Adam Smith was no socialist. In fact, he has often been described as “the father of capitalism.” Yet, despite this, if one were to read Adam Smith’s The Wealth of Nations these days without being told who wrote it, one might be inclined to believe it was an economic text written by a communist. There is far more in common between Adam Smith’s analysis and Marxian economics than with Adam Smith’s analysis and modern day neoclassical economics.
Despite common misconception, the Labor Theory of Value did not originate with Karl Marx. Adam Smith was also a proponent of it long before Marx.
“The price which he pays must always be the same, whatever may be the quantity of goods which he receives in return for it. Of these, indeed, it may sometimes purchase a greater and sometimes a smaller quantity; but it is their value which varies, not that of the labour which purchases them. At all times and places that is dear which it is difficult to come at, or which it costs much labour to acquire; and that cheap which is to be had easily, or with very little labour. Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.”
“The real value of all the different component parts of price, it must be observed, is measured by the quantity of labour which they can, each of them, purchase or command.”
— Adam Smith, “The Wealth of Nations”
Marx had argued that in primitive hunter-gatherer times, all the fruits of the labor of working people belonged to themselves. However, when private property came into existence, so did exploitation. That is to say, the fruits of the labor of working people did not belong to themselves any longer, but had to be shared with someone above them.
Workers not owning the fruits of their own labor is something neoclassical economics vehemently deny. Yet, this was also a position held by Adam Smith as it is inevitable from consequence of the Labor Theory of Value.
“In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another…In this state of things, the whole produce of labour belongs to the labourer; and the quantity of labour commonly employed in acquiring or producing any commodity is the only circumstance which can regulate the quantity exchange for which it ought commonly to purchase, command, or exchange for.”
“As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials…The value which the workmen add to the materials, therefore, resolves itself in this ease into two parts, of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced…In this state of things, the whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him.”
— Adam Smith, “The Wealth of Nations”
You will often hear liberals these days criticize this idea by arguing that the capitalist himself does hard work, and that Marx does not account for the hard work of the capitalist that creates the business and thus the profits. However, this, too, was a position Smith specifically criticized.
“The profits of stock, it may perhaps be thought are only a different name for the wages of a particular sort of labour, the labour of inspection and direction. They are, however, altogether different, are regulated by quite different principles, and bear no proportion to the quantity, the hardship, or the ingenuity of this supposed labour of inspection and direction. They are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock.”
— Adam Smith, “The Wealth of Nations”
Smith also viewed society as being divisible into “classes,” although his classes were somewhat different than Marx. He viewed society as being divisible not into two major groups, but into three: the capitalist, the worker, and the landlord. He does not refer to these as “classes,” but instead as “three great orders.” He also does not tend to use the word “capitalist” but instead “master.”
“The whole annual produce of the land and labour of every country, or what comes to the same thing, the whole price of that annual produce, naturally divides itself, it has already been observed, into three parts; the rent of land, the wages of labour, and the profits of stock; and constitutes a revenue to three different orders of people; to those who live by rent, to those who live by wages, and to those who live by profit. These are the three great, original, and constituent orders of every civilised society, from whose revenue that of every other order is ultimately derived.”
— Adam Smith, “The Wealth of Nations”
Although, despite being three distinct groups, they can overlap. The landlord can also be a capitalist, the worker can also be a capitalist, etc.
“A gentleman who farms a part of his own estate, after paying the expense of cultivation, should gain both the rent of the landlord and the profit of the farmer…Common farmers seldom employ any overseer to direct the general operations of the farm…An independent manufacturer, who has stock enough both to purchase materials, and to maintain himself till he can carry his work to market, should gain both the wages of a journeyman who works under a master, and the profit which that master makes by the sale of the journeyman’s work…A gardener who cultivates his own garden with his own hands, unites in his own person the three different characters of landlord, farmer, and labourer.”
— Adam Smith, “The Wealth of Nations”
He was particularly critical of landlords, as landlords neither labor as the workers do nor take the same sort of financial risks as the capitalists do. They simply collected rent while living on land without contributing much to society as a whole.
“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed”
— Adam Smith, “The Wealth of Nations”
Smith also warned against allowing too much wealth to flow into the hands of the “idle.” Wealth should not be hoarded by landlords and capitalists, but expended on productive labor, as productive labor is what actually develops the economy.
“…there is no country in which the whole annual produce is employed in maintaining the industrious. The idle everywhere consume a great part of it; and according to the different proportions in which it is annually divided between those two different orders of people, its ordinary or average value must either annually increase, or diminish, or continue the same from one year to another.”
— Adam Smith, “The Wealth of Nations”
Interestingly enough, Smith argued that the interests of the capitalists are fundamentally different than that of the workers and the landlords. The interests of the worker and landlord are the same as the interests of society as a whole. While, on the other hand, the interests of the capitalists are directly opposed to society as a whole. This is because rent and wages tend to increase as society is developing, while profits tend to decline. Development is also encouraged by competition, while capitalists want to monopolize.
“His employers constitute the third order, that of those who live by profit…the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich and high in poor countries, and it is always highest in the countries which are going fastest to ruin. The interest of this third order, therefore, has not the same connection with the general interest of the society as that of the other two…The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.”
— Adam Smith, “The Wealth of Nations”
Yet, it is always the capitalists who are most influential in policy decisions, therefore Smith argued all new legislation should not be passed without the utmost scrutiny and caution.
“The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”
— Adam Smith, “The Wealth of Nations”
Smith also had similar ideas of “class struggle” as Marx. The basis of Marxian class struggle comes back to exploitation. As we have already seen, Smith agreed with Marx that the fruits of labor of the worker is shared between the worker as his wages and the capitalist as his profits. Therefore, Marx argued there would be a struggle between the worker and the capitalist on the rate of wages and profits, both classes with opposing interests to one another. Smith strongly agreed with this notion.
“What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.”
— Adam Smith, “The Wealth of Nations”
The capitalist in this struggle, from Smith’s point of view, always has the advance. The law is typically on their side, and they also have a stock of funds which can last them for a long time. The worker, on the other hand, needs consistent wages or he will starve.
“It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, a merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.”
— Adam Smith, “The Wealth of Nations”
Smith argued that one way the capitalists work to increase profits is to “combine” together. This is not akin to Marx’s idea of capital concentration, but Lenin’s idea of “cartels.” The capitalists remain as independent businesses, but “combine” through mutual agreement between different capitalists, for their collective interests, to sink wages. The workers, being in a far more desperate situation than the capitalists, also “combine” into unions to fight back. These tend to be out of much greater desperation and thus are often much more violent, and therefore get more attention in the media.
“Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy, till the moment of execution, and when the workmen yield, as they sometimes do, without resistance, though severely felt by them, they are never heard of by other people. Such combinations, however, are frequently resisted by a contrary defensive combination of the workmen; who sometimes too, without any provocation of this kind, combine of their own accord to raise the price of their labour. Their usual pretences are, sometimes the high price of provisions; sometimes the great profit which their masters make by their work. But whether their combinations be offensive or defensive, they are always abundantly heard of. In order to bring the point to a speedy decision, they have always recourse to the loudest clamour, and sometimes to the most shocking violence and outrage. They are desperate, and act with the folly and extravagance of desperate men, who must either starve, or frighten their masters into an immediate compliance with their demands.”
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public”
— Adam Smith, “The Wealth of Nations”
Smith here clearly cannot help but sympathize with the plight of the workers. He understands their desperation in the struggle between the capitalists and defends often violent responses from the working class as due to reasonable desperation. Smith also defended workers against the criticism of their desire to raise wages, arguing that the capitalist’s desire to raise profits was much more harmful. This is because, in order to raise the rate of profits, prices would raise exponentially as they moved up the supply chain due to having to add on this rate at every step of the way, while wage increases would only lead to a linear increase in prices. This has to do with the fact that workers ultimately care about their wages in absolute monetary terms, while capitalists care about their profits as a rate of return on investment.
“…That part of the price of the commodity which resolved itself into wages would, through all the different stages of the manufacture, rise only in arithmetical proportion to this rise of wages. But if the profits of all the different employers of those working people should be raised five per cent, that part of the price of the commodity which resolved itself into profit would, through all the different stages of the manufacture, rise in geometrical proportion to this rise of profit…Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”
— Adam Smith, “The Wealth of Nations”
Despite Adam Smith being associated with laissez-faire economics, Smith actually did not reject government interference and regulation in the markets. In fact, he argued that if the markets are doing something that specifically harms society as a whole, the government should, indeed, interfere, in order to strain the liberties of a few in order to protect the liberties of the rest of society. He specifically made this argument to justify his position on placing regulation on private banking.
“To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.”
— Adam Smith, “The Wealth of Nations”
Smith’s vision for the most developed capitalist society possible was actually quite dystopian. Unlike Marx, Smith did not see capitalism centralizing into monopolies as it developed. Rather, he believed it would only continue to get more and more competitive. This increased competition over time would continually drive down profits until all businesses are operating at a profit rate as low as possible to merely keep them afloat.
On top of this, wages are, for Smith, not determined by the size of the economy, but by the derivative of it. In other words, wages are determined by how fast the economy is growing, not by its absolute size. If a society develops “fully” so that it ceases to grow, people will continue having children, and this will mean the supply of laborers would continually increase while the demand will not. This would drive wages down more and more over time, until wages are so low that people would begin to starve and die off, and then the supply to demand of laborers will eventually find a balance where people earn just enough wages to barely survive.
“In a country which had acquired that full complement of riches which the nature of its soil and climate, and its situation with respect to other countries, allowed it to acquire; which could, therefore, advance no further, and which was not going backwards, both the wages of labour and the profits of stock would probably be very low. In a country fully peopled in proportion to what either its territory could maintain or its stock employ, the competition for employment would necessarily be so great as to reduce the wages of labour to what was barely sufficient to keep up the number of labourers, and, the country being already fully peopled, that number could never be augmented. In a country fully stocked in proportion to all the business it had to transact, as great a quantity of stock would be employed in every particular branch as the nature and extent of the trade would admit. The competition, therefore, would everywhere be as great, and consequently the ordinary profit as low as possible.”
— Adam Smith, “The Wealth of Nations”
For Smith, the “most developed capitalist society possible” is one where businesses make just enough profits to stay afloat, and workers earn just enough wages to stay alive. Sounds quite dystopian!
In a book by Karl Marx, an introduction is added by Friedrich Engels. In it, he takes notice that Marx was not the only socialist of his time arguing for socialism from a position of economic theory. There were other socialists as well who were influenced by economic theories prior to Marx, whom Engels believed to be influenced by David Ricardo.
“Insofar as modern socialism, no matter of what tendency, starts out from bourgeois political economy, it almost without exception takes up the Ricardian theory of value. The two propositions which Ricardo proclaimed in 1817 right at the beginning of his Principles, 3 Poverty of Philosophy. Introduction 1) That the value of any commodity is purely and solely determined by the quantity of labour required for its production, and 2) That the product of the entire social labour is divided among the three classes: landowners (rent), capitalists (profit) and workers (wages)”
— Friedrich Engels, “The Poverty of Philosophy”
Some scholars have noted, however, that this is not necessarily “Ricardian theory of value,” but that these tendencies of socialists Engels was referring to may have been Smithian socialists. This theory of value can be traced back to Adam Smith just as much as it can David Ricardo, and since Smith’s work had been around longer, it is more likely they got it from Smith.
“Labour measures the value not only of that part of price which resolves itself into labour, but of that which resolves itself into rent, and of that which resolves itself into profit. In every society the price of every commodity finally resolves itself into some one or other, or all of those three parts; and in every improved society, all the three enter more or less, as component parts, into the price of the far greater part of commodities…Wages, profit, and rent, are the three original sources of all revenue as well as of all exchangeable value. All other revenue is ultimately derived from some one or other of these.”
— Adam Smith, “The Wealth of Nations”
What sort of “socialism” could be derived from Smith’s theories? It would definitely not be the same as Marx’s, as mentioned prior, Smith did not see capitalism centralizing as it developed, but only becoming more and more competitive. I discuss in this post how, for Marx, centralization was key to his idea of socialism involving public ownership over the means of production, while for Smith, the economy only becomes more competitive as it develops.
Smith did seem to have, in embryo, a basis for suspecting capitalism would centralize, but he never builds off of it. As mentioned prior, he agrees that it benefits the profits of capitalists to “combine.” He also argues that as capitalism develops, so does the scale of production. Each business is constantly striving to innovate, and thus, each businesses is constantly trying to supply its workers with the best machines.
“The owner of the stock which employs a great number of labourers, necessarily endeavours, for his own advantage, to make such a proper division and distribution of employment that they may be enabled to produce the greatest quantity of work possible. For the same reason, he endeavours to supply them with the best machinery which either he or they can think of. What takes place among the labourers in a particular workhouse takes place, for the same reason, among those of a great society. The greater their number, the more they naturally divide themselves into different classes and subdivisions of employment. More heads are occupied in inventing the most proper machinery for executing the work of each, and it is, therefore, more likely to be invented.”
— Adam Smith, “The Wealth of Nations”
He never concludes, however, that this means capitalism must centralize, as shown before, he envisioned a “fully developed” society as also being as competitive as possible. The fact capitalism would develop, from Smith’s perspective, into a dystopia where all businesses can barely survive and all workers could barely afford to eat, one could potentially justify a transition to socialism from a historical material lens in this light, but this socialism could not be based on centralization, and therefore would remain a competitive market economy.
Smith agreed with the class struggle between the worker and the capitalist. He also agreed that the worker does not receive the full fruits of his labor but must share it with the capitalist. Therefore, one could argue for worker ownership over the means of production from a Smithian perspective. However, due to the decentralized nature of this, it would have to be ownership in the form of a worker cooperative and not public ownership, and these worker cooperatives would still compete on a market.
While Smith did not see businesses in general centralizing, he did view banking as potentially centralizing, as the lower the profit rates, the more difficult it would be for smaller businesses to carry on profitable businesses in banking, as interest rates would have to be so low there would hardly be any revenue. Only those incredibly wealthy could ever carry out banking. On top of this, we also saw prior that he was fine with public regulation of banking, so it would not be a leap to then justify public control of banking from a Smithian economic perspective.
“In a country which had acquired its full complement of riches, where in every particular branch of business there was the greatest quantity of stock that could be employed in it, as the ordinary rate of clear profit would be very small, so the usual market rate of interest which could be afforded out of it would be so low as to render it impossible for any but the very wealthiest people to live upon the interest of their money. All people of small or middling fortunes would be obliged to superintend themselves the employment of their own stocks.”
— Adam Smith, “The Wealth of Nations”
Smith argued that private property leads the development of large amounts of wealth inequality. This wealth inequality causes social instability, as those who have nothing at all will wish to acquire this wealth from those who have a large amount. Therefore, Smith believed the reason the state had come into existence was to protect the property of the wealthy against those without any property.
“Wherever there is great property there is great inequality. For one very rich man there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many. The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy, to invade his possessions…Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.”
— Adam Smith, “The Wealth of Nations”
Within a socialist society where there is no longer “great property,” there must also no longer be “great inequality.” Thus, the purpose of the state, of “civil government,” would cease to exist. One could make an argument, then, that the abolition of private property would also pave the way for a not only classless society, but also a stateless society. Engels does argue in Anti-Durhing that usury could lead to the restoration of capitalism, although, in this scenario, banking is made public, so usury could at least, in principle, be avoided.
All this taken together, one could justify some form of socialism simply from Smith’s analysis alone. This system would contain a publicly owned central bank with worker cooperatives that own the means of production directly in the form of worker cooperatives in the framework of a market economy.
Given that Smith also viewed the state as protecting the rich from the poor, one could thus also conclude that such a society may be capable of being stateless. The landlord, workers, and capitalists would all be the same, and thus, it would also abolish the “three great orders,” and thus be a classless society as well.
By this description, this sounds rather similar to mutualism. Mutualism is an anarchist philosophy, popularized by Pierre-Joseph Proudhon, that advocates for a stateless and classless society based in the establishment of a central bank and markets where workers directly own the means of production. While most socialists these days would definitely consider Smithian economic theory to be outdated, it is as at least understandable why the left-wing of older days came to some of the conclusions they did.
Without Marx’s analysis, mutualist ideas seemed plausible at the time. Free market competition had only continued to increase to until the 1873 crisis, and free market capitalism was at its height in the 1860s. Marx’s Capital was published in 1867. This means that his predictions of capitalism centralizing the means of production over time had yet to become as obvious as it is today and one could easily be mistaken to believe that capitalism could remain competitive forever.
It is interesting, however, to see many of Marx’s ideas for the basis of socialism in embryo in the writings of Adam Smith. It is also interesting to compare Smith to the so-called “classical liberals” of the modern era, who deny most everything mentioned here and take a dogmatic laissez-faire approach to economics which Smith himself would have vehemently opposed.
“This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments.”
— Adam Smith, “The Theory of Moral Sentiments”
