The document compares the economic theories of Karl Marx and Adam Smith, emphasizing their differing views on consumption and capitalism. While both theorists acknowledge the importance of consumption and labor in assigning value, Smith promotes capitalism and the idea of an 'invisible hand' guiding market forces, whereas Marx critiques capitalism for exploiting workers and advocates for a communist society. Ultimately, the analysis suggests that Smith's ideas may be more relevant to contemporary society than those of Marx, especially in the context of historical outcomes in socialist regimes.

1. 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

2. 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

3. 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

4. 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

5. 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.

6. 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

7. 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

8. 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.

9. 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.

10. 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

11. 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.

12. 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,

13. 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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