Review of Smith’s Ideas About Capitalism, Essay Example

Having been called the father of capitalism, Adam Smith is one of the greatest thinkers of economic science. The below essay will cover the main terms and ideas included in his revolutionary book: “The Wealth of Nations” and try to find a way to explain the term Smith uses: natural liberty”. The author of the current study will embark on a journey to discuss the validity and truthfulness of Smith’s ideology, when he states that the system of capitalism is based on a “natural liberty”. Further, the author would like to examine how Smith saw the question of classes; did he think that it was a natural process, or did he call for the abolition of social classes and norms completely?

Smith’s Ideology and Capitalism

One of the most quoted arguments of Smith is that humans act of self-interest. According to the author, serving one’s self interest is the main motivation for creating wealth. Customers buy products to serve their own interest, while merchants sell them for making profit for themselves. For nations to obtain wealth, there is a need for limiting the authority of the government, to allow the supply and demand determine commodity prices. His economic model is truly liberal, and rejects every type of regulation. While free capitalism has never been tried, and there have always been controls in place, even during the industrial revolution in England and the colonization of the world, it is a remarkable idea to think that without control markets would be able to regulate themselves. As Smith rejects every type of control; internal and external, he is also against authority of the classes. According to him, wealth and ability to create profits should determine one’s worth.

The idea of capitalism, first developed by Smith is based on the idea of commodity production that can have an exchange value related to labor costs (Hunt 5). Today, consumerism is more prevalent in capitalist ideology: the main force that determines markets, competition, and production is the consumer, instead of commodity production (surplus and shortage).

On Social Classes

Smith’s theory of classes can be defined as a revolutionary view of the society. He created three different categories: landlords, workers, and merchants/manufacturers. According to Smith, they all have a unique purpose in the capitalist society. His three-class concept was based on the assumption that landlords were providing environment for commercial production, workers were selling labor, while merchants and manufacturers were making a profit based on the price difference between labor and the end product. This simple concept assigned each class with a unique rank, and assumed that workers did not have a high rank, as they did not have the ability to bargain on the price. While Smith stated that market conditions determined by the demand and supply created wealth, he ignored the possibility of workers bargaining. Talking about working class, he states: “the understandings of the greater part of men necessarily formed by their ordinary employments” (Smith, V.i.f.50). This is one of the reasons why the Smith-type simplistic model of society is not applicable today. According to the author, the division of labor is determined by the demands for activities.

Hall (61) states that Smith explains class conflict as a natural process from the perspective of the labor theory. While workers’ labor had value for the other two classes, they had to “give up” some of the income to provide those who benefited from “property ownership” and had “the right to reap where they did not sow”. The whole social and economic system – according to Smith – was built on the aim to “protect the rich from the poor”.

Is Capitalism the Answer?

While capitalism, according to Smith is an ideal status of the economy, and a state of “natural liberty”, it has created class struggles in the past, and governments have found it necessary to create market corrections. While Smith analyzes capitalism within the state, it is important to note that globalization has brought forward some further challenges additional to the original ones. When large merchants or manufacturers (currently multimillion dollar companies) control markets, they can influence trends, decision makers, and their power makes them the main controllers of the economy. If there was an uncontrolled “natural liberty” today, these companies could buy “labor” at a price they want to. The economic system is today more complicated on the national and international level than it was in the times of Smith.

One of the mistakes Smith made in his theory is that he assumed that workers were unable to obtain bargaining power to stand up against those who buy labor and try to bring down the cost of production. Today, there are several workers’ unions fighting back large organizations, and government regulations control free market to protect the interest of workers.

Finally, it is important to check what Smith says about the value of workers, and their social status. He concludes:  a worker “is rich or poor, is well or ill rewarded, in proportion to the real, not the nominal price of his labour”. This quote is based on the assumption that the price of the labor is determined by those who buy it; therefore, the laborer is inferior to that who has the money to buy it. In today’s globalized world, however, this is not necessarily the case. The bargaining power of workers is higher, and companies use worker evaluations, reward systems, targets to motivate employees, and distinguish between different qualities of work. He simply concludes that – according to the rules of capitalism – there are winners and losers, and some people with purchasing power determine the value of work. Therefore, there will always be poor and miserable people, as this is how the “greater good of the society” is served. This means that while the author states that a social harmony is reached, it is not a harmony, but a new class system. In the class system, two classes have the ability to represent their interest: landlords and merchants/manufacturers. Workers, however, are defined as the value of their labor. Merchants have the ability to improve themselves, so do landlords. However, in the structure of society described by Smith, workers are still oppressed. The only difference between aristocratic systems and Smith’s capitalism is that the power is not in the hands of those who inherited them, but those who have money and know the means of making more by creating a profit based on the difference between commodity prices and labor cost.

Smith’s Ideas Today

It is evident that Smith’s ideology was somewhat simplified when it was developed, and it did not apply for all people in the society. However, his Utopia of views of capitalism, free markets, and harmony has not been confirmed in the past two centuries. Capitalism did not create harmony, and governments had to intervene into markets in order to correct the demand and supply balance several times. In the 2007 financial crisis, it was clearly visible that without government regulation and intervention economies can collapse. Banks were allowed to set the prices of their services, interest rate correction was not introduced, and house prices ballooned. It was a perfect example of Smith’s utopia when demand and supply determined prices of commodities. However, when there was no more demand for homes, as people got into debt, the prices went down and houses became impossible to sell. It is possible that – if Smith lived today – he would call this a “natural liberty” of markets, however, it does not fulfill one important criteria: benefiting the majority of the society.

The appearance of urban working class, and the rise of some people from other classes has changed the economic and social landscape that Smith’s ideology was built upon. Today, the society is different and more segmented than it was in the 19^th Century, and this means that workers have more power to purchase commodities, influence trade, as they have become “consumers”.

Conclusion

Reviewing Smith’s work about capitalism defined as a “natural liberty”, it has been found that classes did exist in the author’s world, and the level of liberty provided for some people was higher than other classes’. Indeed, free capitalism has not been proven successful in the Western civilization, and there is a need for government intervention to protect the interest of those under-represented, with limited bargaining power to create a real state of “natural liberty” that benefits all people.

Works Cited

Smith, Adam.  “The Wealth of Nations”  New York: Penguin Classics, 1986, (first published: 1776)

Hunt, E. K. “History of economic thought: A critical Perspective”. 2002. Print.