Group 5: The Development of Exploitation: Capitalism

Adam Smith’s Approach to Classical Economics

Introduction:

Smith comprehended and analyzed the deepest levels of the developing industrial economy. By doing so he provided a solution to the problem of the organization and control of the economic system. Through numerous works and specifically through the Wealth of Nations he inquires into the significance for economic policy. His work has been used through the ages and continues to be critiqued and followed currently.

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Smith’s Synoptic and Synthetic System:

Smith’s dual vision of a synoptic view intertwined with a synthetic way of thinking led to an extensive comprehension. What many times went under looked and lost significance was the moral philosophical approach Smith possessed. This encompassed four realms of thought and action: Natural theology, ethics, justice and jurisprudence, and expediency. By breaking down the moral, market, and legal orders into distinguishable interacting subprocesses of a larger whole it becomes clearer of their operation and explanation.

His view of the individual and their unique role in a greater society was a synthesis that led to many forces; including, self-love, self-interest, self-command, sympathy, benevolence, moral rules, and legal control. This individual thought and behavior represented that choices in society were both deliberate and non-deliberate. Society’s interaction with the individual and its role in exhibiting tendencies toward both harmony and conflict, with tension between them, clearly exemplified individual choice. It also exemplifies that no society is ever in a fully spontaneous harmony.

This deductive reasoning and his factual inductive arguments lead to an essentially modern, underdeveloped, theory of society. His work emphasizes the importance of recognizing there are inevitable interactions, tensions, and problems which are the characteristics of working out the solutions to the problem of order. These attributes are the most important with his analysis of market and power in their relation to freedom and control. While doing this one must also regard his analysis of moral rules, law, and institutions generally to comprehend his political economic system for all of its value.

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Interdependence and Tensions:

Adam Smith viewed the market as a regulatory system, itself an institution of social control. The invisible hand theory promotes itself to control individual conflicts and the excesses of competition. This led to a safeguard of the public goods through healthy competition. “The market above all is an institutional mechanism to compel men to pursue self-interest in social rather than anti-social ways.” He does understand the self-regulatory character of the market but emphasizes the importance and how the heavier insight should fall on the regulation of self-interest by the market.

He clearly states that it is not in all cases that self-interest is led by an invisible hand to promote public interest, but in many cases. The underlying message being that pursuit of self-interest does not always promote the interest of society, but frequently. This insight led Smith to believe the market, as a regulatory system is a new discovered institution of social control. His scheme preached voluntary exchange and its only place of action being under legal and moral rules as well as the market.

One of the most fundamental argument in which Smith presents is that institutions, including moral and legal rules, function as social control. This analysis leads to deeper insight on institutions governing distribution. This was led by his concern with the social gains and the costs of division of labor, concluding that institutions govern their distribution among classes. Hence, institutions are given the ability to govern whose liberty is to be achieved. It is the combination of morality and law in the market to regulate the detailed realities of freedom and of exposure to freedom.

His model is one of controlled freedom which takes place through socially established norms of conduct. This controlled freedom sets the personal foundation of his individual and moral economic theory. This elevates the individual to be the prime element in the economic system. He does not only operate within a moral and legal framework, but it is also a socialized or moralized individual. His model provides both self-interested behavior and the control of self-interest by moral and legal rules.

Social control is created through the operation of individual conscience and of social conscience as they interact together. The impartial spectator principle sets the moral rules and customs which serve as social bond, but the principle depends for its content on already internalized social control.

Smith’s aspect of social conditioning involves individuals preferences are endogenously determined with the economic system. They serve as the moralizing and socializing processes which help define self-interest, leading to the proper objects of vanity. Institutions help form the incentive and reward system of individuals. These institutions are not inevitable, but as subject to re-design and change, as the product of past choice and subject to revised choices.

The Smithian model “sets the individual as the prime element in the economic system, but the individual exists and acts only within the evolving moral, legal, and institutional framework as a socialized individual;” leading to both individual choice and social force. His complex vision of businessmen versus consumers emphasizes the critical role of the business class in regard to the organization and direction of production and thereby growth.

These points lead to the central topic of the evolution of legal and moral rules and institutions. “Moral and legal rules evolve through the principles of approbation and disapprobation operating through the impartial spectator principle, expressing a refined sympathy and moral sensibility, as part of the larger evolving system.”

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Smith's Main Points:

• The free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods.

• If a product shortage occurs creating a profit margin this creates an incentive for others to enter production, eventually curing the shortage.

• If too many producers enter the market, the increased competition among manufacturers and increased supply would lower the price of the product to its production cost, the "natural price.”

• As profits are zeroed out at the "natural price," there would be incentives to produce goods and services, as all costs of production, including compensation for the owner's labor, are also built into the price of the goods.

• If prices dip below a zero profit, producers would drop out of the market; if they were above a zero profit, producers would enter the market.

• Smith believed that while human motives are often through self-interest, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services.

• Nevertheless, he was wary of businessmen and argued against the formation of monopolies.

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Smith’s Input on Capitalism:

The theoretical elaboration of the ethical framework of classical capitalism as formulated by Adam Smith in the reaction to the dominant mercantilism of his day is difficult to compare to society today. Over time, the various dysfunctions of a capitalist economy became manifest and the utilitarian ethical basis on the system eroded. Contemporary capitalism, dominated as it is by large corporations, entrenched political interests and persistent social pathologies, and is lacking a resemblance to the system which Smith envisioned would serve the common individual.

Moreover, Smith did not write about ‘competition on capitalist markets’, nor did he deny ‘real consequences of capitalist development’, for the simple reason ‘capitalism’ was a 19th century, not a mid-18th century phenomenon. Smith wrote about market transactions, how they had evolved from the division of labor since pre-history, and how they fitted in with the conditions for social-harmony that he expounded at length in Moral Sentiments.

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Classical Economics Impact on the Exploitation Theory

Introduction:

The Exploitation Theory states that capitalism is a system of virtual slavery, where is focuses on serving the narrow interests of a comparative handful of businessmen and capitalists. Whom in which driven by their own self interest of greed and power only drain and exploit the labor of the masses. Marxists believe that people attribute economic progress to labor unions and social legislation, yet capitalism is not being attributed for the rise in the standard of living, but the infringements which have been made on capitalism are being credited, which is not the case.

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The Framework of the Exploitation Theory:

Three aspects within classical economics contribute to the exploitation theory. These being the labor theory of value, the iron law of wages, and the third being the conceptual framework within which the exploitation theory is advanced. “This framework is the belief that wages are the original and primary form of income, from which profits and all other non-wage incomes emerge as a deduction with the coming of capitalism and businessmen and capitalists.” The framework is based on the assertion of the wage earner’s right to its full value. This is based on the belief that all income is due to the performance of labor is wages and that all who work are wage earners.

Smith’s primacy of wages doctrine is set in a pre-capitalist economy, in which workers produce and sell commodities and do not buy in order to sell. These incomes the workers receive are the workers wages; therefore wages are the original income according to Smith. All income in a pre-capitalist society is supposed to be wages where no income is profit; this is because workers are the only recipients of income. Smith does realize the coming of capitalism in his corollary doctrine where profit only emerges with the rise of capitalism, which is a deduction of the natural form, which is wages. From these doctrines the conceptual framework of the exploitation theory is posed.

Profits, then, according to Smith, first come into existence only with capitalism, and are a deduction from what naturally and rightfully belongs to the wage earners. Marx and Böhm-Bawerk use these original doctrines to form their conceptual framework. But classical economics imply that it is false to claim that wages are the original form of income and that profits are a deduction from them.

But Smith is wrong, wages are not the primary form of income in production, and profits are. In order for wages to exist in production there must be capitalists present. Their emergence does not bring into existence the phenomenon of profit; instead profit exists prior to their emergence. Their emergence however does bring the phenomena of wages and money costs of production. Therefore the profits which exist in a capitalist society are a deduction from what was originally laborers wages.

These theories lead Karl Marx into seeing all of world history and economics as a being driven by various forms of class exploitation, in sometimes better and sometimes worse contexts. The exploitation theory shows that if one were to compare Marx's "alienated Labor" and "capital", for example, one would see a definite change in his perspective on the way in which capitalism works upon the laboring class. However, one central idea remains relatively consistent through his writings, which being a firm belief in the capitalist's exploitation of the working class stemming from the inherent inequality between the worker's wage and the selling price of his product, which became the profit of the capitalist. Therefore the capitalist system is one of the exploitation of labor.

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