Essay on Theory of Capitalism by Karl Marx and Adam Smith

Karl Marx:

It is generally considered that the most thorough and enduring critique of the results of capitalism was the one formulated by Karl Marx. According to Marx, the treatment of labour as a commodity led to people valuing things more in terms of their price rather than their usefulness, and hence to an expansion of the system of commodities.

Marx observed that some people bought commodities in order to use them, while others bought them in order to sell them at a profit

Much of the history of late capitalism involves what David Harvey called the "system of flexible accumulation" in which more and more things become commodities, the value of which is determined through the process of exchange rather through their use.

For example, not only pins are commodities; shares in the ownership of a factory that manufactures pins become commodities; then options on the stock issued in the company that operates the factory become commodities; then portions of the interest rate attached to bonds issued by the company become commodities, and so on. The prevalence of commodity speculation in modern capitalism significantly shapes its outcomes.

Marx defines "capital" as money and "capitalist production" as the use of money to denominate wealth in money terms; these labels refer to John Stuart Mill's definition of value in a market economy as being the going price for a good or service.

Marx expounded on the Labour Theory of Value to show that according to the Labour Theory of Value (which was the theory of value that was used by Thomas Hobbes, John Locke, Adam Smith, David Ricardo, etc) capitalists (owners of the means of production) exploit workers by depriving them of value that workers themselves create. According to Marx, profit is the difference between the value that the worker has created and the wage that the worker receives from his employer.

Once Marx firmly established this principle, the Labour Theory of Value was criticized and abandoned by supporters of capitalism.

Adam smith:

The first theorist of what we commonly refer to as capitalism is usually considered to be Adam Smith. His 1776 work, An Inquiry into the Nature and Causes of the Wealth of Nations, theorized that within a given stable system of commerce and evaluation, individuals would respond to the incentive of earning more by specializing their production.

These individuals would naturally, without specific state intervention, "direct that industry in such a manner as its produce may be of the greatest value."

This would enable the whole economy to become more productive, and it would therefore be wealthier. Smith argued that protecting particular producers would lead to inefficient production, and that a national hoarding of specie (i.e. cash in the form of coinage) would only increase prices, in an argument similar to that advanced by David Hume.

His systematic treatment of how the exchange of goods, or a market, would create incentives to act in the general interest, became the basis of what was then called political economy and later economics. It was also the basis for a theory of law and government which would gradually supersede the mercantilist regime that was then prevalent.

Smith asserts that when individuals make a trade they value what they are purchasing more than they value what they are giving in exchange for a commodity. If this were not the case, then they would not make the trade but retain ownership of the more valuable commodity. This notion underlies the concept of mutually-beneficial trade where it is held that both sides tend to benefit by an exchange.

Although he is often described as the "father of capitalism" (and the "father of economics"), Adam Smith himself never used the term "capitalism". He described his own preferred economic system as "the system of natural liberty." However, Smith defined "capital" as stock, and "profit" as the just expectation of retaining the revenue from improvements made to that stock.

Smith also viewed capital improvement as being the proper central aim of the economic and political system. A major difference between Adam Smith's view of economics and that of present day capitalist theory is that Adam Smith viewed value as a product of labour, and thus operated under the Labour Theory of Value, which was used by basically all economists until the Labour Theory of Value became central to Marxism.