Karl Marx vs.

Adam Smith:

Consumption

By Ashwin Raman

I. Introduction

Karl Marx and Adam Smith are two of the most well known historical economic

theorists. In fact, many view Adam Smith as the ‘Father of Economics’ as we know it

today. Both Marx and Smith held detailed but different views on how economies function

as well as how specific political regimes operate. These views eventually became

philosophies that both economists believed would lead to an idealistic society. By

relating the views of Marx and Smith, I am comparing economists from two different

time periods, as Smith was active during the 18th century while Marx’s works were

published in the 19th century. As a result, it will be important to note the different

circumstances under which the two economists were inspired to construct their respective

ideas regarding the economy. Although both Marx’s and Smith’s theories have some

similarities, they also have major differences. Both economists hoped to form a perfect

society, however the ways in which they believed society would achieve this goal

differed greatly. In this paper, I will be focusing on the concept of consumption in an

economy viewed through the lenses of Marx and Smith. Alongside this focus, I will also

be defending my thesis that Adam Smith’s conceptualization of consumption is more

relevant to today’s society than Karl Marx’s.

II. Adam Smith: History and Opposition to Mercantilism

Adam Smith was born in Kirkcaldy, Scotland in 1723. He entered the University

of Glasgow at the age of 14, studying moral philosophy, then continued on to

postgraduate studies at the University of Oxford. In book V, chapter I of The Wealth of

Nations, Smith claimed to have disliked his experience at Oxford due to the quality of the

teachers, saying that

“The greater part of the public professors have, for these many years, given up
altogether even the pretense of teaching.”

Though discontent with his experience at Oxford, Smith made use of his time by reading

various books from the Bodleian library in the university. In addition to these books, he

also read David Hume’s Treatise on Human Nature, which consequently sparked his

interest in economics and politics. After attending the University of Oxford, Smith started

delivering lectures in Edinburgh on the subject of ‘the progress of opulence,’ specifically

speaking about a system of ‘natural liberty’ (Smith, “Lectures”). These experiences

would ultimately lead to the creation of his magnum opus, The Wealth of Nations (TWN).

The prevailing economic theory during Smith’s time was mercantilism. This

theory emphasized the importance of trade in increasing the wealth of a nation as well as

the maintenance of a positive trade balance. Smith opposed this theory claiming that the

wealth it generates falls mainly into the hands of the rich, leaving little or no opportunity

for working or middle class individuals to prosper freely. Even though according to

Smith, the main source of growth for a nation would be due to the productivity and

division of its labor force, he does say in book IV of TWN that

“It is as foolish for a nation as for an individual to make what can be bought
cheaper.”

It is clear that Smith believed that foreign trade did help economies prosper,

however he seemed to associate it with mercantilism, which he contested. Ultimately,

Smith sought for a government that would protect the rights of individuals and allow for
societal growth. He believed that the government should have the responsibility of

providing public goods such as highways and canals, as well as the general maintenance

of the state. He also viewed government regulation to be beneficial with regard to certain

institutions such as banks. Alongside those governmental regulations and responsibilities,

he believed in a progressive taxation system similar to the one we use today. Smith

argued that the rich benefit the most from government programs and as a result, should

pay more in taxes,

“It is not very unreasonable that the rich should contribute to the public expence,
not only in proportion to their revenue, but something more than in that
proportion” (Smith “Wealth,” Book IV Chapter II).

III. The ‘Invisible Hand’

The central point of Smithian economics is the concept of the ‘invisible hand.’

Smith believed that in an economy, free market forces behaving as the ‘invisible hand’,

would eventually lead to societal benefit, implying that such outcomes are unintended by

the individual. He explains this in detail in book IV, chapter II of The Wealth of Nations,

“He (the individual) generally, indeed, neither intends to promote the public
interest…he intends only his own security…he intends only his own gain, and he
is in this, as in many other cases, led by an invisible hand to promote an end
which was no part of his intention…By pursuing his own interest he frequently
promotes that of the society more effectually than when he really intends to
promote it.”

So for Smith, in the long run, all members of society shall reap benefits from the

decisions of consumers and producers. This is due to his belief that people inherently

wish to maximize their own happiness and wealth. This intrinsic ambition would lead to

phenomena such as free enterprise and trade. Although Smith believed that government

should play a major role in public works, he also believed that government should stay
out of the economy in terms of production and consumption, leaving regulation to the

‘invisible hand.’

IV. Consumption per Adam Smith

In order to fully understand Smith’s idea of this ‘invisible hand,’ it is important to

examine how Smith relates production and consumption in an economy, as his

philosophy supports the notion that the ‘invisible hand’ would guide consumers and

producers to unintentionally make societally beneficial decisions. In terms of this

relationship, Smith makes a definitive statement,

“Consumption is the sole end and purpose of all production; and the interest of
the producer ought to be attended to only so far as it may be necessary for
promoting that of the consumer” (Smith, “Wealth,” Book IV, Chapter VIII).

This importance of consumption in an economy for Smith is understandable as it

follows from his view that the real wealth of a nation is not measured in gold and silver,

but rather in real goods. It is significant to note that Adam Smith’s idea of consumption

being the end goal of production stems from his belief that the end goal of consumption is

happiness, as indicated in his book The Theory of Moral Sentiments (TMS). It is also

important to understand that at the time, this relationship between consumption and

production was not the commonly held view. The purpose of production was more so

seen as a means to accumulate wealth rather than satisfy the needs of the consumer.

Although Smith believed that consumers and producers would inevitably make decisions

that benefit society, he also believed that consumers are capable of making ‘ill-

conceived’ and ‘socially-damaging’ decisions. In these cases, Smith would argue that

free market forces in the long run should be able to adjust for such circumstances. Paul D.

Mueller points out that in order to understand Smith's contrasting comments about
consumption, it is vital to realize that he viewed happiness as every individual's final and

most essential goal. He thought consumption was necessary, but not adequate in defining

the human condition of happiness (Mueller 4).

For Smith, consumption is not only a necessary aspect of an economy, it is also

the most significant as it is the end goal of production. He believed that without

consumption, production would not exist. His belief that the ‘invisible hand’ would lead

consumers into making the most societally beneficial decision is in contrast to his

critiques of consumption. In the TMS, he mentions that people consume unnecessarily for

reasons other than enjoyment or happiness. These include flattery and admiration of the

rich. Regardless of those sentiments, he believed that it is better to consume than not to

consume at all. In essence, Adam Smith believed that consumption is the driver of

economy.

Now that we have assessed Adam Smith’s economic views and his ideas on

consumption, let us examine the ideas of Karl Marx.

V. Karl Marx: History

Marx was born in Prussia in 1818. He attended the University of Bonn at the age

of 17. While at the university he was involved in various disputes. Apparently his grades

started to deteriorate and as a result, his father forced him to transfer to the University of

Berlin, which was considered a stricter and more serious institution (Nicolaivsky). He

finished his PhD in 1841 and moved to Cologne, a city in the western part of Germany

where he started to write for the radical newspaper, ‘Rheinische Zeitung,’ which

translates to ‘Rhineland News.’ By this point, Marx had already been criticizing both

conservative and liberal regimes, claiming that they were ineffective in their governance.
These views were evident in the newspaper and attracted the attention of the Prussian

government censors. After an article was released criticizing the Russian monarchy, Tsar

Nicholas I demanded that the newspaper be banned and the Prussian government agreed.

Shortly after, Marx moved to Paris, France and began writing for another radical leftist

newspaper.

Marx published an essay in the Parisian newspaper embracing communism and

the revolutionary characteristics of the proletariat or working class. It was at this time that

Marx developed a major interest in political economy as well as economics. In order to

gain a better understanding of the two fields, he studied the works of well-known

economic scholars before him including Adam Smith, David Ricardo, and James Mill

(Fedoseyev). During this time, again the newspaper he was working for got shut down,

forcing him to emigrate to Belgium. It was there that he wrote one of his most famous

works, The Communist Manifesto.

VI: Marx and Political Economy

Marx believed that capitalism was inherently flawed. He believed that the system

favored the rich and exploited the working class. Both Marx and Smith believed in the

labor theory of value, which basically states that the value of a commodity can be

measured by the amount of labor hours it took to produce it. The difference between

Marx and Smith in that aspect is that Marx viewed labor as a commodity that workers sell

to capitalists for a wage. He referred to this commodity as ‘labour power.’ Within this

framework, Marx created the concept of the ‘rate of exploitation’ defining it as surplus

value (profits incurred after paying for labor), divided by variable capital (wages paid for

the production of a commodity). This rate, he argued, explains how much the capitalist is
exploiting the worker. Lauren M. Twigg points out the problems with Marx’s labor

theory claiming that desirability of a commodity is what determines its value rather than

the amount of labor put into it. Even though hours of labor have gone into producing a

commodity, if no one wants to purchase it, then it has no value (Twigg). So Marx, in

trying to upend capitalism, ended up weakening the logic of his own theory.

Like Smith, Marx also believed in the idea of market forces and how they control

the economy. The major difference between the two lies in the ideas of what individuals

desire. Smith believed individuals are inherently greedy and want to obtain wealth in

order to enjoy happiness. Marx on the other hand believed that people by nature are free

and creative beings and working for the capitalist inevitably alienates them and

essentially treats them like objects (Prychitko). This foundation gave rise to Marx’s view

that the end goal of humanity is to form a communist society. He seems to have believed

that people are naturally willing to give up a portion of their happiness for the greater

good of society.

VII: Consumption per Karl Marx

Marx broke down capitalism into two parts, production and consumption. Without

production, nothing can be consumed. He also believed that consumption stems from the

production of goods that are needed, largely claiming that the demand of the consumer

dictates supply. The main flaw in capitalism that Marx points out is the production

aspect. He believed that production in a capitalistic society innately favors the rich and

exploits the poor. He also viewed production as an act of consumption.

According to Marx, production is two-fold consumption; both subjective and

objective. He asserted that in production, people develop abilities and use them up, or
consume them. Secondly, he believed that the producer consumes the means of

production. He defended this point by saying that the producer consumes raw materials

by using them for production. Marx also viewed consumption and production to be in a

continuous cycle. Production is immediate consumption and consumption is immediate

production. From these views, he coined the terms ‘consumptive production’ and

‘productive consumption’ (Marx). In terms of what factor determines when production

stops within a capitalistic society, Marx claimed

“Production comes to a standstill not at a point where needs are satisfied, but rather
where the production and realisation of profits impose this”
(Marx, Das Kapital, Volume 3, Chapter 15)

Alongside this concept, Marx argued that when profits are low, the capitalist

unsurprisingly makes decisions that negatively affect the working class. These include

decisions such as cutting wages or increasing the length of the working day (without

increasing pay).

Another fault that Marx assigned to capitalism is the phenomenon of ‘under-

consumption.’ He believed that “under-consumption” is intrinsic to capitalism and is the

first step to crisis. He asserts that the working class receives in value less wages than

what they produce (Sewell). The remaining labor after the laborer has worked long

enough to pay for the product they are producing is the surplus value for the capitalist. So

for Marx, consumption and production are cyclical events that depend on one another.

The low wages earned by workers would cause a decrease in consumption and as a result,

capitalism will forever be in a state of crisis and class struggle.

VIII: Adam Smith vs. Karl Marx: Similarities and Differences

Both Smith and Marx held several similar economic views, but differed

drastically with respect to political ideology. Both believed that labor assigns value to

objects and they agreed on the importance of consumption as it gives rise to production.

The value of market forces was vital in both Marxian and Smithian economies. A key

similarity between the two was that both examined the inner workings of capitalism and

used these observations to make predictions about the future, converging in their vista of

an ideal society. Ultimately, their goals of stabilizing the economy and government are

what united their ideologies; it is the paths to these goals wherein they differed.

The main characteristic that divided these two famous economists was the fact

that Smith was a capitalist while Marx was a communist. Smith essentially defended

capitalism in TWN while Marx sought to point out its flaws in Das Kapital. Though both

economists believed in the labor theory of value, Marx also believed in a ‘rate of

exploitation’ being imposed on the workers. This led to his view that laborers are paid an

unfair wage for what they produce. Another major divergence with respect to the labor

theory is rooted in the Marxian view of ‘consumptive production.’ For Marx, the laborer

provides the producer a commodity for which the producer pays for, essentially playing

the role of consumer while for Smith, the producer only exists to suit the needs of the

consumer. For Marx, consumption and production are in a continuous cycle while for

Smith, consumption is the end all of production. In terms of problems within capitalistic

consumption, Marx alleged that under-consumption due to low wages received by the

worker would inevitably lead to a crisis in capitalism.

 Like Smith, Marx also believed in market forces and how they play a fundamental

role in an economy but he did not agree with Smith’s description of these forces,

specifically with regard to them being a self-regulating mechanism. Politically, Marx

believed that society is in constant struggle due to capitalism. Smith believed that

government needs to partake in society differently in order for society to flourish but

believed that it was possible to achieve these goals while maintaining capitalism. Marx

vehemently disagreed with this, claiming that the exploitative nature of capitalism

hinders these goals from coming to fruition.

IX: Smith and Marx: The Test of Time

Following World War 2, China, Germany, and Korea were divided into socialist

and non-socialist regimes. At the time of division, these countries possessed the same

culture, language, birth rate, and quality of life. As time went on, it became clear that the

non-socialist parts of each of these countries experienced far better growth and societal

progress as Julian L. notes:

“In each of these country pairs, since 1950, the free market countries -West Germany,
the Republic of China in Taiwan, and South Korea have experienced far more rapid
income growth, provided more education for a larger percentage of their citizens, have
longer life expectancies and lower infant mortality rates, and fare better in other "quality
of life" measurements than their socialist counterparts East Germany, the People's
Republic of China, and North Korea.” (L, Julian).

Interpreting these facts, it seems clear that these centrally planned governments have not

done justice in terms of providing for their citizens. For Marx, collective ownership of the

means of production was to be the ultimate goal of socialist governments. In theory, he

claimed that state ownership was to be employed during the transitional period of shifting

away from capitalism. In practice, most of these Marxist inspired regimes never

completed this transition, allowing for oppressive governments, and sometimes

dictatorships, to thrive. The logical progression of this fact would be that these countries

eventually suffered from Marx’s own idea of under-consumption, leading to stagnant or

declining growth.

The context behind Marx’s eventual state of communism is based on the natural

willingness of people to sacrifice excess enjoyment or wealth, for the greater good of

society. If this is the case, a classless society would prevail and the income gaps within a

country would diminish. In those aforementioned regimes, the working class, who was to

benefit from these socialist policies, actually became worse off. So in essence, based on

what we have seen happen in communist countries, Marx’s critique of capitalism being

inherently exploitative seems to more so fit the description of regimes that were inspired

by his own theories.

In the last century, several other countries including Russia and the Soviet Union

countries as well as Cuba have tried to adopt a form of government based on the key

principles espoused by Karl Marx regarding consumption and production. None of these

countries fared well economically over time. The Soviet Union broke up and several

countries including Russia and China have abandoned the Marxist philosophy,

consequently moving towards some form of market driven economy. The natural

tendency of these regimes to veer towards capitalism shows that Adam Smith’s ideas

prevailed over Marx’s. Regimes like Russia now produce in order to appeal to the

consumer, creating supply to support demand. This is essentially a testament to the

Smithian concept of individual prosperity of both consumers and producers, both of

whom are interested in maximizing their own individual happiness.

 Only a handful of countries still continue to follow some form of Marxism in their

economic policy. The disillusionment of several of these countries with the concept of the

state controlling production as well as consumption and other economic activities is a

clear testimony to the impracticality of Marxist philosophy. In addition, all of these

communist countries became totalitarian states driven primarily by the need to control not

only the economy, but also their own citizens. Over time, the state control mandated by

Marxism resulted in governments controlling all aspects of its citizens’ lives. As a result,

citizens of countries such as Poland and other former Soviet Union countries have

revolted and moved away from their repressive communist systems. Even a country like

China, which was formed in 1948 as a strong Marxist philosophy based communist

country, abandoned many economic concepts of Marxism about twenty five years ago

and has adopted a more market driven economical philosophy while still preserving many

of the non-democratic, oppressive aspects of a communist country. On the other hand,

most of the countries that chose the capitalistic and democratic path have remained that

way over the last century in spite of the economic problems they have experienced.

Hence, Adam Smith’s market driven economy concept has survived the test of

time while Marx’s concepts have not faired well.

X: Conclusion:

Both Marx and Smith believed in the importance of consumption within an

economy. They disagreed somewhat on the relationship between consumption and

production. Marx believed the two are in a continuous cycle while Smith believed that

happiness is the end goal of consumption and the role of the producer is to promote the

needs of the consumer. Marx believed that the producers also consume two-fold,
subjective and objective, referring to the ability to produce, as well as the consumption of

the means of production. He asserted that in a capitalistic society, private ownership of

these means of production would lead to low wages and subsequent revolt by the working

class. Based on this course of events, Marx argued that a capitalistic society is in a

constant state of crisis and class struggle. Unlike Marx, Smith cites the ‘invisible hand’ as

a guiding instrument that pilots the decisions of the consumer and producer, subsequently

leading to societally beneficial choices.

Overall, both Marx and Smith’s views on consumption are not perfect. However

Smith’s concept is more universally applied today. In terms of consumption, Smith’s

view overlooks the idea that the producer also consumes which Marx’s view takes into

account. The Marxian view also claims that due to the rate of exploitation imposed on

workers, low wages would prevail leading to under-consumption, which would inevitably

occur as a predecessor to crisis. The crises that Marx speaks of can be related to modern

day recessions in which there is under-consumption. However, the problem with his

theory is that it supposes these crises are constant rather than occurring as cyclical events.

Many nations have tried to adopt Marxist philosophies and have failed. These

countries started to lean towards capitalism and free market principles inspired by Adam

Smith. Based on the performance history of these countries I believe Adam Smith’s

concept of a market driven economy has triumphed over time. Though neither economist

had a flawless perception of consumption within an economy, Adam Smith’s concepts do

seem to have a better track record.

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