How Did Adam Smith Influence Capitalism

Adam Smith, Karl Marx and Karl Polanyi, have influenced capitalism in different ways. Adam Smith known as the father of the political economy, developed the concept of the invisible hand; which explains how self-interest and competition in a free market economy, would allow economic prosperity. Likewise, Smith developed the concept of the division of labour which articulates that different jobs in a business should be specialised, instead of one person having to carry out all the processes. Karl Marx, on the other hand, demonstrated the adverse consequence of the capitalist system upon workers and society. Since, Marx believed that workers gained nothing, instead get exploited by the capitalist who employ them; he established this through his
labour theory of value which disputes that economic value of a good or service, is determined by the total amount of socially necessary labour required to produce it. Additional, Marx also developed the concept of circuit of capital and how its alteration from being commodity orientated to capital orientated and the introduction of M’ prime. Finally, Karl Polanyi, known as an economic anthropologist was judiciously against the concept of self-regulating markets, as he considered that society and the market should be embedded together and saw land, labour and money not as commodities to be traded among other normal commodities.
The forces of self-interest and competition come together as the invisible hand, the invisible hand indicates that if each consumer can choose freely what to buy and each producer can choose freely what to produce, it would make the market settle at a product distribution and prices that were beneficial to all individuals of society, and society would prosper. Smith said that this is because of self-interest leads to competitions emerging in the market. As efficient production processes, would be adopted by producers to maximise their profits and low prices would be charged to maximise revenue through gaining more market shares and under cutting competitors. Smith said this self-interest of maximisation of profit and revenue is driven by the invisible hand. Critics of the invisible hand say that it’s not as strong as it was in Smith’s time, due to large powerful cooperation, effective marketing system and inefficient financial market that block the mechanisms of the invisible hand which does not allow the resources to be used at their best use.
An example of the invisible hand is, say if a candle maker sells one candle stick for £1 but, another candle maker sells 3 sets of candles for £2, it would mean he would get all the business making the other candle maker lose out and make even run out of business. So, to compensate the lose the candle marker would be forced lower his prices to survive and not get out of business, therefore, the candle maker is guided by the invisible hand being his self-interest to gain profit to lower his prices.
Division of labour another, one of Adam Smith’s concept explains that an increase in productivity and total output would occur if, each worker had a specialised job to do. Smith further, says that division of labour is not something that is regulated by an authority, instead it is human nature. As what makes us human is our propensity to truck, barter and exchange items, which gives us assurance to be able to trade, what we have produced which encourages division of labour.
Smith gives 3 reasons to why division of labour increase’s productivity. Firstly, division of labour allows the worker to have specialised knowledge of the task they are carrying out, this would allow the worker to be more engaged, dexterous and in turn would increase productivity. Secondly, division of labour saves time as the worker can focus of one specialised task, rather than doing multiple tasks and losing concertation in between tasks. Allowing the worker to emphasis on one task would allow him to become more efficient in that task which would increase productivity. Lastly, division of labour leads to innovation, as the amount of time spend on one task would lead to innovative methods and tools to complete the task, which would lead to technological innovation allowing the task to get completed more effectively and efficiently.
Moving on to Marx, Marx’s labour theory of value, originated from David Ricardo’s labour theory of price which suggest that that the prices of commodities shows the labour power that want in to making the commodities. However, Marx’s labour theory of value differs and focuses on the production process, identifies labour power as the only capacity to create greater value than it cost the capitalist to hire. It is this crucial difference that create surplus and therefore profit.
The way the labour exploitation story works is that workers get paid full competitive wages, due to this the capitalist take advantage of the worker and make him produce more than the value he sells himself at, allowing capitalist to gain surplus value. For example, Marx said if a worker works for 10 hours, but the job can be completed in 4 hours the extra 6 hours is surplus for the capitalist and would allow him to make extra profit, Marx called this the rate of exploitation. This idea of surplus value demonstrated how exploitation can occur in a free market economy. The introduction of machinery which is known as a constant capital can increase the surplus value by reducing labour time, as workers would get more done per hour and instead of completing the job in 4 hours he can complete it in 3 hour increasing the surplus value to 7 hours.
Before in the primitive system, there was a greater focus on consumption rather than capital as framers produced commodities and exchanged them for money to buy more commodities that better fit their consumption needs (C-M-C). In modern capitalism, capitalists are more interested in increasing capital accumulation rather than consumption. As capitalists uses money to buy labour power and raw materials which then transforms production in to commodities, which are sold for greater amount of money known as M prime (M’).
The transition for (C-M-C) to (M-C-M’) was bought about due to the competitive nature of capitalism, as the drive for making profit was a necessity for capitalists as they had an urgent need to accumulate money to reinvest in the latest technology or risk getting cut out by other capitalists.
Ultimately, Polanyi’s concept of embeddedness, argues that individuals are social beings, rather than economic ones.
Therefore, embeddedness is a necessary and basic condition of the economy. Polanyi further, argues that before the free market economy the economic system was part of the broader system, which was governed by social customs and norms as much it was by market principle of profit and exchange. The rise of capitalism saw a political effort to de-embed the economy from it social environment, this, also impacted society as basic aspect of social life would be treated as pure market commodities such as fictitious commodities and humans would be redefined as economic rational profit maximising actors. Polanyi said that these efforts of de-embed society from the market, would fail and would bring in dangerous societal reactions, which is seen in the double
movement.
The double movement, demonstrated how the free market economy got created and why people want against it. The first movement of the double movement concept is the creation of the free market economy. Bourgeoisie were pushed to create the market utopia, in which markets got de-embedded from societies rule and had their own life, Polanyi states that free market liberals wanted to reduce social control from the market such as feudal organisation, and wanted society to follow the rules of the market. This is seen through fictitious commodities, were nature and human beings get categorised as land and labour and get traded in the market like any other normal commodity would.
The second movement, is a countermovement to the first movement as it is a reversal process to re-introduce social control back in to the economy. Polanyi said that the countermovement was necessary, because of the first movement society had to protect itself from the destabilising effects of the free market economy. Various political organisations, such as community, state, church, and industry reacted against the free market system, as they claimed it caused disruption to the tradition social institution. As it made people adopt the workings of the market such as people migrated to the city for work, in doing so they had to live in overcrowded slums, workers, worked for relatively low prices, which made capitalists benefit from cheap labour. Worker also had to work long hours due to capitalist wanting surplus value and the free market economy main drive was to maximise profits which out did all other motives. The second movement bought about a modern type of embeddedness in the free market system such as labour unions, minimum wage and welfare state.
Another concept of Polanyi is fictitious commodities being land, labour and money, Polanyi, firstly evaluate the history of these elements, beginning with land in the Middle Ages in Europe, land was the basis of the military, judicial, administrative and political system but, it was never given importance as commodities to be bought or sold in the market. Next, Labour was highly localised practise, with individual guilds and towns establishing work rules for worker. The attitude in the Middle Ages in Europe put a lot of great emphasis on the country and how it should operate; and didn’t put emphasis on self-maximisation.
Moreover, Polanyi said that the free market was self-regulating, meaning all element were determined by the market which puts emphasis on self-maximisation, hence viewing land, labour and money and normal commodities.
Therefore, Polanyi argued that if land, labour and money are sold on the market, then human being would become subordinate to the system itself. Treating land, labour and money as trading commodities, when there not made for that purpose, makes them fictitious commodities. As land is simply nature, labour is human life and money is purchasing power. Consequently, when these elements are viewed as commodities, it would result in destruction of the free market system. As the market system itself is artificial because of the buying and selling and the fact that you can build an economic system based on fabricated commodities shows the flaws in the market
system.
To conclude I would say all 3 writers had their own unique view to improve capitalism of their time and made it what it is today. As they allowed us to see the flaws and strengths of the capitalist system. Which today is a learning curve for modern economists to use as a guideline for their work to improve the market system.