism of Mercantilism
– Absolute Advantage, Basic Principles &
Assumptions of Capitalist Model
– Evaluation & Critique of the Classical Model
Carl Marx
- Background
– Evolution
– Characteristics
– Critique

3. Page 3
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).

4. Page 4
The Wealth of Nations (1776)

5. 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.

6. 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

7. 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!

8. 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.

9. 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.”]

10. 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.

11. 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.

12. 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.

13. 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.

14. Critique of Adam Smith Capitalist
Theory
• Carl Marx – The Conflict Theory
• John Maynard Keynes - The General
Theory

15. Karl Marx (1818-1883)
15
• 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

16. 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
16

17. 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
17

18. 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.
18

19. 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
19

20. 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
20

21. 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.
21

22. 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.
22

23. 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
23

24. 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.
24

25. 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
25

26. 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
26

27. 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
27

28. 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.
28

29. And Now…Work Outside the Lecture
Preparation
For
Padagogic
Style
Preparation
Time Budget
Individual
Task
Group 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 Hour
Online Collaboration Activities relating Group
Presentation in Week 6
2 HourLecture 4

30. End of presentation
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