The Path

A Student’s Analytical Commentary on the Ideas of Smith, Keynes, and Marx

          “It’s the economy, stupid.” Bill Clinton in his 1992 campaign for the United States presidency quipped in response to then President H. W. Bush’s stance on the importance of the United States economy in the everyday lives of Americans. To expound upon then-candidate Clinton’s comment, when it comes to attaining the food we eat, the clothes we wear, and the shelter we need to survive, every American utilizes our nation’s economic system. That being said, there has been great debate as to the most efficient economic system for a modern, industrialized country like the United States. Many intellectuals over the years have attempted to answer this question. I, also, will start on this journey. However, I will springboard off the ideas of several of the greatest minds in economic philosophical thinking in order to come to a conclusion. Primarily, I will analyze the ideas and perspectives of Adam Smith (a capitalist), John Keynes (a semi-capitalist), and Carl Marx (a communist), and conclude which system appears to be the best policy for an economy today. As an individual who was born into and has only lived in a capitalist market-economy, I acknowledge that I would be at least partially biased towards a capitalist line of thinking. Regardless, I will attempt to look through the eyes of each of these three men and arrive at a logical position on the best economic structure for an industrialized, modern society.

          When discussing the ideas of Adam Smith (1723-1790), it is imperative to consider his concepts of the “The Invisible Hand”, the “Price of Commodities”, and the “Division of Labor”. However, before we dissect these three concepts in more detail, a general overview of Smith would be prudent. In Smith’s thinking, the increase of the wealth of a nation is a direct result of the increase in the wealth of that nation’s individual citizens. A rich country must have a rich people. These people use their wealth to buy food, clothes, and shelter. Once people achieve these needs via the economic system, they are then able to move on to buying comfort or “luxury” items. The difference between a luxury item and those things of just simple necessity is many times merely found in only the price of both of those commodities. More expensive, rare goods are luxury items, while cheap, common goods are basic necessities.

          The fluid flow of goods in the “market machine” is controlled by what Smith calls “The Invisible Hand” of the market. This is an interesting phenomenon in which the desires and needs of a population are “invisibly” met by the market, and the market produces the goods that are needed by the population. Thus, the economy functions as a well-balanced system without anyone making a conscious effort to guide it. For example, if the citizens of a nation all decided simultaneously that they must have fish for dinner every night, fish would quickly become hard to find in the market. With this lack of supply, the price of fish would rise, and fish would become more expensive. Fishermen would then catch and supply more fish in order to capitalize on the higher prices. However, once the population’s need for fish is met, competition between fishermen would increase as they attempt to sell their fish, and the price of fish would go back down.

          Smith believed that the source of a nation’s wealth was a nation’s ability to produce labor. “Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased.” (Smith, 1776) It is labor that decides the value of a good. The more labor required for a good to be produced, the more that said good is going to be worth in the market system. This idea is also known as the Labor Theory of Value. A nation capable of producing more labor, will, therefore, be able to produce more wealth. Additionally, a nation will also have greater production when its labor force specializes in certain industries, Smith calls this Division of Labor. “Labour, therefore, it appears evidently, is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and at all places.” (Smith 1776) This idea is known as the “Price of Commodities”. Smith ruled out the idea that wealth is a result of an abundance of silver and gold. Rather, he concluded that a strong specialized labor force will lead to a nation’s wealth. Once a nation is wealthy, all men will use their wealth for their own needs and wants. Smith argued that every individual selfishly strives to look after their own needs first, without regard to the workings of the economy. “…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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” (Smith, 1776) Therefore, the competition for the fulfillment of needs between individuals is the only thing necessary for the well-functioning of an economy. In this line of thinking (according to Smith), when it comes to the economy, the governing authorities of a country should have an incredibly small impact on the workings of the market system. Smith believed that labor created and valued the commodities. The commodities are then distributed properly by the waves of self-interest in a population whose needs are justified by the market system. With limited government intervention, the market will take care of itself. Price will stabilize on its own (as in the previous example of the fish), and the rate of production of goods will follow its lead.

          This capitalist line of thinking did not change until John Keynes (1883-1946). What differentiates the economic philosophy of Adam Smith from the philosophy of John Keynes? To put it simply, Keynes agreed in many ways with Smith except in one large area: government intervention in the workings of the economy. Unlike Smith, who believed that the Invisible Hand alone was necessary to guide the workings of the market with no government intervention, Keynes believed a strong governmental structure was necessary for the long-term sustainability of a nation’s economy. Also, unlike Smith, Keynes watched his economic system play out in real time in the American Great Depression of the 1930s and President Franklin D. Roosevelt’s New Deal. Keynes lived almost 100 years after Smith and was born into a society in which Smith’s economics were the dominating force in the economic thought of the time. However, Keynes was able to watch the Invisible Hand fail to keep the American economy flowing properly when the market system failed to meet the needs of the American people.  Not enough of the basic necessities of life: food, clothing, and shelter, were being produced in enough quantity. Before the Great Depression hit the United States, there was plenty of labor (Smith’s source of a nation’s wealth). Additionally, once the Great Depression had begun, the labor force was still present. However, the surplus of labor was not providing the nation’s economic wealth or even balancing the basic needs of the nation’s population with production. “Something had to start up the investment motor that hoisted the economic car up the shaft, and he [Keynes] hoped that government spending would act as such a stimulus by bolstering the nation’s general buying power – “priming the pump” it was called in those days.” (Heilbroner, 2000) Once the economy reached the point of a depression, like a rut in the road, it was impossible for the Invisible Hand to drag the economy back up and allow it to continue down the path to economic productivity. Keynes believed that the natural progression of an economy without government supervision was toward the cliff of depression and recession. Thus, the concept of government spending or “bailouts” entered into common economic thinking. “If business was not able to expand, the government must take up the slack.” (Heilbroner, 2000)

          Keynes looked at the government as a safety harness for the economy, restraining and saving it as it either marched towards or began to fall off the cliff of economic depression. Smith lived in a time when industrialization was beginning to take root and flourish. Almost a century later, the Great Depression and President Franklin D. Roosevelt’s New Deal showed that the Invisible Hand, though a crucial force within the workings of an economy, was not alone enough in the modern age to prevent an economic disaster. Instead, the government must watch over the twists and turns of the market and intervene when necessary to avoid economic disaster.

          Unlike both Adam Smith and John Keynes, Karl Marx (1818-1883) had a different perceptive on the proper role of government in a market. Adam Smith believed in as little government intervention in the market system as possible, and John Keynes believed in maintaining a strong national government which was capable to offset any disturbance in the economy by either a bailout, taxation or both. Marx, however, was in a class of his own. Highly critical of the capitalist system, Marx believed that a laborer within a capitalist system does not receive the full value of his labor, but only makes enough to survive by earning his basic necessities. Meanwhile, Marx claimed that the capitalist receives the excess value in the form of profit and capital. He believed that this was a form of usury and a gross reestablishment of the feudal system in which the rich benefit from the labors of the poor for their own luxury. The poor then remain poor since they only receive enough for their bare survival, with no sight of increasing their economic “class” since the rich capitalists have ownership of production. The rich receive the surplus while the workers only make enough for their own self-sustainment and continue to live in want.

          The end result of communism is that every worker receives the exact value for his labors, and every capitalist pays for the exact value of their equipment, machinery, and labor. In this system, no one has the ability to use the work of another to receive a benefit greater than the value they have paid. Everyone is equal. Competition is not necessary because everyone receives exactly what they deserve. However, who is to enforce such a system? Will the capitalist merely lay down their “power” in their businesses and halt the market system which is already feeding off competition? The stunning opening words of the Communist Manifesto answer this question. “The Communists disdain to conceal their view and aims, they openly declare that their ends can be attained only by the forcible overthrow of all existing social relations. Let the ruling classes tremble at the Communist revolution. The proletarians have nothing to lose but their chains. They have a world to win.” (Marx, 1847) Marx was describing a world completely contrary to the one in which he lived. Many followed his call for revolution, and, in the cases of China and Russia, were able to successfully overthrow their governments. With the collapse of the USSR in 1991, the question remains that a society in which everyone is required to be “equal” is even sustainable in the modern age.

          Which economic system, Smith, Keynes, or Marx, works in the modern day? Adam Smith lived only at the beginning of the Industrial Revolution. His ideas of almost no government intervention against the Invisible Hand of the economy were common, and such a system worked for close to a century. John Keynes witnessed the Great Depression and influenced Franklin D. Roosevelt’s decision to create the New Deal. He then observed the reverse of an economy from depression to economic productivity. Karl Marx called for equality of all men, completely disregarded the concept of the Invisible Hand, and replaced it with the iron fist of a national government. In the dynamic world, we live in today, we can’t trust an Invisible Hand to always be able to correct an economy screeching toward the cliff of depression. We also can’t always trust a strong national government to be able to always justly decide equality between individuals in the market system. In the ambiguous, complex world we live in today, the market system must exist within a middle ground between the two extremes. The Invisible Hand must be allowed to work when it can, unrestrained, but when the economy begins to spiral into oblivion, it is necessary for an external guide to be ready to step in and stop a potential disaster.

          It appears that John Keynes’ economic system would be the best policy for a modern industrialized nation in today’s world. Adam Smith was right in his time in history. He couldn’t have even imagined the technological world we live in today. In the late 18^th century, the world of Smith, the majority of the world’s population still worked in agriculture. The Industrial Revolution was starting but had not even begun to show its potential. Going back to our fish and fisherman example, the market was simpler back in the 1700s. Fishmen caught and sold the fish, and the population bought and consumed the fish. Three hundred years later, the world has advanced. Now, massive shipping corporations hunt for fish in the deep sea. Thousands of fish are caught and processed to be sent all over the world. Instead of a population striving just to put food on the table, populations are worried about overfishing and the extinction of entire species. Meanwhile, the technological advances of fishing come with a risk of dangerous practices which could result in the sale of polluted fish. Unrestrained competition of fishermen could result in the complete destruction of a food source. This was never a thought in the mind of Adam Smith. The “Invisible Hand” was never concerned with anything but supply and demand. It takes a strong government to regulate the practices of the market and enact laws that allow for the production of goods without the risk of harm to a population. Like Smith, Karl Marx falls short of discovering the necessary relationship between the government and the market. Marx believed in a world where all fishermen would catch and sell fish for the same price regardless of the supply or the demand. A fisherman’s job was only to catch fish. The government would decide the proper price for the fish regardless of the needs of the population. Very possibly, the government could cause a lack of supply when there is a high demand, or a large supply when there is no demand. Unrestrained competition can result in disaster, and unrestrained government can result in unmet needs and waste. In the 21^st century, there cannot be unhindered competition, and there cannot be an inflexible market structure created by a government. Keynes was proved right during the 1930’s Great Depression. Capitalism must work on its own under the watchful eye of the government.

Smith, Adam, 1723-1790. (1993). An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford; New York: Oxford University Press.

Heilbroner, R. L. (2000). The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers. London: Penguin.

Marx, Karl, 1818-1883. (1996). The Communist Manifesto. London; Chicago: Pluto Press.